Parliament reviews behavioural taxes under EU control: VAT; alcohol; tobacco; and energy products
The European Parliament has published a briefing called “Shaping choices: Behavioural taxation
in the EU“. It was compiled by the European Parliamentary Research Service.
In the briefing, the European Parliament explores the potential of pro-health taxation to reduce consumption of health harming products as well as increasing revenue. The EU has set ambitious environmental and health policy targets that will likely influence the future direction of these taxes.
Richard Asquith reports for VAT Calc that the EU has some direct influence and control over several of these so called “behavioral taxes,” including VAT and excise duties. Separately, the EC is looking at the VAT reforms after ViDA and environmental taxes for potential changes to the tax regime. Reforms to the EU energy tax directive are still searching for a compromise.
The briefing was published on October 16, 2024. It highlights the use of taxes on health harming products, such as tobacco, alcohol, and fossil fuels. Whilst a number of Member States have introduced other behavioural taxes at national level, for instance on flights and on sugar.
Quoting from the EU Parliament briefing, key issues it addresses:
- Public support for behavioural taxes,
- Economic consequences of behavioural taxation – negative externalities,
- Role of the EU,
- Changing revenue dynamics – waining tobacco and energy taxes,
- Possible avenues for new behavioural taxation – sugar, meat and aviation taxes, and
- Looking ahead – EU’s DG TAXUD new dedicated behavioural tax unit.
The European Union has set ambitious environmental and health policy targets that will likely influence the future direction of “behavioural taxation”. Taxes such as excise duties on tobacco, alcohol or energy and general value-added tax (VAT) – for which common EU rules are in place – may help Member States achieve these objectives and provide additional revenue.
Alcohol and other pro-health taxes to meet EU health and environmental goals
The briefing contains controversial and flawed terms such as “harmful use of alcohol” and “sin taxes”.
Better terms are pro-health taxes and harm due to alcohol.
Pro-health taxes aim to reduce population level consumption of health harming products, to improve public health and the environment. Therefore such taxes are aligning with broader EU goals such as achieving climate neutrality by 2050 and improving public health under the EU Beating Cancer Plan.
Behavioural taxes are based on Pigouvian theory, seeking to reduce harmful societal externalities by targeting price-sensitive behaviours. However, due to the addictive nature of products like tobacco and alcohol, demand is often inelastic. Understanding cross-price elasticity and how taxes impact related goods is essential for policymakers.
At the EU level, excise duties on alcohol, tobacco, and energy are subject to minimum rates, but Member States can set higher rates. The Tobacco Tax Directive focuses on health, while the Energy Tax Directive has been criticized for not aligning with current climate goals. VAT regulations, initially designed for market efficiency, have been reformed to include green incentives like solar panels and e-bikes.
The briefing also explores potential new behavioural taxes on sugar, aviation, and meat to address health and environmental concerns. The European Commission is currently reviewing existing taxes and preparing to revise outdated directives, such as the Tobacco Tax Directive, to further guide future policy.
Public support for alcohol taxes
The briefing discusses the level of public support for raising alcohol taxes.
Public support for health and alcohol taxes varies, reflecting the many different views on state intervention and taxation in Europe, and particularly in the case of alcohol, different cultural traditions. One study found much more support for alcohol policies, including taxation, in northern Europe than elsewhere. Public support for pro-health taxes also appears to be stronger when the revenue is specifically ‘earmarked’ for (tobacco or alcohol-related) healthcare initiatives.
But the briefing fails to explore public support in a comprehensive and nuanced way.
For example, a global representative survey showed that a majority of adults support raising alcohol taxes.
Another example is a 2023 Germany survey commissioned by Federal Drug Commissioner Burkhard Blienert. It revealed that 59% of Germans support a complete ban of alcohol advertising. 50% also support increasing alcohol taxes. In Germany, the harm caused by alcohol companies is rampant and people want to see government action.
Economic consequences of behavioural taxation
The briefing also explores some issues related to the economic consequences of alcohol and tobacco taxes. The briefing however fails to address that alcohol taxation in the EU has eroded over time, meaning there is significant potential for raising alcohol taxes.
The motivation for imposing behavioural taxes is to stem negative ‘externalities’ – harmful side effects affecting third parties or society as a whole. These can range from public health costs to air pollution and climate change. To address these externalities, economists advocate the introduction of ‘Pigouvian taxes’ on such ‘harmful’ goods, with tax levels set at an equal level to the marginal cost imposed on society from additional consumption of the goods.
