North-East Europe: Escalating Struggle Over Alcohol Taxation
The northeastern part of the European Union is struggling with a race to the bottom since the alcohol tax cuts announced by Estonia.
Estonia decided to reduce alcohol taxes by 25% from July 2019. The move would undoubtedly affect the progress achieved by Estonia in reducing alcohol consumption and harm over the years through strong policy measures. Estonia was just starting to show positive results in 2018 with the 10 year lowest consumption reported that year.
In a bid to compete with the Estonians, Latvia will also be cutting taxes. Latvian Prime Minister Arturs Krisjanis Karins stated they had intended to increase alcohol prices but, will now have to reduce taxes due to Estonia’s move.
Latvia will be slashing taxes for hard liquor by 15% from July 2019.
The domino effect of alcohol tax cuts
In Finland, alcohol taxes are higher than both neighboring Estonia and Latvia. This has lead to an increased number of Fins bringing in alcohol from these countries. The figure of import of liquor has risen by almost 6% since last year.
A major increase in these imports is expected with the tax cuts by Estonia and Latvia due to cross-border trade. The two Baltic countries have been locked in a race to the bottom to retain the Finnish tourist spending on alcohol within their turf.
Estonians also show a tendency of going to Latvia to purchase alcohol since the alcohol tax hikes in the country two years ago. Through the reductions, Estonian government hopes this trend will reduce and Finnish purchasing will increase.
The underlying factors of the situation are the totally free carriage of merchandise by travelers and the difference in alcohol taxation. Since Estonia became a member of the EU after the turn of the century, Finns started bringing in large amount of cheap alcohol on ships across the 100-kilometer-wide Gulf of Finland.
In recent years, Finnish visitors began transiting through Estonia and purchasing their alcohol in Latvia, Estonia’s southern neighbor. Currently a quarter of all the alcohol that travelers haul from Estonia to Finland has actually been purchased in Latvia.
An upgrade of alcohol tax revenue in Finland was decided in the governmental talks in June as the political parties could not agree on an increase in corporate taxation.
However, Finland is now considering reacting to the Baltic countries’ alcohol tax reductions.
Finnish Prime Minister Antti Rinne said after his talks with Estonian Prime Minister Juri Ratas two weeks ago that Finland could adjust its increase to the “impact of the Estonian reduction”. This could mean that Finland would target wines and mixed alcoholic beverages more than beer and hard liquor, as the former products’ prices will not be reduced in the competing countries.
With cross-border trade happening strongly, the best method to reduce consumption and curb alcohol harm for the region would be to adopt stronger alcohol control policy measures across the region. Weakening of policy in one country will inevitably lead to negative implications for the entire region.