Federal Taxation of Tobacco, Alcoholic Beverages, and Motor Fuels

156 Pages·2005·4.47 MB·English

CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE AUGUST 1990
Federal Taxation of Tobacco,
Alcoholic Beverages, and
Motor Fuels
A CBO STUDY
S U M M A RY
CBO Publication
#519
June 1990
CBO STUDY ON FEDERAL TAXATION OF TOBACCO,
ALCOHOLIC BEVERAGES, AND MOTOR FUELS
The federal government draws only a small portion of its revenues from excise
taxes on tobacco, alcoholic beverages, and motor fuels. Over the last 40 years,
the share of these taxes in federal revenues has been declining. Some sentiment
has been expressed for reconsidering the role of these taxes, partly to reduce the
budget deficit but also because of the role that such excise taxes might play in
federal health, safety, energy, and environmental programs.
The CBO study, Federal Taxation of Tobacco, Alcoholic Beverages, and Mo-
tor Fuels, analyzes some illustrative tax increases. It focuses on how the in-
creases would affect family incomes, and to a lesser degree on whether they
would serve other policy goals. The options in CBO's study are: doubling the cig-
arette tax from 16 cents to 32 cents per pack; equalizing the tax on all alcoholic
beverages at $16.00 per proof-gallon ($0.25 per ounce of pure alcohol); and rais-
ing the gasoline tax from 9 cents to 21 cents per gallon and the tax on highway
diesel fuel from 15 cents to 27 cents per gallon. Because excise taxes are thought
to place a disproportionate burden on lower-income families, the report also ana-
lyzes measures that would reduce the burden for these families—through in-
creases in the Food Stamp program and in the earned income tax credit.
The tax increases would burden lower-income families relatively more than
other families, when the increases are measured relative to family incomes.
Taking account of the effects of the tax increases on the price level and, as a re-
sult, on income taxes and transfer payments, would reduce but not eliminate the
relatively greater burden on lower-income families. If the effects of the excise
tax increases are measured relative to total annual family expenditures, which
some people view as a better reflection of a family's economic circumstances than
is its income for a single year, the net tax increases for lower-income families
would be similar to those for other families.
Questions regarding the analysis should be directed to Frank Sammartino
of CBO's Tax Analysis Division at [phone]. The Office of Intergovern-
mental Relations is CBO's Congressional liaison office and can be reached at
226-2600. For additional copies of the report, please call the CBO Publications
Office at 226-2809.
CONGRESSIONAL
BUDGET OFFICE
Second and D Streets, S.W.
Washington, D.C. 20515
FEDERAL TAXATION OF TOBACCO,
ALCOHOLIC BEVERAGES, AND
MOTOR FUELS
The Congress of the United States
Congressional Budget Office
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402

PREFACE
In 1989, federal excise taxes on tobacco, alcoholic beverages, and motor
fuels raised $24.4 billion in revenue-about 2.5 percent of total federal
revenues. At the request of the Subcommittee on Human Resources of
the House Committee on Ways and Means, this study examines cur-
rent federal taxation of tobacco, alcoholic beverages, and motor fuels,
and the likely effects of an illustrative set of increases in those taxes.
In accordance with the mandate of the Congressional Budget Office
(CBO) to provide objective and impartial analysis, the study contains
no recommendations.
Frank Sammartino of CBO's Tax Analysis Division prepared the
study under the direction of Rosemary Marcuss and Joseph Cordes.
Len Burman, Maureen Griffin, and Eric Nicholson made important
contributions to the report. Many people provided valuable comments
on earlier drafts, including Robert Hartman, Richard Kasten, Stephen
Long, David Montgomery, Rosemarie Nielsen, Kathleen O'Connell,
Linda Radey, Frederick Ribe, Steven Sheingold, Frances Sussman, and
Roberton Williams. Richard Kasten and Frank Sammartino developed
the CBO tax simulation models used in the study. Eric Nicholson pre-
pared the background tables contained in Appendix A.
Francis Pierce and Sherry Snyder edited the manuscript, Nancy
H. Brooks provided editorial assistance, Denise Thomas typed the
many tables, and Kathryn Quattrone prepared the paper for publi-
cation.
Robert D. Reischauer
Director
August 1990

