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Raising Alcohol Tax to Reduce Drinking Can Backfire

Drinkers Switch to Cheaper Brands, Drink More

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Updated January 18, 2009

Updated January 18, 2009
Researchers have found that increasing the prices of alcohol beverages to reduce alcohol consumption may actually have the opposite effect, since drinkers who were buying the more expensive brands will switch to cheaper drinks, and because they are cheaper than what they were paying originally, buy and drink more.

It has long been thought that raising alcohol prices through taxation reduces alcohol sales and related problems associated with drinking, but a new study has found the across-the-board price increases on all alcoholic beverages may have the opposite effect.

"Our study accepts the assumption that alcohol is a "complex good," composed of different beverage types – such as beer, wine and spirits – as well as quality brands that can be high-, medium- or low-end," said Paul J. Gruenewald, senior research scientist at the Prevention Research Center and first author of the study. "We then go on to examine the impacts of the broad distribution of alcohol beverage prices upon sales of alcohol."

"Our results show that higher alcohol prices may and may not cause reductions in alcohol sales and related problems. These effects will depend upon how the distribution of prices is affected. In other words, the same tax may have different impacts in different markets and with different distributions of prices."

"In general," added Raul Caetano, professor of epidemiology and regional dean at The University of Texas School of Public Health, "the evidence suggests that as you increase taxes, and alcoholic beverages become more expensive, individuals tend to use alcohol less. However, the findings in this paper indicate that the reality is not so simple, because there are alcoholic beverages at different levels of price, and when you implement taxation, what happens is that the individuals who are able to purchase the alcoholic beverages that were more expensive just switch to less expensive ones.

"In fact, the paper shows that there may be situations where the intent of the taxation is reversed, in that alcohol consumption increases rather than decreases because the alcohol of choice has become cheaper. Basically, they buy more and end up drinking more."

Little Impact on Sales

Researchers analyzed Swedish price and sales data for the years 1984 through 1994 for price effects on alcohol consumption. Caetano said the ability to "combine an outstanding data set with very sophisticated statistical techniques has given them the ability to focus a magnifying lens on this important area of alcohol policy."

"We had four major findings," said Gruenewald. "One, the distribution of prices for alcohol is very broad. Two, increases in prices of expensive alcohol have little impacts on sales. Three, increases in prices of inexpensive alcohol have large impacts on sales. Therefore, four, tax increases can have different impacts on sales, depending upon how they are passed on to the consumer."

Altering Drinking Choices

"In short, consumers respond to price increases by altering their total consumption and by varying their brand choices," Caetano said. "This highlights the importance of considering choice before implementing 'beverage price interventions'."

"The full impact of any policy must take into consideration the potential freedom of consumers to change their beverage of choice from wine to beer or liquor, or to consume beverages that are cheaper," he said. "This is particularly important in western societies where consumers who possess affluent economies have a lot of freedom to choose.

Impact Greater on Inexpensive Drinks

"Given that substitutions can minimize the policy's impact, it would be much better to increase prices of low-level alcoholic beverages than increase prices equally across all beverages."

"If a tax is passed on by raising prices primarily on already expensive brands of alcohol, tax impacts on sales will be small," Gruenewald said. "If a tax is passed on by raising prices primarily on inexpensive brands of alcohol, tax impacts on sales will be large. Policy makers should be very sensitive to the manner in which alcohol distributors can pass a tax on to consumers. This study shows that the manner in which a tax is passed on to the consumer can be the primary determinant of its effects on use and problems."

Cheaper Beverages Available

"Beverage prices can be manipulated by the alcohol industry to their own ends, in order to maximize the consumer base or minimize tax impacts. In fact, ever cheaper alcoholic beverages are being made available in the market in order to ensure continuous growth in the consumer base," Gruenewald said.

"Alcohol taxes may have no effects upon the prices of these beverages and, therefore, little effect on use and problems. Our findings suggest that a simple form of regulation, minimum price posting [that retailers cannot undercut], may be the best form of regulation."

Source:
Gruenewald, P.J., et al. " Alcohol Prices, Beverage Quality, and the Demand for Alcohol: Quality Substitutions and Price Elasticities." Alcoholism: Clinical & Experimental Research January 2006.

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