TAX  INCREASES IN ESTONIA

 

The latest tax increase in Estonia raised beer taxes for 70% in July 2017. Since then trips to alcohol shops near Estonia/Latvia border has skyrocketed. According to a recent survey (March 2018) by Estonian Institute for Economic Research showed that while in 2016 21 percent of respondents bought booze in Latvia and 79 percent didn't, last year this number was up 66 percent, with 35 percent shopping for alcoholic beverages across the border. The share of all those who travelled to Latvia specifically to buy alcoholic drinks increased by 11 percent, from 7 percent in 2016 to 18 percent in 2017.

In August 2017 a 0.5-liter bottle of Viru Valge vodka cost €9-11 in Estonian shops, in Latvia (Alko1000 Store) it cost €5.6. The same bottle costs €14 in Finland.
The price difference was even greater regarding a case of Alexander beer that cost €9 in Latvian shops and €20-22 in Estonian shops in August.

Estonian government had a plan to raise alcohol taxes also in February 2018 and also in 2019 and 2020. As it became clear that tax income was much lower than what government predicted it decided to halve the increase planned for February 2018. In February 1 excise tax for beer and cider increased by 9% (originally planned 18%) and for spirits by 5% (planned 10%). 

These decisions were forced by the fact that in 2017 Estonia's state budget received 19.8 percent, or €55 million, less in alcohol excise duty than expected.

In the first quarter of 2018 government has almost come to a conclusion that 2019 and 2020 tax increases will be cancelled. The decision hasn´t been made yet but all three coalition parties seem to have a consensus.

 

MAIN PROBLEMS

While cross-border trade is almost unavoidable in European Union, it probably could have been controlled better if excise raises were divided better between different years. The increase was too steep and created an environment where excise policy was both easy to attack and Latvian market was too close and attractive.

In my view, the lost revenue was not the biggest problem. Important by-products were following:
 

1. The image of tax increase is under fire. It hasn´t been a popular measure before but at the moment it is really under attack. We have been saying that tax increase is not only effective but also cost-effective as it both decreases the consumption but at the same time can increase the revenue. It hasn´t worked at the moment. Again, time might change the situation as it seems that some people are going to Latvia as a statement of protest against the government policy. But for how long can you protest like that. We´ll see. Unfortunately, we have also lost the support of Finance minister, which is crucial for tax policy.
 

2. According to annual surveys people have been supporting stronger alcohol policies in Estonia. Estonia-Latvia border situation seem to turn that against alcohol policy as such. People view tax policy as a failed attempt to both decrease consumption and bring in revenue and they generalize that view on the whole alcohol policy.

 

3. Politicians are discouraged to take alcohol policy forward. The progress in alcohol policy comes usually down to the boldness of certain political parties or even individual politicians who understand the importance of alcohol regulation and at the same time recognize the support of the public for introducing different policy measures. Health minister (and leader of the Social Democrats in Estonia) Jevgeni Ossinovski is clearly that kind of politician who made unprecedented decisions in alcohol policy. It is important to note that while he obviously also supported the government tax plan and was probably one of it´s strongest advocates, tax policy is the responsibility of the minister of finance. Health minister Ossinovski has fought for an alcohol policy bill which was adopted in December 2017 and which will introduce major regulations to alcohol advertising (starting June 2018) and alcohol positioning at the grocery stores (June 2019). In addition, the Ministry of Health has improved the treatment system among other aspects.

Minister Ossinovski has experienced strong personal attacks by both alcohol industry and also media. The main reason - the failure of tax policy. As a result, the support of Social Democrats has fallen to the lowest ratings since 2010. As a rather logical result, SD is now clearly making an effort to show itself as more than just one theme party.

In the future, minister Ossinovski´s experience will probably be remembered and reminded when someone attempts similar focus on alcohol policy. 

 

4. Another negative aspect of this is the situation where various public health organisations are finding themselves in. They have supported the steep tax raise for beer and are now justifying that policy despite the increased border trade and lost revenue. The concept of "evidence-based" is threatened.

 

5. Cancelling of the taxes, especially for spirits. In 2015, previous government decided a longer plan for excise taxes, according to which alcohol taxes were supposed to be raised by 10% every year until 2020. New government changed it for beer and made unprecedented 70% rise in August 2017. The tax raises for spirits remained the same. But as a result of the increasing border trade, the 2018 tax increase was halved, which meant 5% for spirits instead of 10% that was decided in 2015. And as mentioned earlier, the tax increases for 2019 and 2020 will probably be cancelled which means that for spirits tax increase for period 2015-2020 will be lower than what the previous government planned.

In this context, it is important to remember that the proportion of spirits in the overall alcohol consumption is one of the highest in Europe. As a result of these changes, the price of spirits has reduced compared to beer and cider.

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Time will tell what the long-term result will be. If the consumption rates will continue to decrease, as it has for the last 4 years, these different costs might have been worth it.