Rapid rise of excise duty correlates with consumption of illegal alcohol
Latvia has tried to regulate alcohol distribution with price and tax policies for several years. Excise duty was last raised in March 2021. In drawing up the next year's state budget, the government has decided to raise the excise rate again, said Ministry of Finance (FM) representative Aleksis Jarockis.
"The nature of excise duty as such is twofold. The first is to stop people from drinking alcohol, so there is excise duty on alcohol. And the second, of course, is the fiscal nature of this tax to receive revenue from consumption in the state budget," Jarockis said.
According to Jarockis, from March next year, excise duty on spirits will increase by 5% on average, while on light alcohol by 10%. And so for three years. There are no plans to take faster steps.
Jarockis stated: "If the rate of excise duty is raised rapidly, then we see a correlation with the consumption of illegal alcohol. We remember very well that in the 2008 and 2009 crises, when the excise rate was high, people had great problems with paying credit, job losses, and so on, and then illegal alcohol consumption also spread very rapidly. And we remember 2011, the misfortune in Preiļi, where several people died of illegal alcohol poisoning."
What rates are planned?
Comparing excise duty rates for 2024 in the Baltics it can be concluded that the impact of excise duty on the price of beer in Latvia will be slightly smaller than in Lithuania or Estonia. In Latvia next year it will be EUR 9 for each absolute alcoholic unit per 100 liters of beer, almost EUR 9.5 in Lithuania, and over EUR 13 in Estonia.
The excise duty rate applicable to wine, brandy, gin, and other beverages with higher alcohol content will be subject to the lowest excise rate in Latvia next year, compared to the other two Baltic States. The rate applied to strong alcohol in Lithuania is the highest.
Lithuanian Ministry of Finance Vice-Minister Rūta Bilkštytė said how, by raising tax rates by not a few percent, but significantly, Lithuania managed to reduce alcohol consumption: “Beer sales fell about 24%. Strong alcohol sales by almost 5%, wine and other fermented beverages by 13%, and intermediate products – for example, vermouth and other similar beverages – dropped by as much as 85%. We see sales have shrunk. We know that there is so-called alcohol tourism in the border area to Poland or Latvia, but there are not many people like this, and it is not so much in monetary terms.”
Industry association defends alcohol tourism
Alcohol tourism is one of the main arguments by the Latvian Alcohol Industry Association to oppose raising excise duty rates. The industry's head Dāvis Vītols says the state budget will not win, but lose. By accepting changes in taxes and introducing proposals offered to the Saeima to reduce the circulation of alcohol, for example, reducing the allowed time for selling alcohol or prohibiting advertisements, the budget will lose a lot, says Vītols.
Vītols explained: "On Sundays we see the most tourists driving to buy alcoholic drinks in the border area. And the Sunday limit means there will be losses in the state budget. Because then the most tourists buy alcohol in Latvia.”
Lithuania's experience once again serves as an illustrative example here. Lithuania substantially increased excise duty in 2017: by 112% on beer, wine on average by 92% to 111% and spirits by 23%, and the vice-mayor of the Lithuanian Ministry of Finance already indicated how these figures affected the trade in alcoholic beverages. Statistics also show that the budget brings in more than EUR 100 million over a few years.
Mindaugas Štelemėkas, head of the Health Research Institute at the Lithuanian University of Health Sciences, said: 'In one year alone - comparing 2016 to 2017 - the state budget received an extra €67 million. If in 2016 it was EUR 250 million from alcohol excise duty alone, a year later this revenue exceeded 300 million. It was great news for our government. And at the same time, alcohol consumption fell sharply. By three liters [per person] in a few years. And it's impressive."
In Latvia, this revenue has increased slightly, despite the fact that excise rates have been raised only marginally compared to Lithuania, according to the data of the State Revenue Service (VID).
Fiscal and alcohol limiting policies go hand in hand
In Lithuania, the increase in excise duty rate has been more rapid. Meanwhile, tax rises in Latvia are moderate without taking into account inflation and population income growth, so purchasing power and consumption do not decrease significantly.
FM spokesman Jarockis stated: "Generally, tax laws are not meant to solve any social problem. Consequently, the excise duty law is not a panacea that will solve the consumption of alcoholic beverages in Latvia. We need to look closely here, and the Saeima will have amendments to the law on the circulation of alcoholic beverages. There are really a lot of different issues out there. These very painful and loud issues will be the subject of a lot of discussion. This question needs to be addressed in a complex way. The law on excise duty is one of the components."
Fiscal and alcohol containment policies go hand in hand, noted Rūta Bilkštytė, vice-minister of the Lithuanian Ministry of Finance.
"All these prohibitions, including the fact that alcohol is prohibited from being sold after 20:00 on working days, but on Sundays from three in the afternoon, [..] have created the conditions that buying alcohol is no longer as easy. We decided it was very important to adopt measures that would limit the availability of alcohol. At the same time, it is also not an overwhelming problem. If you want to buy it, you'll buy it the same. But those purchases that occur spontaneously and when there is no need for that commodity will be left behind."
It is planned to raise excise duty on alcohol in Latvia from March 1 next year.