Estonia - Pricing
Alcohol has been cheap in Estonia. At least for tourists coming from the north, from Finland. Booze rally between Helsinki and Tallinn has coloured the alcohol tax issue for the last 15 years.
Raising taxes has still been the primary alcohol policy measure that different governments in Estonia have used. Mainly for economic purposes, but public health arguments are right there as well.
In their 2011 study, Taavi Lai and Jarno Habicht wrote that "excise tax on alcohol has been increased on four occasions since 2005 for all alcoholic beverages except wine. Compared with the 2004 level, excise tax increased 45% by the beginning of 2010. The highest tax increases (30% altogether) occurred in 2008 when the economic crisis started to affect the Estonian economy. This was the first occasion when the affordability of alcoholic beverages decreased after many years." Lai and Habicht also indicated that the motives for these increases were mainly economic. "Changes in alcohol taxation had mainly fiscal and tax policy objectives arising from the economic crisis and a general preference for consumption taxation over income taxation."
In 2012, the Estonian government laid out a more extended plan to raise alcohol excise taxes by 5% every year from 2013-2016. Until now, every tax increase was more or less a separate decision and lacked a longer plan. 5% was seen as too low by the public health organisations and experts but the more structured approach was mostly welcomed.
Taavi Rõivas´s government
When Taavi Rõivas, from the Reform Party, became a prime minister in March 2014, the plan changed, and in May the same year, the government changed the excise tax plan for the following years: 2015 alcohol taxes were raised by 15% and in 2016 by 10%. In 2017 and 2018, alcohol taxes were planned to increase also by 10%.
Rõivas´s Governments plan changed one more time as in 2015 the minister of Finance Sven Sester introduced an amendment to 2016 tax increase which was now increased by 15% instead of 10% as earlier planned. “The decision to increase the excise duty on alcohol and tobacco earlier than originally agreed was born after it became clear that the current measures to increase excise duty do not have the expected impact on public health and the additional increase is appropriate. The government must prevent alcohol and tobacco from becoming more accessible as the economy and income grows, ”said Finance Minister Sven Sester in May 2015.
Also, the government decided that excise duties on alcohol would rise by 10 per cent in 2019 and 2020, except for the excise duty on wine, which would increase by 20 per cent. With these changes, the government wanted to reduce harmful consumption and improve the budget balance.
That was a change in rhetorics as now public health was explained as the main reason for the tax increase. It is important to remember that at that time, the government approved the alcohol policy green paper which meant that there was a comprehensive and adopted understanding on how the alcohol policy should be developed in the future.
Alcohol tax increases were the central alcohol policy development at the time, and it was repeatedly reminded that these have the most substantial evidence base for reducing alcohol consumption and related harm. These arguments came to play as the government and society were discussing health minister Ossinovski´s bold alcohol policy bill which was introduced already in October 2015. Other measures were downplayed as less effective and thus not reasonable. In October 2016, the bill was weakened and didn´t seem to go anywhere.
Jüri Ratas´s first cabinet
Taavi Rõivas's cabinet ended on November 2016 when Social Democrats and the Union of Pro Patria and Res Publica joined the opposition's no-confidence vote against the cabinet. This was the first time since 1999 the liberal centre-right Reform Party were out of the government. The new government was formed between a Centre Party, Social Democratic Party and conservative Pro Patria and Res Publica Union, with Jüri Ratas from the Center Party becoming the new prime minister.
The new coalition agreement raised the alcohol policy as one of the priority themes and showed a green light to Ossinovski's bill.
The new government planned to focus on beer taxes and introduced an unprecedented increase of almost 90% in 2017. The first rise was done in February (17%) and then a major escalation of 70% in August of 2017. As to spirits, Estonia planned to stick to the original plan by increasing their tax rate 10 per cent every year until 2020.
The cross-border trade between Estonia and Latvia started to grow, and it appeared that the earlier tax increase was much to be blamed. In October 2017, the Estonian Institute of Economic Research predicted that in 2018, alcohol excise duty would bring in some €80 million less than estimated by the Ministry of Finance. "The price difference with products sold in Latvia caused by increases in the alcohol excise duty has given rise to cross-border trade," EKI director Marje Josing said in a press release. "Cross-border trade has a major impact on the inflow of excise duty and VAT into the state budget."
