How alcohol impacts the economy; a long and controversial history

The Japanese government’s initiative has come under significant criticism for promoting habits that are detrimental to public health. But the National Tax Agency of Japan, according to reports, says that the competition was purely meant to stimulate economic growth in a country where the liquor industry has been on a decline.

The debate on alcohol consumption is a nuanced one with states having to balance the need to raise tax revenue with the need to combat the adverse effects of heavy drinking.

Taxation revenue from alcohol

Alcohol taxes are sometimes referred to as a corrective or ‘sin’ tax, because, unlike regular sales tax, these taxes are levied in part to discourage the consumption of alcohol. Nonetheless, they can be an important source of revenue for state and national governments.

(State Finances, A Study of Budgets of 2019-20; RBI)

According to a report published by the Reserve Bank of India in September 2021, state excise duty on alcohol accounts for around 10 to 15 per cent of Own Tax Revenue for a majority of states. State excise duty on liquor is the second or third largest contributor to State’s Own Tax Revenue, with sales tax (now GST), being the largest.

Uttar Pradesh, for example, got 22 per cent of its tax revenue from alcohol in FY20, while Karnataka earned 21 per cent of its revenues from liquor sales.

The impact of liquor on state revenue was demonstrated by the effects of the lockdown. In Maharashtra, state revenues amounted to Rs 11,000 crore in April 2020 (during the nationwide Covid lockdown), compared to Rs 17,000 crore in March. The state government attributed much of this drop to the closure of liquor stores, later categorising them as an essential service, in part, due to the industry’s contribution to tax revenues. The day liquor stores were reopened, the Maharashtra government collected Rs 11 crore revenue from liquor sales in a single day. 

However, the amount of tax revenue generated is highly dependent on the form of taxation. In Kerala, where liquor consumption is considerably high, only four per cent of state revenue is generated from alcohol taxation.

The same is true globally.

In 2019, state and local governments in the US collected USD 7.7 billion, or 0.2 per cent of general revenue, from alcohol taxes. In no state did combined alcohol tax revenue account for more than one per cent of general revenue. This is largely because of how the US taxes alcohol. Countries with similar tax policies as the US tend to generate less revenue from alcohol taxes, whereas in countries where alcohol taxation rates are high, they can account for a significant percentage of overall revenue.

According to the Transnational Alliance to Combat Illicit Trade, a global non profit, the countries most dependent on alcohol taxation include India, South Africa, Colombia, Sri Lanka, Mexico and Kenya.

Arguments for and against taxation

In 1875, Norwegian Member of Parliament Anton Schweigaard attempted to justify a bill prohibiting liquor altogether, by identifying the effects of alcohol consumption on public health. He argued that manufacturing liquor did not create value, but instead, made the raw materials (grain and potatoes) unavailable for value creating uses. He also pointed out that overall productivity would increase if alcohol was banned and that healthcare costs associated with consumption would decrease.

However, Stanford University Professor Brendon Walsh, in a paper written in 1982, argues that economists often miscalculate the adverse impacts of alcohol on society.

(Indian Express)

Walsh says that by taxing alcohol or prohibiting it altogether, states discount the agency of individuals who are capable of making reasonable decisions. He states that under the ‘economic man’ theory, individuals are believed to be the best judges of what contributes to their welfare, are capable of making reasonably systematic evaluations of available alternatives, and are able to obtain information concerning the characteristics of commodities they consume.

Walsh also points out that there is a pervasive belief that longevity is the key indicator of progress. He states that a longer lifespan has to be weighed against the quality of life, which, for many people, includes alcohol consumption.

But whether or not taxing alcohol reduces consumption is dependent on various factors, including the overall cost of living in a country. According to the World Financial Review, expensive countries like Bermuda, Iceland and Australia are also expensive places to drink because it generally costs more to make and sell liquor in places with high labour costs.

However, in Bahrain, where the cost of living is relatively low, alcohol costs over 300 per cent more than the global average, whereas in Germany, where goods are relatively more expensive, alcohol prices are 23 per cent lower than the global average.

Taxation also doesn’t necessarily correlate with a reduction in alcohol-related deaths. European countries pay the highest rates of taxes on alcohol with Hungary levying a 27 per cent tax, and countries like Croatia, Denmark, Norway and Sweden following closely behind.

Despite that, Hungary had the second highest alcohol-related death rate at 6.7 per cent, which, in 2014, was twice the global average. Norway’s alcohol mortality rate is 2%, with Sweden at 3.3%, Denmark at 4.8%, and Croatia at 5.6%. 

On the other hand, the average tax on alcohol is 16 per cent globally and Zambia and Kenya, both who maintain that rate, have relatively low alcohol-related deaths, at 2.1 per cent and 2.6 per cent respectively. This, according to the World Financial review, suggests that alcohol tax is effective in these countries for reducing alcohol intake.

David Roodman, a senior advisor at the Open Philanthropy Project, concurs with this viewpoint. He writes that “the preponderance of the evidence says that higher prices do correlate with less drinking and lower incidence of problems such as cirrhosis deaths.” He concludes that “a 10% price increase would cut the death rate [from alcohol-caused diseases by] 9-25%. For the US in 2010, this represents 2,000-6,000 averted deaths/year.”

Additionally, in a 2010 research review in the American Journal of Public Health, a team of researchers found that doubling the alcohol tax would reduce alcohol related mortality by 35 per cent, traffic crash deaths by 11 per cent, sexually transmitted disease by 6 per cent and crime by 1.4 per cent. 

