No. 37




Excise Duty Policy – an Equation with Several Denominators

04 June 2018


RiTo No. 37, 2018

  • Marje Josing

    Marje Josing

    Director, Estonian Institute of Economic Research

Alcohol excise duty has several purposes. The most important of them is restricting consumption through increasing the retail price, but the revenues of the state budget, suppressing of shadow economy and the problems of border trade are also relevant factors. Several factors (among other things, the prices in neighbouring countries and the competitiveness of companies) have to be simultaneously taken into account in establishing optimal excise duty rates, and if a mistake is made with the level of the excise duty rates, it will be accompanied by negative consequences in the society.

In 2014, the Government of Estonia decided that in the coming years, the excise duty rates of alcohol would be raised at an advanced pace (by 15 per cent instead of the agreed upon 5 per cent). The aim was to increase the budget revenue and to reduce the consumption of alcohol. This decision was not preceded by correct impact analysis, and during the next years, the real processes taking place on the alcohol market were not taken into account.

The result is that now the retail prices of alcoholic drinks in Estonia are among the highest in the European Union in comparison to the purchasing power of the population. The retail prices in Estonia are almost two times higher than in Latvia. Large-scale border trade has emerged, much of the alcohol that is consumed is bought from Latvia, shadow economy has increased, budget revenues decrease, and the most important original goal, reduction of consumption, has not been achieved.

This process shows that the national alcohol policy has to be balanced and consist of several simultaneous measures – restrictions on advertising, limiting of availability, changing of attitudes, distributing of information, providing alternative opportunities for spending leisure time, etc. Increasing of retail price is one of the possibilities for restricting availability, but if the price rise is too rapid and drastic, border trade and black market emerge.

It all is a vivid example of how a tax change that is made hastily and without a thorough analysis may bring along results that are contrary to what was expected.