Biggest Lesson from Studying Marijuana Taxes: Raise Alcohol Taxes

After six years of studying taxation of marijuana, my firmest conclusion is that we should raise alcohol taxes. Figuring how much tax the marijuana market can stand, and how soon, is really hard.  The illegal market stands ready to take market share whenever cannabis taxes are too high.

But in the USA, it’s clear to me that the alcohol market can stand a lot more tax before bootlegging becomes a noticeable problem.

In Junior Johnson’s pre-NASCAR alcohol-running heyday, some 60 years ago, “A gallon of whiskey [bore] $11 tax. You could make it for 75 cents to a dollar and sell it for $3 or $4.”*

OK, he was either (1) rounding from $10.50 to $11, or (2) including state taxes. The federal excise tax per proof gallon was $10.50. Still, despite that huge price advantage for bootlegged product, legal product dominated the market.  A key reason not to raise taxes is to keep the black market at bay, but we could raise alcohol taxes a lot before the black market can compete on price.

Today’s non-indexed tax of $13.50 per proof gallon has far from kept up with inflation. Since the early 1990s, that nominal rate has lost about 60 percent of its real impact.

Working on RAND’s Insights for Vermont let me know that I’m not the only one thinking that “the total social cost associated with alcohol abuse is very much larger than all costs and outcomes related directly to marijuana use.” And exposed me to the idea that “even a 10-percent reduction in alcohol abuse accompanying the doubling in marijuana use could be a net win for society.”

So I am all for increasing taxes on alcohol.  When I get time, this will be a new project for the Center for New Revenue.

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• (Source: Junior Johnson, quoted in Peter Golenbock, American Zoom: Stock Car Racing – From the Dirt Tracks to Daytona, page 22 (MacMillan 1993).)