Commentary 1

Title of the article: Massachusetts lawmakers considering doubling alcohol

tax, adding sugary beverage tax

Source of the article: Masslive.com

https://www.masslive.com/politics/2021/10/massachusetts-lawmakers-conside
ring-doubling-alcohol-tax-adding-sugary-beverage-tax.html

Date the article was published: 20th October 2021

Date the commentary was written: 1st March 2022

Word count of the commentary: 797

Unit of the syllabus to which the article relates: Microeconomics

Key concept being used: Economic well-being

Massachusetts lawmakers considering doubling
alcohol tax, adding sugary beverage tax
masslive.com/politics/2021/10/massachusetts-lawmakers-considering-doubling-alcohol-tax-adding-sugary-
beverage-tax.html

October 20, 2021

By
Will Katcher | WKatcher@masslive.com

Alcohol and sugary drinks in Massachusetts could carry a heavier price tag if two
proposed bills are passed.

Rep. Kay Khan, a Newton Democrat, is hoping to double the state’s excise tax on alcohol
and create a new tax on beverages high in sugar. The taxes, she said, could net $435
million in revenue to fund public health programs, including some for substance abuse.

Massachusetts currently taxes alcohol at different rates depending on its strength, variety
and volume. Wine, for example, is taxed at a lower rate than a 40% alcohol by volume
rum. But the bill, if passed, would double all alcohol excise taxes across the board.

Excise taxes are charged to the producer of the product. They are considered an indirect
tax on customers, since a manufacturer will tend to cover the increased cost by raising
the price of the product.

The alcohol bill would change tax rates that Sen. Adam Hinds, the co-chair of the
Committee on Revenue, said have not been raised in decades, WHDH reported. While
the bill does not address the state sales tax, Hinds said that taxing alcohol at the same
6.25% rate as other products could earn the state $120 million in new revenue.

In 2010, voters rejected a sales tax on alcohol after the state’s general sales tax was
raised from 5% to 6.25%.

By doubling the excise tax, Khan said the state would take in $67 million more in revenue
that could be used for substance abuse programs, WHDH said. The bill would create a
“substance abuse health protection fund” to direct money from taxes into necessary
programs.

The Massachusetts Package Stores Association has rejected the idea, WHDH said,
saying it would drive people to purchase alcohol from out of state, either by ordering
online or driving to New Hampshire, which does not tax alcohol.

Rob Mellion, executive director of the MPSA, said New Hampshire already markets to
Massachusetts customers on its lower costs.

“When you raise the excise tax, you’ve just given them a new campaign,” he said.

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The sugar beverage bill would tax drinks in a tiered structure depending on their volume
and sugar content. It would add taxes up to 3% per ounce to drinks with more than 7.5
grams of sugar.

The tax, Khan said, could raise $368 million for public health, nutrition programs and
drinking water improvements in schools, WHDH said.

“$368 million is a lot of money that could be poured into better health services,” she said.

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 Commentary

The article discusses the doubling of alcohol tax and the addition of sugary beverage
tax in Massachusetts, a form of government intervention used to correct negative
externalities of consumption. Negative externalities of consumption are third-party
spillover costs caused by the consumption of demerit goods like alcohol and sugary
drinks, which are over-consumed and socially undesirable. This is a form of market
failure as the free market is unable to allocate resources efficiently. Some external costs
of alcohol consumption are drunk driving and a decrease in productivity. Whereas
external costs of sugary drink consumption include strains on families' healthcare costs
as well as an opportunity cost using the state budget since other people may not be
treated. These issues have a negative impact on consumers' and society's quality of
life, thereby lowering economic well-being.

In Fig 1, the market for sugary beverages shows a relatively steep demand curve which
is the marginal private benefit (MPB), indicating a relatively inelastic demand as these
drinks are usually addictive and habit-forming. It meets the supply curve at the
equilibrium of Qm (market quantity) and Pm (market price). At Qm, the MSB (Marginal
Social Benefit) is lower than MSC (Marginal Social Cost) resulting in welfare loss
formed in area E. This signifies that the benefit to private parties is greater than the
benefit to society. At Qm, Consumer surplus is area AB and producer surplus is CDF.
Qm exceeds the socially optimal level (Qopt), indicating that there is an overallocation
of sugary drinks. If only Qopt were consumed, ADE wouldn’t exist. Consumer surplus
and producer surplus would be maximized at BC and F respectively.

To correct the market failure and promote economic well-being, Massachusetts

lawmakers consider doubling the indirect alcohol tax and adding an indirect sugary
beverage tax of 3% per ounce. Theoretically it will remove the externality if equal to the
external cost.
Figure 2 shows that as a result of the 3% per ounce tax, the firm's cost of production
increases, which results in a leftward shift of the supply curve from S to MPC + tax.
Quantity in the market decreases from Qm to Qopt. Assuming that the tax is equal to
the external cost, welfare loss is eliminated and governments gain revenue from the
rectangle (Pc - Pp) x Qopt. Consumer burden is illustrated on the top half of the
rectangle, consumers have to pay a higher price (Pc) whilst receiving a lower quantity
(Qopt), whereas earlier they paid Pm x Qm. Producer burden is illustrated on the bottom
half of the rectangle, they receive a lower price (Pp) and supply less (Qopt) so their
revenue is lesser than the earlier Pm x Qm. This may force them to reduce their
production costs including labor, leading to increased unemployment of these beverage
workers. There is less incentive for consumers to purchase and producers to supply
these beverages in Massachusetts.

Whilst in theory, the tax can internalize the externality in reality it is difficult to measure
the external cost of alcohol and sugary drinks hence the externality may not be
completely eliminated.

Another issue is that since these demerit goods are addictive and have a relatively
inelastic demand, the indirect tax will be ineffective especially in the short run because
consumers will continue to purchase them. The increased price for consumers may
encourage illicit trading whilst the Massachusetts Package Stores Association believes
that the tax “would drive people to purchase alcohol from out of state”. This would
defeat the purpose of the tax and consumption levels will remain high, negatively
impacting economic well-being.

However, inelastic demand is also an advantage in this case as it can raise “435 million
in revenue to fund public health programs… $67 million more in revenue that could be
used for substance abuse programs”, merit goods that can improve social healthcare
and economic well-being as education of nutritious foods become more widespread.
Substance abuse programs may further reduce consumption to the point where welfare
loss disappears as consumers will become aware of the consequences of consuming
these drinks. This demonstrates economic well-being as consumers may be healthier
and safer in the long run.

An alternative policy is regulations and legislation. which have the effect of shifting the
demand curve to the left from the market quantity to the optimal quantity. Regulations
are effective in reducing consumption quickly however there is an opportunity cost for
the government budget.

Massachusetts lawmakers’ approach is the best long-term solution to combat alcohol

and sugary beverage consumption, and promote economic well-being. Whilst
regulations are effective in the short-run they require government expenditure. In
contrast, indirect taxes generate revenue for programs that educate consumers about
the consequences of these demerit goods. This gives them the chance to make
healthier decisions, which benefits society and improves economic well-being and
quality of life.