Alcohol tax pass-through across the product and price range: Do retailers treat cheap alcohol differently?

Abdallah Ally, Yang Meng, Ratula Chakraborty, Paul Dobson, Jonathan Seaton, John Holmes, Colin Angus, Yelan Guo, Daniel Hill-Mcmanus, Alan Brennan, Petra Meier

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26 Citations (Scopus)
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Abstract

Background and Aims:  Effective use of alcohol duty to reduce consumption and harm depends partly on retailers passing duty increases on to consumers via price increases, also known as 'pass-through'. The aim of this analysis is to provide evidence of UK excise duty and sales tax (VAT) pass-through rates for alcohol products at different price points.  

Setting: March 2008 to August 2011, United Kingdom.  

Design and Measurements: Panel data quantile regression estimating the effects of three duty changes, two VAT changes and one combined duty and VAT change on UK alcohol prices, using product-level supermarket price data for 254 alcohol products available weekly. Products were analysed in four categories: beers, ciders/ready to drink (RTDs), spirits and wines.  

Findings: Within all four categories there exists considerable heterogeneity in the level of duty pass-through for cheaper versus expensive products. Price increases for the cheapest 15% of products fall below duty rises (undershifting), while products sold above the median price are overshifted (price increases are higher than duty increases). The level of undershifting is greatest for beer [0.85 (0.79, 0.92)] and spirits [0.86 (0.83, 0.89)]. Undershifting affects approximately 67% of total beer sales and 38% of total spirits sales.  

Conclusions: Alcohol retailers in the United Kingdom appear to respond to increases in alcohol tax by undershifting their cheaper products (raising prices below the level of the tax increase) and overshifting their more expensive products (raising prices beyond the level of the tax increase). This is likely to impact negatively on tax policy effectiveness, because high-risk groups favour cheaper alcohol and undershifting is likely to produce smaller consumption reductions.

Original languageEnglish
Pages (from-to)1994-2002
Number of pages9
JournalAddiction
Volume109
Issue number12
Early online date24 Jun 2014
DOIs
Publication statusPublished - 1 Dec 2014

Keywords

  • Alcohol excise duty
  • Alcohol pass-through
  • Alcohol prices
  • Alcohol tax policy
  • Alcohol taxation
  • Quantile regression

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