There is lots of evidence that the more affordable alcohol is, the more people will drink. So by increasing the price of alcohol, we can reduce the population’s level of consumption and improve people’s health. In the UK, alcohol is more affordable than ever, and although the price of alcohol has increased by 28% over the last 10 years, it remains 74% more affordable than it was in 1987. One way the government can change the price of alcohol is to increase the tax on alcohol (also known as duty or excises). This makes the cost of producing alcohol more expensive for manufacturers and the cost of buying stock more expensive for retailers. We’d expect that the retailers would increase the price that consumers have to pay as well. This means essentially that the tax on manufacturers is paid for by the consumer.
In this blog we explain the main findings from an Alcohol Change UK-funded report on ‘Understanding the link between alcohol excises and the price of alcoholic drinks in UK supermarkets using scanner data’ by Dr Luca Panzone and Dr Viviana Albani.
Introduction
Why this report is important
If tax increases make consumers choose lower-strength products, then this policy is beneficial to health, as it means people will consume less alcohol overall.
This research doesn’t just look at how prices in shops change as a result of tax increases, but also looks at sales as an indicator of consumer behaviour. Taking this into account is important because consumers can choose cheaper products, possibly at a lower strength. If tax increases make consumers choose lower-strength products, then this policy is beneficial to health, as it means people will consume less alcohol overall.
What data did this report look at?
The researchers looked at sales of alcoholic drinks in one of the UK’s largest supermarket chains between February 2008 and February 2013. The researchers included data for different shop sizes, from small convenience branches to extra-large superstores. Between 2008 and 2013, the UK government introduced a ‘duty escalator’, meaning every year they would increase the tax on alcohol by 2% above inflation. They compared the sales data with the information on how tax increased to work out the ‘pass-through’. This means “the extent to which the tax is passed onto the price the consumer pays or is absorbed by the retailer”.
What happened to prices and spending?
The headline finding is that alcohol duty can change consumers’ behaviour due to increased prices, but they are less effective than they should be due to incomplete pass-through.
When just looking at the prices the supermarket set for the products, there was a clear trend that as tax increased, the prices of some drink types also increased (still wine, fortified wine, alcopops and spirits). For sparkling wine, beer and cider there didn’t seem to be a link between tax and price. For perry, prices declined as taxes increased.
When looking at all alcoholic drinks, for every £1 increase in tax, there was on average only a 66p increase in the price consumers paid. This is known as ‘under-shifting’, meaning the manufacturer and/or retailer is taking some of the hit of the tax hike, and not passing the full impact onto the consumer. However, the pass-through rate varied between different types of alcohol, different shop sizes and different container sizes.
The headline finding is that alcohol duty can change consumers’ behaviour due to increased prices, but they are less effective than they should be due to incomplete pass-through. Stores adapt to minimise the impact of increased taxes on the consumer by protecting the price of the most commonly-sized versions of a product.
Depending on the type of alcohol, consumers are more or less easily able to switch to a cheaper product. For example, there are a wide variety of wines so it is quite easy for consumers to choose another product. Whisky, on the other hand, has less choice, meaning consumers are forced to buy a more expensive product. This is why pass-through for whisky is higher than for wine.
Implications
Because the current system of alcohol taxation doesn’t link the alcohol content with the tax, it’s less effective than it could be.
Because the current system of alcohol taxation doesn’t link the alcohol content with the tax, it’s less effective than it could be. For example, “an 11% wine and a 14.5% wine pay the same tax”, even though the 11% is a better option in terms of health. If we want to encourage people to drink less alcohol, then the current duty system is ineffective. As the researchers say, “a linear alcohol tax that targets the alcohol content of products may be more effective in addressing excessive alcohol consumption, and possibly show a higher pass-through rate”.
Conclusion
In lots of studies of pricing policies, there is an assumption that duty has a direct impact on price, however, this report found that only two-thirds of the tax is passed onto the price.
However, this doesn’t mean that duty isn’t an effective measure, but it indicates that it would be more effective when coupled with other pricing policies such as minimum unit pricing (MUP). Both policies have pros and cons. MUP is more targeted at the cheaper, stronger products and has a direct impact on price, but duty can have an additional impact by raising revenue which can go on to fund public services, such as the NHS.