In November 2017, the Government decided to reduce the increase in excise duties on beer, cider, and spirits scheduled for February by half to reduce the risks associated with border trade. It meant that the duty on beer and cider would go up by 9 per cent instead of 18, while the tax on strong alcohol would grow by 5 per cent instead of 10 in February 2018. The duty on wine would be hiked in the initially planned volume.
“On the one hand, we are committed to reducing the consumption of alcohol and the associated health risks, with alcohol prices being a crucial measure in this regard,” said Prime Minister Jüri Ratas. “On the other hand, an excessive increase in the excise duty on alcohol would significantly increase border trade.” The Cabinet decided to lower the increase in excise duties on beer, cider, and spirits by half of what was planned to reduce the involved risks. This means that the increase in excise duties will be lower in 2018 than in Latvia or Finland.”
In September 2018 the Government approved changes that were to cancel increases in alcohol excise rates planned for 2019 and 2020. “To the extent that border trade between Latvia and Estonia takes place, it is neither normal nor economically feasible,” said Toomas Tõniste, Minister of Finance.
Alcohol excise duty receipts in 2018 totalled 4.6%, or €10 million euros more than during the previous year, but still fell 32.1%, or €101 million, below budget. The main reason for the lower than expected receipts was the planned elimination of excise duties in 2019, which came to focus during the handling of the 2018 budget.
In 2018 the state budget collected 231.8 million euros in excise duties on alcohol. However, EUR 332.7 million had been written into the law. For clarification, however, over time the Ministry adjusted its hopes considerably. By autumn that expectations was lowered to 259 million.
Ministry of Finance spokesman Ott Heinapuu said one of the reasons was that last year the government decided to cancel the excise tax increase planned for this year.
But that's only half the equation. Most, € 60 million, was lost for other reasons, which Heinapuu highlighted as "significant changes in consumer behaviour, alcohol consumption patterns and border trade". In essence, we were deprived of excise revenue because Estonian people buy large quantities of alcohol in Latvia and Finns buy less alcohol in Estonia.
Jüri Ratas' second cabinet
In office since 29 April 2019. It is a centre-right coalition cabinet of the Centre Party, far-right leaning Conservative People's Party and conservative Pro Patria.
Both Conservative People's Party and conservative Pro Patria promised during the election campaign that they will lower alcohol taxes if they get to the government. Prime minister´s Center Party´s position was to avoid radical changes and they supported a tax peace which would have meant no changes for alcohol taxes. With these odds, lowering alcohol taxes did end up in the coalition agreement of the new government.
In the end of May 2019 as part of its negotiations on the next state budget strategy and the 2020 state budget, the government decided to reduce the alcohol excise duty on both spirits and low alcohol by volume (ABV) beverages by 25 percent as of July 1 in order to curb cross-border trade on Estonia's southern border. It is important to mention that the minister of social affairs Tanel Kiik (Center Party) disagreed with the government about lowering the excise duty on alcohol because the public health risks of a reduction in excise duty need to be analyzed.
At its third and final reading on June 13, the Riigikogu voted 70-9 in favour of a bill that will lower the alcohol excise duty rates for beer, cider and hard liquor by 25 per cent beginning July 1.
According to the letter of explanation, reduced alcohol prices in Estonia may lead to a reduction in the amount of alcohol purchased in Latvia and an increase in the amount of alcohol purchased in Estonia.
In the course of the second reading, the Finance Committee of the Riigikogu made an addition to the bill aimed at preventing excise goods on which duties have already been paid in Estonia from being transported to another member state and then returned to Estonia in order to apply the new, lower excise duty rate. Thus, goods which have already been released for consumption in Estonia will be subject to the excise duty rate in force upon their initial release.
Following the slashing of excise duties in Estonia, Latvia responded with the 15 per cent cut of its own coming into effect on Aug. 1. 2019. Latvian Prime Minister Krišjānis Kariņš (Unity) said on the eve of the Estonian law coming into effect that it was not how neighbours should behave towards one another, citing damage to its own alcohol retail sector. At the same time, his Estonian counterpart Jüri Ratas (Centre) said that an excise duty war was neither Estonia's aim nor its intention.
The reduced rate is at present set to be temporary, running only until February 29 2020.