By Indrek Saar of the University of Tartu
According to the World Health Organization, 2.5 million people die each year because of the harmful use of alcohol.
One main reason for governments to tax alcohol is related to the potential harmful consequences of alcohol abuse such as disease, accidents and violence. At the same time, the alcohol industry has beneficial consequences such as the creation of jobs and as a consumer product that helps fulfill people’s leisure needs. This is especially true for Europeans who drink on average twice as much as people in other regions of the world—more than 10 liters of pure alcohol a year.
An appropriate government alcohol policy should consider both the positive and negative effects of alcohol consumption. Development of such a policy is complex and typically includes objective fiscal and subjective emotional discussions.
Alcohol taxation in the European Union (EU) is especially complex due to the large amount of cross-border trading arising from considerable differences in tax rates and alcohol prices among EU countries. Specifically, because of current EU regulations large quantities of alcohol can be transported from one EU member to another without the requirement to pay taxes in the destination country. This creates an incentive for some EU citizens to acquire markedly cheaper alcohol from neighboring countries.
A study was undertaken to determine some of the cross-border implications for countries with and without lower alcohol prices. Specifically, the aim was to determine a level of excise taxation in Estonia that would be appropriate under active border trade between Estonia and Finland. The main question was what level of alcohol excise would maximize the welfare of an average local consumer in Estonia. In theory, Estonia should be a beneficiary of its current low alcohol prices as they should attract a high number of tourists, who typically spend money in the country they are visiting. In practice, as both countries are considered the world’s top alcohol drinkers per inhabitant; it is very common to see Finnish people in Estonia with a six-pack of beer in their hands returning to Finland. This is confirmed also in the statistics: one fourth of the alcohol purchases in Estonia are made by tourists. However, the magnitude of that theoretical benefit is unknown.
To accomplish the study’s aim, several effects that taxation may have on a consumer’s well-being have to be determined and quantified. For example, as a result of alcohol taxation, a consumer may experience less harm caused by other drinkers. In addition, if alcohol prices are increased, a consumer may drink less alcohol, have better health and be more productive at work. As a negative example, alcohol taxation may change the amount and type of alcohol available, thereby affecting a consumer’s consumption.
In this study, special attention was paid to fiscal system effects. Specifically, alcohol taxation generates revenues from alcohol purchases by locals and, as noted above, by tourists. It also provides cost savings to the government (assuming the effects of alcohol consumption on health care and criminal justice systems decrease). Increased alcohol taxation may lower the individual consumer’s tax burden as the government, to maintain a given budget, can reduce non-alcohol taxes. However, increased alcohol taxation could stimulate the illegal alcohol market, which would require the government to spend more to maintain its alcohol revenues.
Adding up all these effects the study results show that the current level is considerably below the appropriate level. Specifically, while one liter of pure alcohol is currently taxed by nearly 9€, under certain reasonable conditions the level that would maximize average Estonian welfare is way above 20€. Even more, the results did indicate that the strongest rationale for taxing alcohol in Estonia is related to the magnitude of the alcohol purchases by tourists.
This is because, unlike excise revenues from local citizens that simply transfer funds from a taxpayer to the government, revenues from tourists enhance public spending without imposing financial burden on local citizens. So, while usually in public debates as well as prior academic papers the most frequent justification for higher alcohol taxes arises from the need to control the alcohol-related harm, the analysis for Estonia discloses a completely different picture.
In general, the results imply that cross-border trade can result in upward pressure on prices in countries with low alcohol prices. But this applies only up to the point where prices attract “alcohol tourism”. In Estonia, this means that the government actually has a strong incentive to implement a policy that would attract tourists to Estonia to buy alcohol. However, from an EU-based perspective such an approach would mean that Estonia’s benefit would have negative effects on other EU countries, particularly Finland.
Based on the study results, it appears that the prevailing EU alcohol regulations may be beneficial to some countries, but are far from optimal for other EU countries, or for the EU as a whole. Specifically, by stimulating free trade across member states, the EU is unable to eliminate negative, alcohol-market spillover effects. Future research in this field should analyze the overall societal implications of alcohol marketing in the EU. Such studies may suggest appropriate and politically feasible solutions to current alcohol marketing problems.
Indrek Saar
University of Tartu
www.atomiumculture.eu
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