Home > Alcohol: increasing price can reduce harm and contribute to revenue collection.

Mongan, Deirdre (2013) Alcohol: increasing price can reduce harm and contribute to revenue collection. Drugnet Ireland , Issue 44, Winter 2012 , pp. 7-9.

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Alcohol is price sensitive – increasing the cost of alcohol reduces its consumption and decreasing the cost of alcohol increases its consumption. Price is therefore often used as a policy lever to reduce alcohol consumption and its related health and social harms. The two main pricing mechanisms that can be used to reduce consumption are taxation and minimum pricing. There are two types of taxes on alcohol in Ireland – excise duties, which vary with the different categories of alcoholic drink, and VAT, a uniform rate currently set at 23%. Excise duties are normally reviewed annually by the Minister for Finance in his Budget.  

Excise duty rates for all alcoholic beverages increased greatly in absolute and relative terms between 1950 and 1994; the rate for distilled spirits increased by 660%, while that for beer increased by 2,570%. Rates increased sharply in the 1960s and 1970s but the rate of increase slowed after 1980. While the rate for beer increased by 1,350% between 1960 and 1994, it only increased by 120% between 1980 and 1994.1  However, since 1994 the rate for beer has actually decreased by 21% and the rate for wine has decreased by 4% (Table 1). In 2010 excise receipts amounted to €826 million.

In general, a reduction in excise duty rates leads to increased alcohol sales, lower excise receipts and higher consumption, while an increase in excise duty rates leads to reduced alcohol sales, higher excise receipts and lower consumption. A recent illustration of the link between tax, price and consumption is provided by Finland, where in 2004 the government reduced alcohol excise duty by an average of 33% in order to reduce the number of cheap imports. The result was an immediate 10% increase in consumption and a 17% increase in alcohol-related mortality, equivalent to approximately eight additional alcohol-related deaths per week.2 

The impact of recent excise duty rate changes in Ireland is outlined in Table 2. In the December 2009 budget, the excise duty rate was decreased by 20–21% for all alcohol beverages. This led to increased sales for the alcohol industry in 2010 amounting to an additional 2,149,624 litres of pure alcohol (equivalent to 8.1 million 700ml bottles of vodka). However, the decrease in excise duty rates had a detrimental impact both on the exchequer and on public health as the excise receipts decreased by €142 million and overall consumption increased by 6%. In comparison, the 42% increase in excise duty rates on spirits in 2003 led to an increase of €39 million in excise receipts and a decrease of 6% in overall alcohol consumption.
In the European context, Ireland, Denmark, Finland, Sweden and the UK are regarded as having relatively high alcohol taxes. However, the rates in Ireland are declining in real terms and the real burden of alcohol taxation has fallen as prices of other consumer goods have risen. Taxation of alcohol has in the past been a very important source of state revenue. Ireland experienced a clear decrease in alcohol tax revenues relative to total state revenues between 1970, when its share was 16.5%, and 1996, when it was estimated at 5%. A major cause of this decline is that excise duties are commonly set as a fixed amount of the local currency, so that inflation automatically reduces their value, unless there is new legislation to set a new tax level. A solution to the tendency of inflation to reduce the tax rate in real terms is to provide that the tax rate is tied to a cost-of-living index, rising and falling with it, rather than being set at a fixed value. This is the case in Australia, where alcohol excise duty rates are adjusted every six months in line with the Consumer Price Index.3
It appears that in Ireland tax is no longer employed as a means of controlling levels of alcohol consumption and its related harm. However, the opposite seems to be the case in relation to cigarette smoking, with the rate of excise duty on cigarettes increasing by 171% between 1994 and 2010 (Figure 1).  


Coinciding with the excise duty rate increase on cigarettes, the number sold decreased by 31%. In addition to the positive public health benefits arising from a reduction in cigarette smoking, the excise duty receipts increased by 149% and amounted to 1.1 billion in 2010 (Figure 2).

Price regulation is the policy governments most commonly use to reduce alcohol consumption. It has a strong evidence base for reducing alcohol-related harm, although historically it has been used to increase revenue for government, rather than for social or public health reasons.  Increasing excise duty rates increases the price of all alcohol regardless of whether it is sold in the on- or off-trade. However, an increase in tax may be absorbed by supermarkets and off-set by increasing the prices of other goods, and if alcohol is sold below cost price the retailer is entitled to a VAT refund on the difference between the cost price and the below-cost sale price, which deprives the state of revenue. Minimum pricing sets a price below which no alcohol beverage can be sold and which therefore cannot be undercut; it predominantly increases the price of the cheaper alcohol sold in supermarkets and mainly impacts harmful and younger drinkers.  Excise duty and minimum pricing are not irreconcilable: a restoration of excise duty to the 2009 levels that existed prior to the last government’s 20% cut could have earned the government around €170 million in 2011.4 It is likely that a combination of taxation and minimum pricing will have the most beneficial effect on public health and will also provide increased revenue to the state at a time when harmful use of alcohol is responsible for 88 deaths each month and costs €3.7 billion annually. In 2009 the alcohol industry contributed €2.0 billion in the form of excise duty and VAT,5 leaving a net cost to the State of €1.7 billion in costs related to alcohol.  

In Budget 2013, presented in December 2012, the government increased excise duty on alcohol. It remains to be seen what impact this measure will have across the board.
Item Type:Article
Issue Title:Issue 44, Winter 2012
Page Range:pp. 7-9
Publisher:Health Research Board
Volume:Issue 44, Winter 2012
Accession Number:HRB (Electronic Only)
Subjects:J Health care, prevention and rehabilitation > Health care economics
VA Geographic area > Europe > Ireland
G Health and disease > Substance use disorder > Alcohol use
B Substances > Alcohol
A Substance use, abuse, and dependence > Prevalence > Substance use behaviour > Alcohol consumption
MP-MR Policy, planning, economics, work and social services > Economic policy
MP-MR Policy, planning, economics, work and social services > Economic aspects of substance use (cost / pricing)

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