How Alcohol, Tobacco, and Drug Use Affect Economics and Government

The alcohol and tobacco industries play large roles in the U.S. economy. Both industries not only provide jobs and income for those involved in growing, manufacturing, and selling these products but also contribute significant tax revenues to the federal, state, and local governments. The U.S. economy also feels the effects of alcohol, tobacco, and illicit drug use in other, less beneficial, ways. All of these drugs can have significant health consequences, with associated health care costs. There are also costs in the form of loss of productivity—work that was never performed because of poor health, death, or imprisonment. The cost of enforcing drug laws, and incarcerating those convicted of breaking such laws, are significant as well.

U.S. ALCOHOL SALES AND CONSUMPTION

Retail sales of alcoholic beverages are divided into three groups: beer, wine, and distilled spirits. According to "Numbers Crunchers" (July 2006, http://www.breweryage.com/archives/winter.spring06/IRI%203-06.pdf), of all the beverage categories in retail sales such as bottled water, carbonated beverages, and coffee, alcoholic beverages made up 38.5% of the dollars spent on beverages in 2005. Of the three alcoholic beverage categories, beer had the highest share at 20.6% of all dollars spent on all beverages, wine was second at 12%, and distilled spirits (including premixed cocktails and coolers) were last at 5.9%

Beer

The Economic Research Service (ERS; December 21, 2005, http://www.ers.usda.gov/Data/FoodConsumption/spreadsheets/beverage.xls) notes that per capita consumption of beer fell almost steadily through the 1980s and early 1990s. Beer consumption was 24.6 gallons per person in 1981 and 21.6 gallons per person in 2003, with the 21.6 figure being relatively constant during the late 1990s and early into the twenty-first century. According to the report "Beer State-of-the-Industry" (Beverage Dynamics, September-October 2005, http://www.adamsbevgroup.com/bd/2005/0510_bd/0510ber.asp), in 2004 the beer industry grew by only 0.7%. The report notes, however, that beer still claims more than half the retail sales of alcoholic beverages.

There were an estimated 1,367 domestic brewers in the United States in 2005, well over four times the number in 1990, according to the Beer Institute's Brewer's Almanac 2006 (2006, http://www.beerinstitute.org/statistics.asp?bid=200). Microbreweries and brewpubs account for this increase. Nonetheless, the Modern Brewery Age (2006, http://www.breweryage.com/archives/winter.spring06/BreweryChart%203-06.pdf) reports that Anheuser-Busch, Inc., a traditional brewery, was the top brewer in the country with a 2005 market share of 49.5%. Anheuser-Busch also controlled 55.3% of industry production in that year. Miller Brewing Company was next (20.9% of industry production), followed by Coors Brewing Company (12.4%).

Wine

Statistics gathered by the Wine Institute, in "2005 California Wine Sales Continue Growth Trend as Wine Enters Mainstream U.S. Lifestyle" (April 2006, http://www.wineinstitute.org/industry/statistics/2006/wine_sales.php), show that 2005 wine sales in the United States grew 5.4% to 703 million gallons, for a retail sales value of $26 billion. In comparison, a total of 612 million gallons of wine were sold in the United States in 2002, for a retail sales value of $21.6 billion, up from $20.2 billion in 2001. Nonetheless, the ERS notes that per capita consumption of wine was at its peak of 2.4 gallons a year in the mid-1980s before beginning a slow decline to 1.7 gallons per capita in the early to mid-1990s. The per capita consumption rate in 2004 was 2.3 gallons per person, having risen close to the peak consumption.

The Wine Institute reports that the California wine industry accounted for a 63% share of the U.S. wine market in 2005. Red wines held a 41.7% market share in 2005, white wines a 41% share, and blush wines a 17.4% share. Chardonnay was the leading varietal wine (a wine produced from a single variety of grape) followed by Merlot.

Distilled Spirits

According to the U.S. Department of Agriculture (USDA), in U.S. Market Profile for Distilled Spirits (April 2005, http://www.fas.usda.gov/agx/ISMG/Distilled%20Spirits%204_19_2005.pdf), 2003 retail sales of distilled spirits (for example, whiskey, vodka, rum) were $42.7 billion, an increase of 7.1% from 2002.

How Much Do Individuals and Families Spend on Alcohol?

