Today, Matt Yglesias examines the issue of using alcohol taxes to modify behavior, influenced by some of Reihan’s tweets. In addition to suggesting that higher alcohol taxes could improve social outcomes, Matt reaches a surprising conclusion about progressivity:
In distributive terms, data from the Consumer Expenditure Survey indicates that an alcohol tax is pretty progressive for a consumption tax, and certainly far less regressive than taxes on tobacco (which, to be clear, I also favor)… you can also look at different categories of goods as a share of expenditure, and you see that the richer you get the larger the share of your consumption going to alcoholic beverages becomes.
Matt’s analysis does not account for the fact that wealthy people tend to buy more expensive alcoholic beverages than poorer people. Since alcoholic beverage taxes are generally specific excise taxes (levied by the ounce, not as a percentage of price) the effective tax rate is highest on cheaper products. And from a perspective of trying to offset the social costs of alcohol consumption, that makes sense: an ounce of Grey Goose isn’t more socially problematic than an ounce of Popov.
Back in 2004, the Tax Foundation released a paper that estimates the distributional effects of major taxes levied by state and federal governments. They found (see page 42) that the average household in the top income quintile spends 0.09% of its income on state and federal alcohol taxes, while a bottom-quintile household spends 0.16%. Essentially, people in the bottom income quintile spend a 78% larger share of their income on alcohol taxes than people in the top quintile.
This makes alcohol taxes less regressive than cigarette taxes (where the difference between effective rates in the top and bottom quintiles is a whopping 583%). They are also not as regressive as public utility taxes or insurance taxes. But they are still more regressive than general sales taxes (which have a gap of just 32%), as well as gasoline taxes, diesel fuel taxes, air transport taxes, severance taxes, import duties, “other excise taxes” and “other selective sales taxes.”
So, while they are not an outlier like tobacco taxes are, I don’t think it’s true to say that alcohol taxes are “pretty progressive for a consumption tax.” It looks to me like they are much more regressive than broad-based consumption taxes and also more regressive than most taxes aimed at specific kinds of consumption.