5. The wine tax rates could be increased to equivalent rates to the present-law tax imposed on beer.

6. The beer tax rate could be doubled, and the wine tax rates increased to equivalent rates to the new tax imposed on beer.

7. The alcoholic beverage tax rates could be increased by 50 percent.

8. The reduction of the tax rate on alcohol content in distilled spirits that is attributable to wine or certain flavors could be repealed.

Pros and Cons

Arguments for the proposals

1. The present alcoholic beverage excise taxes are imposed at flat rates rather than being adjusted to reflect inflation. Despite the 1982 increase in the distilled spirits excise tax rate (the only increase since 1951), the effective rate of all of the alcoholic beverage excise taxes is less than it was in 1951 (distilled spirits) or in 1955 (wine and beer). For example, had the distilled spirits tax rate been indexed to the CPI in 1951, the present tax would be approximately $44.00 per proof gallon instead of $12.50 per proof gallon. Similarly, the taxes on wine and beer would be significantly higher. Increases in these taxes, therefore, are appropriate.

2. While excise taxes generally are viewed as affecting the poor more than the wealthy, i.e., as regressive, the alcoholic beverage excise taxes are imposed on discretionary purchases. Arguments against regressive taxes are less persuasive in the case of taxes imposed on discretionary purchases than in the case of taxes affecting necessities.

3. From a public policy perspective, alcoholic beverage excise taxes are appropriately imposed on alcohol content. Additionally, the three major types of alcoholic beverages are substitutes for each other and should be taxed at equivalent rates.

4. The Administration has proposed user fees to offset costs of administering programs of the Bureau of Alcohol, Tobacco, and Firearms. Increasing the alcoholic beverage excise tax rates is a possible alternative means of accomplishing this Administration proposal.

5. Alcohol-related deaths run as high as 100,000 per year. Estimated annual costs for business associated with alcohol abuse were as high as $113 billion in 1979, with two-thirds of the costs being productivity losses of workers. Studies have shown that increases in the alcoholic beverage taxes could have a substantial impact in reducing consumption.1

Arguments against the proposals

1. Excise taxes imposed at flat rates cost the poor a larger percentage of disposable income than the relative income share of wealthier individuals. According to a 1987 CBO study of excise taxes, alcohol expenditures are 10 times higher as a percentage of

1 Cook, Philip J., "The Economics of Alcohol Consumption and Abuse," Alcoholism and Related Problems, 1984; and Impact of Alcohol Excise Tax Increases on Federal Revenues, National Alcohol Tax Coalition, 1984.

income for the ten percent of the families with the lowest income than the percentage for the ten percent of families with the highest incomes.

2. Indexing the alcoholic beverage excise tax rates could lead to market distortions as the tax rates changed annually. Prevention of such distortions would require imposition of floor stocks taxes 2 whenever significant tax increases occurred. Floor stocks taxes may impose administrative burdens on retail and wholesale dealers in taxable articles.

3. State and local governments impose excise taxes on alcoholic beverages. Increasing Federal tax rates could preempt possible tax increases at the State and local levels at a time when other Federal assistance is being reduced due to Federal deficit problems.

4. The alcoholic beverage excise taxes represent a burden on one industry. Excessive deficits are a broad-based problem; deficit reduction should be accomplished by measures that spread the burden across all segments of the economy rather than unduly burdening a single industry.

2 Floor stocks taxes are special add-on taxes imposed on products held for sale beyond the regular point of taxation on the date of a scheduled increase in rate.

1 All proposals except indexing would be effective on October 1, 1987, with appropriate floor stocks taxes being imposed. Indexing would be effective on January 1, 1989.

2 Gain of less than $50 million.

(1) (1) (1)

0.1

2. Tobacco Products Excise Taxes

Present Law

Excise taxes are imposed on cigars, cigarettes, cigarette papers and tubes, snuff, and chewing tobacco manufactured in or imported into the United States. Substantially all of the revenue from these taxes is raised from the tax on "small cigarettes." Small cigarettes are cigarettes weighing no more than 3 pounds per thousand. The present rate for that tax has been in effect since 1982.

The following is a summary of the Federal excise taxes imposed on tobacco products under present law:

1. The present excise taxes on tobacco products could be doubled (e.g., small cigarettes could be taxed at $0.32 per pack of 20 cigarettes, a $0.16 per pack increase).

2. The flat tax rates in possible proposal 1 could be indexed for inflation, using the CPI.

3. The present excise taxes on tobacco products could be doubled as provided in possible proposal 1 and tax could be imposed on pipe, etc. tobacco at $0.48 per pound (the new rate that would apply to snuff).

4. The present excise tax rate for small cigarettes could be increased by 50 percent to $0.24 per pack of 20 cigarettes (an $0.08 per pack increase) with comparable increases being enacted for all other tobacco products.

5. The present excise tax rate for small cigarettes could be tripled to $0.48 per pack of 20 cigarettes (a $0.32 per pack increase) with comparable increases being enacted for all other tobacco prod

ucts.

Pros and Cons

Arguments for the proposals

1. The present tobacco product excise taxes are imposed at flat rates rather than being adjusted to reflect inflation. Despite the 1982 increase in the cigarette excise tax rates (the only such increase since 1951), the effective rate of these taxes is lower today than it was in 1951. Had the rates been indexed to the CPI in 1951, the present cigarette excise tax rate would be approximately 34 cents per pack of 20 small cigarettes rather than 16 cents. Higher tax rates are therefore appropriate.

2. Indexing the tobacco taxes would retain the real tax burden of these taxes as the general price level increases.

3. While excise taxes generally are viewed as affecting the poor more than the wealthy, i.e., as regressive, the tobacco excise taxes are imposed on discretionary purchases. Arguments against any regressive impact of taxes are less persuasive in the case of taxes imposed on discretionary purchases than in the case of taxes imposed on necessities.

4. The Administration has proposed user fees to offset costs of administering programs of the Bureau of Alcohol, Tobacco, and Firearms. Increasing the tobacco excise tax rates is a possible alternative means of accomplishing this Administration proposal.

5. The U.S. Surgeon General has identified cigarette smoking as the single most important source of premature death in the United States. At least one study has stated that 30 percent of deaths from heart disease and cancer are smoking related.3 Another study has estimated additional health care costs of from $12 to $35 billion per year and between $27 and 61 billion per year in lost income result from smoking. Increasing tobacco excise taxes is consistent with other Federal Government policies to discourage smoking because of the associated health hazards.

Arguments against the proposals

1. Excise taxes imposed at flat rates are regressive, i.e., they cost the poor a larger percentage of disposable income than they cost wealthier individuals making the same purchases. According to a January 1987 CBO study on the distributional aspects of selected Federal excise taxes, individuals with incomes below $5,000 and between $5,000 and $10,000 spent 7.89 and 3.33 percent, respectively, of income on tobacco purchases. The percentage declines steadily as incomes rise, falling to 0.54 percent for individuals with incomes of $50,000 or more.

2. Indexing the tobacco products excise tax rates could lead to market distortions as the tax rates changed annually. Prevention on such distortions would require imposition of floor stocks taxes 5 whenever significant tax increases occurred. Floor stocks taxes impose administrative burdens on retail and wholesale dealers in taxable articles.

3 The Distributional Aspects of an Increase in Selected Federal Excise Taxes, Congressional Budget Office Staff Working Paper, January 1987.

4 Chandler, William U., Banishing Tobacco, Washington Worldwatch Institute, 1986.

5 Floor stocks taxes are special add-on taxes imposed on products held for sale beyond the regular point of taxation on the date of a scheduled increase in tax.