The U.S. Bureau of Labor Statistics reports in Consumer Expenditures in 2004 (April 2006, http://www.bls.gov/cex/csxann04.pdf) that the average American family (or other consumer unit) spent $459 on alcoholic beverages in 2004, up from $376 in 2002 and $391 in 2003. This figure represents about 1% of the average annual expenditures for the American family. This percentage has remained relatively stable since 1993.

The amount spent on alcohol varied in 2004, depending on the characteristics of the household. On average, single parents with at least one child under age eighteen spent only $219 on alcoholic beverages in 2004, or about 0.7% of their average annual expenditures. Married couples with no children spent $567 (up from $388 in 1999), which was 0.8% of their average annual expenditures. The percentage other groups spent on alcohol varied within a range of 0.7% to 1.1%, except for the "single person and other consumer units" group. This group spent the largest proportion of its average annual expenditures on alcohol: nearly 1.3%.

U.S. TOBACCO PRODUCTION AND CONSUMPTION

Farming Trends

Thomas C. Capehart notes in "Trends in U.S. Tobacco Farming" (November 2004, http://www.ers.usda.gov/publications/tbs/nov04/tbs25702/tbs25702.pdf) that, sparked by the invention of the cigarette-making machine by James A. Bonsack in 1881, which made cigarettes cheaper and faster to manufacture, tobacco production in the United States grew from three hundred million pounds in the mid-1860s to over one billion pounds in 1909. In 1946, at the end of World War II, tobacco production was above two billion pounds. During the 1960s changes in tobacco preparation and the introduction of new machinery increased the amount of tobacco production per acre, although the number of tobacco farms dropped from about 512,000 in 1954 to 56,977 in 2002.

Table 7.1 shows that beginning in 1998 acreage devoted to tobacco and the value of production declined steadily. According to "Trends in U.S. Tobacco Farming," the number of acres used to grow tobacco fell from 1.5 million in 1954 to 717,620 in 1998 to 298,020 in 2005. The 2005 harvest produced 639.7 million pounds of tobacco, valued at about $1 billion, down from a high of $3.2 billion in 1997.

In 2005 North Carolina led in tobacco production, followed by Kentucky, Tennessee, South Carolina, Georgia, and Virginia. (See Table 7.2.) Tobacco plays a major role in the agricultural economies of the leading half-dozen tobacco-producing states.

Value and Income

According to the USDA (July 2006, http://www.ers.usda.gov/briefing/tobacco/data/table23.pdf), in 2002 tobacco crops had a value of approximately $1.7 billion in cash receipts. Preliminary USDA figures about the 2002 tobacco crop indicate it represented 0.90% of all cash receipts from crops and 1.75% of all farm commodities.

Tobacco is a labor-intensive crop to produce. Brazilian researchers estimate that it takes up to three thousand person-hours per year to grow one hectare of tobacco. (A hectare is 2.47 acres.) By comparison, vegetables take about one-tenth the labor to grow. Although tobacco pays more per hectare than any other commonly grown farm crop, more than half of tobacco growers cannot support themselves purely through tobacco farming because of high costs for labor. They must also work at other jobs to support themselves and their families.

Manufacturing

In Tobacco Situation and Outlook Yearbook (December 2005, http://usda.mannlib.cornell.edu/reports/erssor/specialty/tbs-bb/2005/tbs2005.pdf), Thomas C. Capehart estimates that in 2005 U.S. factories produced 481.9 billion cigarettes, of which 109.2 billion were shipped to other countries. This is down from a peak output of 754.5 billion cigarettes produced by U.S. factories in 1996. Exports were high that year as well: 243.9 billion cigarettes.

Tobacco Consumption

The ERS (October 3, 2005, http://www.ers.usda.gov/Briefing/Tobacco/Background.htm) notes that cigarette smoking in the United States has been dropping almost every year since 1963, when per capita consumption reached a record high of 4,345 cigarettes. Preliminary USDA figures estimated the 2006 per capita cigarette consumption of the population aged eighteen years and older at 1,691 cigarettes. (See Table 3.1 in Chapter 3.)

Table 3.1 also shows that per capita consumption of all tobacco products generally decreased from 1996 to 2006, from 4.8 pounds in 1996 to 3.7 pounds in 2006. Per capita consumption of large cigars by males, however, increased during the period, jumping from nearly 31.9 large cigars and cigarillos (small cigars) per adult male in 1996 to 47.8 in 2006.

