The Effect Of An Increase In Sin Taxes On The Market Value Of Alcohol Stock

Abstract

The Omnibus Budget Reconciliation Act of 1990 imposed an increase in excise taxes on alcohol, a $1.00 increase on a proof gallon of distilled spirits, a $9.00 increase in the tax on a barrel of beer, and a $.90 increase on a wine gallon. Previous research has concluded that despite the addictive nature of alcohol, the demand for alcohol is not price inelastic. Thus, the expectation was that the prices of stocks in the alcohol industry should drop as a result of the passage of this act. A standard event methodology was employed. While some decrease in stock price was detected when agreement was reached by the House and Senate the decrease was not significant. Other possible event dates showed positive price movements but these were also insignificant. Thus, it would appear that the market thought that the tax was not high enough to cause a change in consumer behavior.