The Pass-through of Alcohol Taxes to Prices in OECD countries

Tuesday, June 25, 2019: 8:00 AM
Wilson C - Mezzanine Level (Marriott Wardman Park Hotel)

Presenter: Ce Shang

Co-Authors: Anh Ngo; Frank Chaloupka

Discussant: John Buckell

Excessive drinking is a major cause for adverse health, economic, and behavior-related consequences. Among all policies aimed at reducing excessive drinking and related harms, increasing taxes is arguably the most effective intervention, and it is important to fully leverage its benefits. In particular, how excise alcohol taxes are passed through to prices will ultimately impact drinking behaviors. Economic theories suggest that the degree to which taxes are passed to prices depends on the supply and demand curves and how competitive the market is. In a competitive market, the taxes are at most fully shifted to prices (i.e., one dollar increase in taxes would lead to one dollar increase in prices). However, how excise taxes are actually shifted to prices is an empirical question. Using panel data of alcoholic beverage prices and taxes from 31 OECD countries from 2003 to 2016, we estimated the excise tax pass-through rates to prices of a variety of alcohol products, including beer, wine, Coganc, Gin, Scotch whisky, and liqueur Cointreau. Using a difference-in-difference framework in a cross-county context, we found that taxes for beer, wine, Cognac, and Liqueur Cointreau were firmly over-shifted, taxes for Scotch whisky were mostly over-shifted, and taxes for Gin were mostly fully passed -through to prices.

Specifically, a $1 increase in beer excise taxes leads to a $1.2 increase in minimum beer prices, a $1.5 increase in average prices, and a $1.7 increase in maximum prices. For wine, the pass-through rate was 1.5 for minimum prices, but increased to 2.9 for average prices and to 4.4 for maximum prices. For Cognac, Scotch, and liqueur Cointreau, excise taxes were over-shifted, with a rate of 1.8-2.2 for Cognac, a rate of 1.1-1.4 for Scotch whisky, and a rate of 2.2-2.3 for liqueur Cointreau. In fact, depending on how to choose cutoff rates for over-shifting, excise taxes can be considered as fully-shifted if the cutoff rate for over-shifting is set to be greater than 1.2. In addition, liquor taxes were nearly fully shifted to gin prices at a rate of 0.89-0.94.

The results are robust to various different model specifications, including first-difference models, dynamic models with both past and future taxes as controls, and seemingly unrelated regressions. Further, the tax pass-through rates along the price distribution are not statistically different within each alcoholic beverage type.