Consumer Spending on Tobacco

Americans spent an estimated $88.9 billion on tobacco products in 2005, more than double that of 1989 spending. (See Table 7.3.) The majority ($82 billion, or 92%) was spent on cigarettes. This was slightly less than 1% of all disposable personal income. Although the per capita consumption of cigarettes has declined, expenditures (after adjustment for inflation) have increased because of increasing cigarette prices and an increase in the population of people of smoking age.

Table 7.4 shows that the average American family (or other consumer unit) spent $288 on tobacco products and smoking supplies in 2004. In 2003 the average spent per consumer unit was $290, and in 2002 the average spent was $320. These data appear to be in contradiction with the data shown in Table 7.3, in that spending seems to be decreasing rather than increasing. However, the data in Table 7.4 are per consumer unit, and the number of consumer units increased from 2002 to 2004. In addition, the two data sets were collected differently. The data in Table 7.4 are averages of self-reported survey data, and the data in Table 7.3 are economic data (adjusted for inflation) compiled by the U.S. Department of Commerce. Thus, the data cannot be directly compared.

Exports

Capehart, in Tobacco Situation and Outlook Yearbook, reports that in 2005, 109.2 billion cigarettes were exported. From 1996 to 2004 cigarette exports fell by about 135 billion pieces. In 2004 most of the cigarettes exported went to Japan (71 billion), Iran (14.5 billion), and Saudi Arabia (10.7 billion). Other major importers of American cigarettes were Israel (5.1 billion), Lebanon (4 billion), Hong Kong (2 billion), Kuwait (1.8 billion), the United Arab Emirates (1.7 billion), and Taiwan (1.5 billion). Many of the importers in these countries then export these cigarettes to other countries.

WORLD TOBACCO MARKETS

The National Agricultural Statistics Service, in Agricultural Statistics, 2005 (2005, http://www.usda.gov/nass/pubs/agr05/05_ch2.PDF), estimates the world production of tobacco in 2004 at 6.6 million metric tons (a metric ton equals 1,000 kilograms, or 2,204.6 pounds), down from 6.9 million in 2000. China produced over 36% (about 2.4 million metric tons). Other leading tobacco producers included Brazil (890,500 metric tons), India (665,000 metric tons), the United States (397,347 metric tons), Indonesia (158,900 metric tons), Argentina (154,300 metric tons), and Turkey (153,750 metric tons).

The Campaign for Tobacco-Free Kids reports in "Tobacco Facts" (June 2005, http://www.tobaccofreekids.org/campaign/global/docs/1.pdf) how lucrative overseas markets can be for cigarette makers. In 2003 Philip Morris had global revenue of $81.8 billion, producing 887.3 billion cigarettes, or 16.5%, of the total world cigarette production. Furthermore, more than half of all smokers in 1999 were in Asia. Concerning cigarette consumption, in 2002 China was the top consumer (2.2 trillion cigarettes) and the United States was the third-highest consumer (463 billion).

On February 27, 2005, the world's first tobacco control treaty, the World Health Organization's Framework Convention on Tobacco Control (http://www.who.int/tobacco/framework/countrylist/en/index.html), became binding international law with ratification by fifty-seven countries, including Canada. The United States signed the measure on May 10, 2004, but as of the end of 2006 had still not ratified it (become bound by it). However, 142 other countries had ratified the treaty by the end of 2006. The goal of the treaty is to improve global health by reducing tobacco consumption by setting international standards on tobacco price and tax increases, tobacco advertising and sponsorship, labeling, illicit trade, and secondhand smoke.

ALCOHOL AND TOBACCO ADVERTISING

Alcohol Advertising

The Center for Science in the Public Interest (CSPI), in "Alcoholic-Beverage Advertising Expenditures" (December 2003, http://www.cspinet.org/booze/FactSheets/AlcAdExp.pdf), the most recent fact sheet on alcohol advertising published by the CSPI, indicates that the beer industry spent approximately $1.2 billion in 2002 on advertising, up from $799.7 million in 1999. The liquor industry spent $408.1 million, up from $321.4 million in 1999. The wine industry spent $122.4 million, up from $120.5 million in 1999.

