Sunday, February 29, 2004
An Alcohol Experiment in Finland
Taxes are one of the best devices for controlling alcohol consumption. It appears that even heavy drinkers are rather sensitive to price, that is, higher prices for booze discourage drinking, and often by a significant amount. (Typical calculated elasticities for beer consumption are around -.3; for wine, -.6; and for spirits, closer to -1.) Legislated changes in alcohol taxes in the US generally raise the level of existing taxes, though inflation slowly eats away at the real value of taxes that are fixed in nominal terms -- for this reason, many states have alcohol taxes that are lower today (in real terms) than in the 1950s.
Finland has maintained high taxes on alcohol since it ended its own national prohibition in 1932. But on March 1, taxes will be considerably reduced. Why? The accession of nearby Estonia to the European Union means that Estonian alcohol will become increasingly available in Finland -- I guess the idea is that Finns will buy their booze in Estonia (where it is cheap) and bring it back home, unmolested by customs once Estonia is in the EU. (For similar reasons, Swedes buy beer in Denmark and the British buy lots of wine in France.) So to reduce the surge of decentralized imports (and to protect domestic sales), Finland is reducing its taxes on alcohol sold domestically. As a result, prices on alcohol are expected to fall, perhaps by as much as 40 percent. So this tax decrease presents quite an experiment with substantially lower alcohol prices, and if the usual elasticities apply, we should see a surge in drinking in Finland.
Update: My speculation about the rationale for the tax decrease was pretty much correct, it seems. This article in the Cleveland Plain Dealer tells the story. Here's an excerpt:
"When Finland and neighboring Sweden, also concerned about high alcohol consumption, joined the EU in 1995, they were granted special permission to continue their tight policies until January 2004, including limiting the amount of alcohol that travelers could bring home from trips abroad to other EU countries.
In Sweden, the government stuck to its policy of high taxes even after the EU's special exemption ended.
In Finland, officials chose to reduce taxes now because they fear what will happen after May 1 when Estonia joins the EU and Finns are expected to swarm to their southern neighbor to buy cheap drink in bulk for personal consumption.
Under EU guidelines, people can import 300 bottles of beer and 12 bottles of hard liquor from another EU country without paying any tariffs.
Situated only 50 miles away, Estonia already is a popular tourist destination for hundreds of thousands of Finns each year, who shop there for alcohol. Current Finnish duty-free import limits are 40 bottles of beer and one bottle of hard liquor from non-EU countries."