High Alcohol Taxes Bad for Public Health, Public Finances: Study

High tax rates on alcoholic beverages can divert consumers to the illicit alcohol market, which poses a major threat to public health and finances. Experts examined illicit alcohol in Colombia, the Dominican Republic, Malaysia, South Africa, and the United Kingdom to uncover the largest drivers of these illicit markets, which are bad for consumers, communities, and businesses due to their negative social and economic impacts.

Research by experts at the International Tax & Investment Center (ITIC) showed that a significant price difference between the licit and illicit alcoholic beverages is one of the biggest drivers; if consumers struggle to afford legal alcoholic beverages, they will turn to cheaper, illicit ones that can be very dangerous and potentially lethal.

Some of the severe consequences of the illicit alcohol market can be observed as recently as in the last two months in Peru and Ecuador, where over 60 deaths between the two countries were reported as a result of the ingestion of illicit alcohol. The research also explored how nations around the world have dealt with illicit alcohol commerce through tax and regulatory policies that lessen the incentives for criminals to engage in illicit alcohol production and trafficking. The study highlights five key findings:

1. Lower tax rates can provide a consistent stream of government revenue by discouraging illicit alcohol purchase and consumption, as well as maintaining demand in the legal market.
2. Alcohol tax increases should be applied slowly over time to avoid sudden price increases for consumers, as this often drives consumers toward the illicit alcohol market.
3. Excise tax policies must consider the size and shape of the illicit alcohol market, consumer purchasing power, the country’s overall fiscal position, and excise rates in neighboring countries to successfully discourage the illegal market.
4. Tax systems, industry and cross-border coordination, and smart, focused enforcement can help combat the illicit alcohol market and reduce its prevalence. This is directly supported by the OECD’s research as well, which observes “[T]he link between alcohol policies and the illicit trade is essential and alcohol policies should not be developed in isolation from realities of the local market… the proportionality between the effectiveness of potentially curbing illicit trade, the cost of the remedy, and the potential disruption to legitimate business.”
5. The illicit alcohol market fuels crime and erodes the rule of law. In many countries, illicit traders are organized criminal businesses that sell unsafe and unregulated products, deliberately escaping revenue that is rightfully due to governments.

“Sharp tax increases have a strong link to increased activity in the illicit alcohol market, a finding supported by recent OECD research and Euromonitor as well,” explains Dan Witt, president of the International Tax and Investment Center. “These costs are passed on to consumers, which widens the price difference between legal and illegal alcohol. Once the tax increases exceed consumer purchasing power, illegal production blossoms, dangerous products enter the market, and fiscal income dwindles.”

Colombia provides an example of how a wide price difference can drive demand for illicit alcohol and create high levels of social acceptance for purchasing illegal beverages. Due in part to pricing, over 22.8% of the total ethanol consumed in the nation is illicit – a value of over US$1.5 billion, accounting for a fiscal loss of US$678 million. Meanwhile, the Dominican Republic’s 33% market share of illicit alcohol showcases its danger to individuals, with over 500 deaths in the country over the past three years.

“It’s clear that excessive alcohol taxation fuels crime while harming the legal domestic industries whose taxes contribute to essential government services,” states Witt. “Smart taxation is key here. Our findings support the idea that well-calibrated alcohol taxation policies that understand and target the illicit market will result in a reduced presence of illegal alcohol, increased tax collections for governments, improved public safety, and a level competitive field for alcohol companies. In short, this is a critical way for governments to reduce fiscal loss and, far more important, avoid needless and preventable death and injury.