A landmark study in 2022 showed that introducing a minimum tax share of 25% in the WHO European Region can prevent 40,033 deaths. A 15% tax share with equalization can prevent 132,906 deaths. Equalization means applying the same minimal retail price per unit of ethanol in any alcohol product regardless of the type (beer, wine, spirit, etc.).
Compared to the tax share of tobacco, the average tax share of alcohol prices for the European Region is about four times lower.
The researchers concluded that similar to tobacco taxes, increasing alcohol taxes should be considered to be a health-based measure aimed at saving lives. The study results show a clear health benefit as a result of implementing a minimum tax share.
The study also highlights that alcohol excise taxation is not only positive for population health, it also has the potential to increase revenue. For instance, the recent substantial increase of excise taxation in Lithuania by more than 100% for beer and wine, and over 20% for spirits, resulted not only in decreases in both alcohol consumption and mortality, but also in an increase in tax revenue.
Also, a recent review showed that taxation increases in several countries – contrary to the claims of the alcohol industry – did not result in increases in unrecorded consumption, or a net increase in overall alcohol use, or in alcohol harm. At the same, if a minimum excise tax share for alcoholic beverages were to be implemented, this should be done in conjunction with measures against unrecorded consumption in countries where such increases are anticipated.
A 2024 study based on a quasi natural experiment in five EU countries, showed that policymakers can indeed increase revenue and reduce alcohol consumption and harm by increasing alcohol taxes.
In most countries in the European Union, alcohol excise taxation levels have remained stable in recent years. However, over the past decade, Estonia, Latvia and Lithuania have increased taxation rates on alcohol to decrease the high levels of alcohol consumption and related harm. In contrast to the Baltic countries, alcohol excise taxes remain under-utilised as a measure for fiscal or alcohol policies in Poland and Germany.
This represents a natural experiment – with the Baltic countries being the intervention group with rigorous alcohol policies in place, and Germany and Poland being the control group having implemented fewer alcohol policy measures.
In 2022, the per capita alcohol excise tax revenue was lowest in Germany (€44) and Poland (€90) and considerably higher in Latvia (€167), Lithuania (€188) and Estonia (€218).
A similar but even clearer pattern was found in the proportion of alcohol excise tax revenue from total tax revenue. While alcohol excise tax revenue only contributed 0.4% to the total tax revenue in Germany, this share was considerably higher in the other four countries (Estonia: 2.3%, Latvia: 2.1%, Lithuania: 2.9%, Poland: 2.7%)
When adjusting for inflation, researchers found that the real per capita alcohol excise tax revenue has declined in Germany (− 22.9%), Poland (− 19.1%) and Estonia (− 4.2%) between 2010 and 2022. Inflation-adjusted increases in per capita alcohol excise tax revenue could be observed only in Lithuania (+ 49.3%) and Latvia (+ 57.2%).
This means that increasing alcohol taxation was not linked to decreased but increased government revenue. The researchers conclude that policymakers can increase revenue and reduce alcohol consumption and harm by increasing alcohol taxes.
Role of the European Union
Taxation is a national competence and EU Member States are free to design their own tax systems. Behavioural taxes therefore vary in both their adoption and implementation across Member States.
However, the EU has some scope for intervention when it comes to excise duties on alcohol, tobacco and energy products and the general value added tax (VAT), where EU-wide frameworks are in place, ensuring a certain level of harmonisation across the EU. Nevertheless, the EU only acts on excise duties and VAT where it is ‘necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition’, subject to unanimous Council support (Article 113, Treaty on the Functioning of the EU). The European Parliament is consulted on legislative initiatives concerning excise duties and VAT, but can only issue (non-binding) opinions.
(Changing?) revenue dynamics
The briefing also explores alcohol tax revenue dynamics.
Alcohol and tobacco tax revenue in the EU has remained stable, consistently representing around 0.80 % of EU GDP, until this share began gradually to fall, ultimately reaching 0.67 % of GDP in 2022, marking its lowest recorded level to date (see Figure 1). While these GDP shares might seem small, alcohol and tobacco excise duties still generate over €100 billion in tax revenue across the EU. In some Member States, these taxes contribute significantly to total revenue – 6.2 % in Bulgaria and 4.4 % in Latvia.
Possible avenues for new behavioural taxation
The briefing also examines possible avenues for new “behavioral taxes”. But it does not examine the potential of raising the EU’s minimum alcohol tax rate for both population health and revenue generation.