CONTENTS
SUMMARY AND INTRODUCTION xiii
I THE ROLE OF FEDERAL
EXCISE TAXES 1
Are Excise Taxes Fair? 2
Do Excise Taxes Interfere with
Consumer Choice? 4
Federal Excise Taxes and
State Revenues 5
H AN OVERVIEW OF FEDERAL
TOBACCO, ALCOHOLIC BEVERAGE,
AND MOTOR FUELS TAXATION 7
Trends in Federal Revenues
and Rates 7
Trends in Tobacco, Alcohol, and
Motor Fuel Consumption 15
The Total Tax Burden on Tobacco,
Alcoholic Beverages,
and Motor Fuels 19
m WHO BUYS TOBACCO, ALCOHOLIC
BEVERAGES, AND MOTOR FUELS? 25
Average Family Expenditures 25
Families with Tobacco, Alcoholic Beverage,
and Motor Fuel Expenditures 33
IV THE ECONOMIC COSTS OF SMOKING,
DRINKING, AND DRIVING 39
Tobacco and Alcohol 40
Motor Fuels 56
vi FEDERAL EXCISE TAXES August 1990
V THE DISTRIBUTIONAL EFFECTS
OF INCREASES IN FEDERAL TAXES
ON TOBACCO, ALCOHOLIC
BEVERAGES, AND MOTOR FUELS 65
Excise Taxes, Prices, and
Consumption 67
The Distribution of Excise Tax
Increases Among Families 75
Options That Would Offset the Regressivity
of an Excise Tax Increase 80
VI OTHER EFFECTS OF EXCISE
TAX INCREASES 87
Effects on the Economy of an Increase
in Excise Taxes on Motor Fuels 88
Regional Effects 91
Tax Collection and Compliance 93
APPENDIXES
A Background Data on Excise Tax
Revenues and Tax Rates 101
B Sources and Treatment of the Data 123
CONTENTS vu
TABLES
1. Projected Weighted-Average Poverty
Thresholds in 1990, by Size of Family 27
2. Average Family Income and Expenditures,
by Adjusted Post-Tax Income Quintiles,
Age of Family Head, and Region, 1990 28
3. Expenditures on Tobacco, Alcoholic
Beverages, and Motor Fuels as Percentages
of Post-Tax Family Income and Total
Expenditures, by Adjusted Post-Tax
Income Quintiles, Age of Family Head,
and Region, 1990 29
4. Expenditures on Distilled Spirits, Beer, and
Wine as a Percentage of Post-Tax Family
Income and of Total Expenditures, by
Adjusted Post-Tax Income Quintiles, 1990 31
5. Share of Family Income and Expenditures
by Adjusted Post-Tax Income Quintiles,
Age of Family Head, and Region, 1990 33
6. Expenditures on Tobacco, Alcoholic
Beverages, and Motor Fuels for Families
With Expenditures, by Adjusted Post-Tax
Income Quintiles, Age of Family Head,
and Region, 1990 34
7. Expenditures on Tobacco, Alcoholic
Beverages, and Motor Fuels as a Percentage
of Post-Tax Family Income and of Total
Expenditures for Families with Expenditures,
by Adjusted Post-Tax Income Quintiles, 1990 36
viii FEDERAL EXCISE TAXES August 1990
8. Distribution of Expenditures on Tobacco,
Alcoholic Beverages, and Motor Fuels, by
Adjusted Post-Tax Income Quintiles, Age
of Family Head, and Region, 1990 37
9. Effects of Increasing Cigarette, Alcoholic
Beverage, and Motor Fuel Taxes, by
Adjusted Post-Tax Income Quintiles,
Age of Family Head, and Region, 1990 78
10. Average Net Tax Increase and Average
Benefit Increase from Food Stamp and
EITC Options, by Adjusted Post-Tax
Income Quintiles, 1990 84
11. Average Net Tax Increase for Families
in the Lowest Income Quintile, by Age
of Head of Family, 1990 85
12. Average Net Tax Increase and Average
Benefit Increase from Food Stamp and
Earned Income Tax Credit Options for
Families in the Lowest Income Quintile
with Age of Family Head Under 60,1990 86
A-l. Total Federal Excise Tax Revenues,
Fiscal Years 1950-1989 102
A-2. Federal Tobacco Tax Revenues,
Fiscal Years 1950-1989 103
A-3. Federal Alcoholic Beverage Tax Revenues,
Fiscal Years 1950-1989 104
A-4. Federal Motor Fuel Tax Revenues,
Fiscal Years 1950-1989 105