Alcohol culture

According to the World Health Organization (WHO), countries that have made drinking a large part of their social culture, are more likely to experience the negative impacts of heavy alcohol consumption. Hungary has been recognised by the WHO as a country that has adopted alcohol as a large part of its culture, a trend also seen amongst other Eastern European countries. 

Although the worldwide prevalence of binge drinking decreased from 22.6 per cent in 2000 to 18.2 per cent in 2016, it remains a huge concern in Europe, with 26.5 per cent of the general population engaging in the practice. 

In a report based on a conference hosted by the Eastern Sociological Society (ESS), a group of authors distinguish between ‘wet’ and ‘dry’ drinking cultures.

In wet cultures, alcohol is integrated into daily life and is easily accessible and affordable relative to the general cost of living. European countries bordering the Mediterranean have traditionally exemplified wet cultures.

In dry cultures, alcohol consumption is uncommon during everyday activities (like meals) and abstinence is far more common. However when drinking does occur, it is more likely to result in intoxication. Examples of traditionally dry cultures include the Scandinavian countries, the US and Canada.

Alcohol taxation is unlikely to work as effectively in wet cultures with other interventions producing better results. According to the WHO, while 95 per cent of countries have adopted an alcohol tax, states that implement strategies targeting the culture of drinking are more likely to decrease consumption.

In the most extreme cases, a complete ban on alcohol has also been adopted, although doing so has had considerably mixed results. The best case study to understand that is the prohibition in the US.

The prohibition debate

Many countries have prohibited the sale of alcohol including Norway (1919-1927), Iceland (1914-1925), and the Soviet Union (1920-1933) but none have garnered as much attention as the Prohibition era in the United States (1920-1933.)

Prohibition was fuelled by a rapid increase in alcohol consumption between 1900 and 1913. In response, prohibitionists agreed that a powerful liquor industry posed the greatest threat to American society and campaigned actively to ban sales of all liquor across the country.

Jack S Blocker, a professor at the University of Ontario, published a paper, in 2006, on the efficacy of prohibition. To begin with, Blocker argues that prohibition was not the first choice of reform for American politicians but after decades of fruitless interventions, was deemed to be the only measure that could address the problem.

He states that prohibition succeeded in reducing alcohol consumption significantly, but also came with a host of its own problems. For one, it wiped out an entire industry and the tax revenue that it generated. In 1916, there were 1300 breweries in the US – ten years later, there were none. The number of liquor wholesalers was cut by 96 per cent and the number of legal retailers by 90 per cent. Between 1919 and 1929, federal tax revenues from distilled spirits dropped from USD 365 million to less than USD 13 million, and revenue from fermented liquors, from USD 117 million to virtually nothing.

Blocker writes that the closing of so many large-scale operations represented a “dramatic reversal of the normal course of industrialisation” as the government went from a body that typically promoted new enterprises, to one that was responsible for decimating an entire industry.

Prohibition also resulted in the unintended flourishing of criminal activity such as bootlegging and smuggling in the US. 

Most importantly, prohibition didn’t address the root cause of binge drinking, with people who wanted liquor badly enough, still being able to procure it. Instead, people who had a drinking problem were less likely to find help with most government programs combating alcoholism, closing during that period.

(NFHS)

The same effect can be witnessed in the dry states of Gujrat and Bihar. Despite alcohol being illegal, the two states report high levels of consumption and between January and July of this year, lost 37 and 155 lives respectively to alcohol-related illnesses. Most of whom died had consumed illegal, often home brewed liquor, mixed with ethanol. While the government has attempted to crack down on bootlegged liquor, critics of the policy, like Delhi Chief Minister Arvind Kejriwal, argue that wherever there is demand, there will be supply and if the product in question is banned, it creates a black market of unregulated production. 

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According to Gujarat’s former chief minister, Shankersinh Vaghela, who spoke with The Indian Express in July this year, “either there is a strict prohibition Act in Gujarat or there is rampant sale of alcohol in cities and villages. Both cannot coexist logically, and this is what the state government is failing to understand. With the total support of the police and government, every village in Gujarat has cheap, dirty and poisonous liquor.”

In America, after the policy was reversed, alcohol companies, fearing its return, began promoting drinking more aggressively. As a result, Blocker writes that “the most significant result of the industry’s campaign was to lay the foundation for a substantial increase in drinking during the 1960s and 1970s.”

 Ultimately, prohibition ended because of the economic situation heralded in by the Great Recession of the 1930s. Like in Japan today, the US government realised that the liquor industry created jobs, fuelled consumption and increased tax revenue. Reintroducing alcohol into American culture was less about the merits of drinking and more about the practical economic benefits that the industry created.

To summarise, Blocker writes that any policy is effective only in moderation, and in conjunction with other interventions. He argues that limiting the sales of heavy liquor while adopting a more lenient approach towards beer and wine, could negate many of the risks of binge drinking. Additionally, campaigns highlighting the dangers of alcohol could prove informative to those ignorant of its long-term consequences. Alcohol taxes also target affordability and if used strategically, could decrease consumption.

For example, in 1985, just a few months after becoming General Secretary of the Communist Party, Mikhail Gorbachev launched a multi-pronged campaign against alcohol abuse including implementing measures to reduce alcohol production and sale. This included limiting the number of shops that could sell alcohol, closing distilleries and vineyards in Moldavia, Armenia and Georgia, and banning sales of alcohol before 2pm in restaurants. Soviet officials also abstained from drinking publicly to set a good precedent. Gorbachev’s policy did reduce the net consumption of alcohol, but like in the US, also gave birth to an illicit smuggling trade and didn’t prevent heavy drinkers from obtaining liquor. 

Governments today looking to address the public health costs of alcohol can learn from the lessons of their predecessors, and frame policies that aim to achieve a balance.