According to the CSPI fact sheet, in 2002 the beer industry focused most of its advertising dollars on television, and the wine industry on both print media (magazines, newspapers, and billboards) and television. The liquor industry focused its advertising primarily on print media, but its spending on television and radio advertising rose substantially between 1999 and 2002 as a result of this industry's decision to lift its self-imposed ban on radio and television advertising.

After the liquor industry lifted its ban, the National Broadcasting Company (NBC) also ended its ban on hard liquor advertising and became the first network television station to do so. The broadcaster's 2001 decision was met with nearly universal derision, and a short time later NBC returned to its ban on hard liquor advertisements. As a response, the liquor industry developed guidelines to restrict advertising to publications or television programs with at least 70% of readers or viewers being age twenty-one or older. Stuart Elliott reports in "Thanks to Cable, Liquor Ads Find a TV Audience" (New York Times, December 15, 2003) that by the end of 2003 hard liquor was being advertised on two dozen national cable networks, 140 local cable systems, and 420 local broadcast stations. In a subsequent article, "In a First, CNN Runs a Liquor Commercial" (New York Times, March 2, 2005), Elliott notes that CNN became the first national cable news network to air, in March 2005, ads for hard liquor with a commercial for Grey Goose vodka. Then, in August 2006 the National Highway Traffic Safety Administration (NHTSA) announced that it would use the same medium—television—to stress the threat of being arrested for driving under the influence. According to Matthew L. Wald, in "Highway Safety Agency Unveils New Campaign against Drunken Driving" (New York Times, August 17, 2006), the NHTSA budgeted $11 million for these television advertisements.

ALCOHOL ADVERTISING AND YOUTH

In "Effects of Alcohol Advertising Exposure on Drinking among Youth" (Archives of Pediatric Adolescent Medicine, January 2006), Leslie B. Snyder et al. state that their objective was "to test whether alcohol advertising expenditures and the degree of exposure to alcohol advertisements affect alcohol consumption by youth." Their results reveal that people aged fifteen to twenty-six who reported seeing more alcohol advertisements drank more, on average, than those who reported seeing fewer or no alcohol advertisements. By analyzing data on alcohol advertising expenditures on television, radio, billboards, and newspapers with the rest of the data they collected, Snyder et al. determine that young people in markets with greater alcohol advertising expenditures drank more than those in markets with less alcohol advertising expenditures. These findings suggest that attempts to reduce youth drinking must involve limiting or changing alcohol advertising to lessen its effect on youth and/or countering alcohol advertising with public health campaigns to reduce youth drinking as the NHTSA was planning in 2006.

Tobacco Advertising

According to the U.S. Federal Trade Commission (FTC), in Cigarette Report for 2003 (2005, http://www.ftc.gov/reports/cigarette05/050809cigrpt.pdf), cigarette sales in 2003 fell 4.2% from the previous year, to 360.5 billion cigarettes. Advertising expenditures in 2003 increased 21.5% from 2002, to approximately $15.1 billion, the most ever reported to the FTC. As expenditures increased, however, per capita cigarette consumption continued to drop.

The tobacco industry is forbidden by law to advertise on radio and television. Where do the industry's advertising dollars go? The largest share (about $10.8 billion) of the approximately $15.1 billion spent in 2003 was used for price discounts, which are paid to cigarette retailers or wholesalers to discount the price of the cigarettes to the consumer. About $1.2 billion was used for retailer promotional allowances, which pays them for stocking, shelving, and displaying cigarettes.

ALCOHOL AND TOBACCO TAXATION

Taxation is an age-old method by which the government raises money. Alcoholic beverages have been taxed since colonial times, and tobacco products have been taxed since 1863. The alcohol and tobacco industries contribute a great deal of tax money to federal, state, and local governments.

Alcohol Taxes

According to the Distilled Spirits Council of the United States (2006, http://www.discus.org/issues/taxes.asp), hard liquor is the most highly taxed consumer product in the nation. The organization estimates that direct and indirect local, state, and federal taxes and fees accounted for 57% of the typical bottle price in 2006. Even though the beer and wine industries are taxed at lower levels, they still contribute a significant amount of tax revenue.

