Examining the effects of beer excise taxation on cross-border sales in border regions of the Baltic States

Exploring the Influence of Excise Taxation on Cross-Border Beer Shopping: An In-depth Analysis by ISM Lecturer Dr. Aras Zirgulis.

In their efforts to curb alcohol consumption and boost tax revenues, the Baltic States have pursued uncoordinated excise tax policies, leading to notable border tax differences. These differences have spurred a cross-border alcohol trade, the magnitude of which has yet to be precisely quantified until now.

The study’s findings are stark: During the height of the border restrictions, beer sales in higher-taxed regions rose by 14%, while plummeting by 52% in their lower-taxed counterparts when compared to non-border areas. This suggests the sheer scale of the cross-border beer market, especially prominent at lower tax borders. Notably, borders with minor tax differentials appeared immune to these fluctuations. Furthermore, when evaluating the longer-term effects of large excise tax shifts, a marked influence on sales was found on the lower tax side of the border.

Data from the Carlsberg group, comprising monthly beer sales from January 2016 to December 2020, served as the foundation for the study. Additionally, tax rate information from the three Baltic States, as well as Finland and Poland, allowed for a comprehensive understanding of border tax differentials.

During the pandemic, border closures across the Baltic region from mid-March to mid-May 2020 resulted in a virtual halt in cross-border beer trade. This temporary standstill provided a unique vantage point to measure the scale of trade, based on sales changes on each side of the border. Expectedly, sales dipped in lower-taxed regions while experiencing an uptick in higher-taxed ones, suggesting a forced shift towards local purchasing.

Considering Latvia's unique positioning between Lithuania and Estonia, the study also explored the implications of three major tax changes in these countries on Latvian sales. These alterations in Lithuania and Estonia consistently demonstrated an impact, with the 2019 tax reduction in Estonia challenging the prevalent belief that retailers amplify tax hikes while absorbing reductions for themselves.

The findings from the Covid-19 lockdown paint a clear picture: The economic and societal implications of consumers traveling long distances to purchase alcohol from lower-taxed regions cannot be underestimated. The associated costs in terms of time, fuel, and potential tax revenue losses are significant. Moreover, such cross-border beer shopping habits directly challenge and reduce the efficacy of measures aiming to curb excessive drinking.

Conclusively, this study underscores the long-term implications of uneven excise tax rate strategies, with the sharp uptick in alcohol sales in lower-taxed regions serving as a testimony to the need for more coordinated tax policies.