Are Alcohol Taxes Still an Effective Policy Lever for Raising Alcohol Prices and Improving Health? Evidence from the Great Recession

Research has consistently shown that higher alcohol prices and taxes reduce alcohol misuse, including underage drinking and binge drinking (Wagenaar et al., 2010; Elder et al., 2010). Historically, however, the political will to raise excise taxes on beer in the United States has been limited, except during economic downturns when states and the federal government experience budget shortfalls. Previous work has also suggested that economic downturns reduce alcohol-related harm due to lower binge drinking and alcohol-related morbidity (Ruhm, 2000). However, that relationship has weakened in recent years (Ruhm, 2016), raising questions as to why this is the case. This paper considers one possible explanation: changing alcohol tax pass-through rates.

Previous work evaluating alcohol tax pass-through rates in the United States has consistently shown that retailers fully or more than fully pass through state excise taxes to final retail prices, though the extent of pass-through varies by beverage type (wine, beer, liquor), brand, and sales premise (Cook, 1981; Kenkel, 2005). This paper studies the relationship between state-level retail beer prices and state excise taxes before, during, and after the Great Recession (1995-2015). Following Young and Bielińska-Kwapisz (2002), we estimate a model of prices as a function of state excise tax amounts, controlling for state and time fixed effects and accounting for autocorrelation and heteroskedasticity. We use price data collected by the Beer Institute and conduct several robustness checks to test assumptions regarding the autocorrelation structure, heterogeneity of the impact of the Great Recession, and measurement error of some imputed price data. We find that on average state pass-through rates fall within the range of 0.70 (undershifting) to 1.0 (full pass-through), and that tax pass-through decreased during the Great Recession and the recovery period. Our findings suggest that current and recent efforts to use beer tax as a policy lever for promoting improved health outcomes related to drinking may not be as effective as in previous decades given that some of these tax increases are absorbed by suppliers.