When prices go up with tax decrease. For some.July 05, 2019
Alcohol excise reduction is, fortunately, a rather rare decision that countries don’t consider often. In our region, there are a couple of occasions where governments decided to lower alcohol taxes, in 2003 and 2005 Denmark did that and in 2004 Finland. Since July 1 Estonia has a 25% lower excise tax for beer and spirits.
The reason for lowering taxes is obviously cross-border trade. In 2018 almost a third of alcohol that was consumed by Estonians was bought from abroad, mainly from Latvia. As a result of that decision, the average beer is (or will be soon) cheaper 10-15 cents and 0.5-litre spirits 1 euro and 50 cents. The evidence clearly says that when prices decrease, the consumption will increase and harms do the same. But there is one important aspect I want to discuss today, that makes the situation in Estonia especially complicated.
True, for most Estonians that reduction will make alcohol cheaper. But not for everyone. For those who are buying their alcohol from Latvia or elsewhere (reminding that a third of alcohol was bought like that in 2018) prices went down in 2017 when Estonia increased beer taxes almost 90%. Let me explain.
After such a steep increase, part of Estonians, mainly from South of Estonia, started to buy their alcohol from Latvia, where alcohol was already cheaper before the tax increases. So, even though prices increased in Estonia, those people are now getting alcohol less expensive than they used to. For them, prices decreased. And as they had to make quite a long trip, it was “reasonable” to buy more which meant stockpiling for many. That is another reason for possible consumption increase.
To illustrate that price difference, let’s look at how much could one person buy alcohol for an average salary. In Estonia, it was 365 litres beer and 56 litres spirits, but with that same salary, if you made a short trip to Latvia, you could buy 770 litres of beer and 89 litres of spirits.
Now I know, these cross-border trade arguments are often used by drinks producers who lobby for lower taxes but let’s not forget another group of economic operators who actually profit from that trade. In this case, these are Estonian businesses which opened alcohol stores right at the border of Latvia. They welcomed when Estonia increased taxes and are now selling these cheaper drinks to their countrymen. Through their business, many Estonians are drinking cheaper alcohol since taxes were increased.
An ideal solution would be to introduce different tax levels to various groups in Estonia. But that is not realistic nor doable. Changing populations health behaviour is complicated, and that case definitely proves it again.
NordAN Executive director