Alcohol Sin Taxes

The externality costs generated by excessive alcohol consumption warrant the imposition of alcohol specific excise taxes. For all U.S. States, average alcohol taxes are significantly below estimates of average externality costs, suggesting the current excise tax regime is inefficiently low relative to the Pigovian benchmark. However, with heterogeneous consumption patterns, this benchmark may be sub-optimal if it fails to consider the welfare losses imposed on non-abusers. Here, using a model calibrated at the State level, we show that once these welfare losses are considered, current U.S. wine and spirit taxes are too high, while beer taxes, on average, are about right