According to Table 7.5, in fiscal year (FY) 2005 the federal government collected approximately $8.9 billion in excise taxes on alcoholic beverages. (Excise taxes are monies paid on purchases of specific goods, such as alcohol and tobacco.) Federal excise taxes on distilled spirits amounted to half that total—about $4.5 billion, which included taxes on both domestic and imported distilled spirits. Distilled spirits are taxed by the proof gallon, which is a standard U.S. gallon of 231 cubic inches containing 50% ethyl alcohol by volume, or 100 proof.

Excise taxes on wine and beer make up the other half of the excise taxes collected on alcoholic beverages. The calculation of wine taxes depends on several variables, such as alcohol content and the size of the winery; in 2005 federal excise taxes on wine totaled $806.8 million. Total beer excise taxes were much higher, at $3.6 billion. (See Table 7.5.) According to the Alcohol and Tobacco Tax and Trade Bureau (TTB; 2006, http://www.ttb.gov/beer/tax.shtml), brewers who produce fewer than two million barrels (one barrel equals thirty-one gallons) get a reduced excise tax rate of $7 per barrel on the first sixty thousand barrels. Those who produce more than two million barrels pay an excise tax of $18 per barrel.

Besides the federal excise taxes, the states levy sales taxes on alcohol. In 2005 the per capita state sales tax collected on alcoholic beverages—averaged across states—was $15.99. Total state tax collections from alcohol include not only the sales tax ($4.7 billion in 2005) but also payments for alcoholic beverage licenses ($389.3 million in 2005). Taxes on alcohol amounted to about 0.7% of the nation's total state taxes collected in 2005. (See Table 7.6.)

Tobacco Taxes

The ERS (March 2006, http://www.ers.usda.gov/Briefing/Tobacco/Data/table22.pdf) reports that in 2004–05 federal, state, and local governments collected $20.3 billion in excise taxes on tobacco products. Most of this revenue came from the sale of cigarettes. According to the National Conference of State Legislatures (July 2006, http://www.ncsl.org/programs/health/Cigarette.htm), the federal excise tax on cigarettes was $0.39 per pack as of January 1, 2006.

States have raised their excise taxes on cigarettes to help defray health costs associated with tobacco, to discourage young people from starting to smoke, and to motivate smokers to stop. Table 7.7 shows state cigarette excise tax rates and rankings in 2006. New Jersey had the highest state excise tax on cigarettes at 257.5 cents per pack. Rhode Island was a close second with 246 cents excise tax per pack. South Carolina (a tobacco-growing state) had the lowest excise tax of 7 cents per pack. The average tax in the nation in 2006 was 96.1 cents per pack.

GOVERNMENT REGULATION OF ALCOHOL AND TOBACCO

Besides taxation, the alcoholic beverage and tobacco industries are subject to federal and state laws that regulate factors such as sales, advertising, and shipping.

Alcohol Regulation

The best-known pieces of legislation regarding alcohol are the Eighteenth and Twenty-First Amendments to the U.S. Constitution. The Eighteenth Amendment prohibited the manufacture, sale, and importation of alcoholic beverages. Ratified in 1919, it took effect in 1920 and ushered in a period in U.S. history known as Prohibition. After twelve years, during which it failed to stop the manufacture and sale of alcohol, Prohibition was repealed in 1933 by the Twenty-First Amendment.

Most interpretations of the Twenty-First Amendment hold that the amendment gives individual states the power to regulate and control alcoholic beverages within their own borders. Consequently, every state has its own alcohol administration and enforcement agency. "Control states" directly control the sale and distribution of alcoholic beverages within their borders. According to the TTB (2006, http://www.ttb.gov/wine/control_board.shtml), there are eighteen control states: Alabama, Idaho, Iowa, Maine, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. Some critics of this policy question whether such state monopolies violate antitrust laws. The other thirty-two states are licensure states and allow only licensed businesses to operate as wholesalers and retailers.

DIRECT SHIPMENTS—RECIPROCITY OR FELONY?

A legislative controversy has developed over the direct shipment of alcoholic beverages from one state directly to consumers or retailers in another. Under the U.S. Constitution's Interstate Commerce Clause, Congress has the power to regulate trade between states. Nevertheless, the Twenty-First Amendment gives states the authority to regulate the sale and distribution of alcoholic beverages. Furthermore, it allows states to set their own laws governing the sale of alcohol within their borders.