Beeronomics: Experiments

This poster from Rogue's Green Dragon Pub in Portland, where they propose raising prices to post-tax levels for a day, made me think of a scheme I thought about and quickly dismissed as too hard to pull off. How could we know the real impact of a beer tax on Oregon's breweries? Run an experiment. Have Rogue, Deschutes, McMenamins, Full Sail and a number of independent pubs raise prices in a randomly selected half of their pubs for a week (by how much to replicate the effects of the tax is a matter of debate). Then switch back to old prices and raise them in the other pubs for a week. Examine sales data for all the different types and prices of beers to understand the price and cross-price elasticity of demand (how sensitive quantity demanded is to price). Not a perfect experiment, but far better than any other data we have. If you could get retailers to do it as well, then we would really be cookin'.

If any brewery owners want to give it a try, I volunteer my expertise in studying the data...

Beeronomics: One More Comment About the Beer Tax

Usually taxes such as these are proposed to address some external costs. But the problem with making the leap from a beer tax to alcohol and drug abuse (and related crime and treatment) is that this is an external cost only associated with a small minority of beer drinkers. In fact as I mentioned in my earlier post, moderate beer consumption may actually cause a positive externality, suggesting (economically) government may wish to subsidize moderate consumption.

Other taxes are different. Take a gas tax, there is a large and recognized cost associated with the release of carbon into the atmosphere and it doesn't matter how much you drive, when you drive or how fuel efficient your car is - the carbon content of a gallon of gas is the carbon content of a gallon of gas. When you consume a gallon of gas in any manner of use, the cost to society is the same. Thus a tax on gas is purely Pigovian. We all pay a price that reflects the costs we impose on society.

Not all sin taxes are like beer taxes, the effect of cigarette smoke are harmful for even moderate smokers and also for those around them. So a tax is much more efficient in addressing the external costs here. But Beer is simply not the same thing. As a occasional and very moderate drinker of beer I impose no external costs - so making me pay a higher price is not Pigovian but simply an arbitrary, and distorting, tax.

Beer Tax Redux: Fred Thompson Weighs In

Fred Thompson, friend of the blog and resident tax and budget expert, sends along his take on the beer tax idea:

Jeff Alworth of Blue Oregon blogged very informatively the other day on the proposed increase in Oregon’s beer tax: Brewing Beer is Not a Sin. To an economist, specific excises raise two additional questions that Jeff did not address: substitution and incidence.

Let’s look at substitution first. As Patrick recently observed, one justification for taxing beer, wine and spirits is that their consumption produces bads and taxing them reduces consumption. People drink beer, wine or spirits to get drunk, which can mean anything from a pleasant buzz to total stupor. For example, although moderate alcohol consumption appears to be good for you, excessive consumption is not. Moreover, even moderate alcohol consumption can lead to negative externalities like dangerous driving. While taxes on beer, wine and spirits are a blunt instrument, the evidence is that they work to reduce the damage associated with alcohol consumption (there is some evidence, that their effects on the benefits of alcohol consumption are disproportionately high, but this evidence is by no means conclusive).

However, if reducing the damage associated with alcohol consumption is the justification for taxing booze, the tax should reflect its potential for doing damage. That means the tax should be based primarily on alcohol content and should be the same for beer, wine and spirits. That is not now the case in Oregon. The alcohol in beer and wine is implicitly taxed at lower rates than the alcohol in spirits (and the tax on spirits is based on the price of the drink not on alcohol content).

The other justification for taxing beer, wine and spirits is that booze taxes generate lots of tax revenues: a means of plucking the goose with the minimum amount of hissing. Booze is an inferior good. Its price elasticity of demand is less than 1, which means that a one percent increase in the price of alcohol will decrease its consumption by less than one percent. Of course, that’s not equally true of all populations. Price affects the consumption of occasional drinkers and teenagers much more than of alcoholics. (Teenagers tend to substitute pot and other tax-free but illegal recreational drugs for alcohol when taxes are increased on beer, which is less harmful for a variety of reasons.)

Since the flip side of price inelasticity is income inelasticity, this takes us to the incidence question. One can estimate the income elasticity of a tax using ordinary-least squares regression according to the following specification: ln(Ci) = a + b(lnYi) + e, where C is tax payment, Y is family income and i represents the ith family. Here, b shows the percentage change in tax payments as a result of a one percent change in family income, which is income elasticity. Elasticities greater than one mean that the tax is progressive; less than one, regressive. It isn’t possible to compute the income elasticity of the alcohol tax in Oregon, but we can use household accounts from the US census to estimate the income elasticity of alcoholic beverage purchases, which indicates that b is approximately equal to .6. That is, a one percent increase in income increases purchases of alcoholic beverages less than one percent, which implies that the tax is regressive.

But, wait, there’s more. There is also some evidence that most of the increase in alcoholic beverage purchases as income increases is not reflected in greater alcohol consumption, but a preference for up-market drinks – Beefeaters instead of Potters gin, fine wines rather than cheap plonk, and designer brews rather than Bud. Consequently, it is likely that a tax on alcohol is not only regressive, but highly regressive.

Is this bad? Hard to say. However, it is somewhat anomalous that the same people who want to increase taxes on alcohol are also big fans of minimum wage increases. One hand gives; the other takes away.

Oregonian on Beer Tax

The Oregonian covers the beer tax idea.  See my earlier post for my take.

Beeronomics: Beer Tax

Sin taxes, taxes on things like alcohol and tobacco, are often justified economically as Pigovian because of the adverse health effects that create costly demands on the state-supported medical system. There is a mountain of evidence suggesting that cigarette smoking has severe adverse health effects and these smoking-induced maladies create large costs for the state, so taxes on cigarettes appear to be pretty well-founded (the appropriate level is still a matter of much debate - especially since the effects of secondhand smoke may be much larger than was once thought).

But can beer taxes be justified along the same lines? There is a lot of evidence suggesting moderate consumption of beer is actually good for your health.  But there are also negative health benefits from alcohol dependency and both the health effects and the behavioral effects impose costs on the state.  But I would argue that beer is not the main culprit  (I would at least like to see evidence that it is) for alcohol dependency.  Furthermore a selective tax on beer would simply shift alcohol consumption to other forms of alcohol (potentially more potent ones) which would not solve the problem.  So I don't find much of a convincing economic rationale for a beer tax.

So the news that the Oregon Legislature is considering, once again, a bill to raise the tax on beer is disheartening.  Just because it is politically expedient does not make it right.  The justification of the bill is appalling: alcohol and drug addicts create huge costs for Oregon, yes, but just because you can't tax illegal drug use doesn't justify harming one of the few bright spots in the Oregon economy by placing the burden of drug and alcohol rehabilitation on beer consumers and  producers.  Beer brewing in Oregon is still a relatively small part of the economy, but it is growing and, according to the Oregon Brewer's Guild, represents about 5000 jobs.

At a time when we are trying to stimulate the economy, raising taxes is counterproductive and this one particularly so.