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Alcohol and tobacco levies show that “sin taxes” are not the answer, says a new study from theInstitutéconomique Molinari (IEM)

Media release

Paris, Wednesday, March 19, 2014 – Alcohol and tobacco have long been subjected to heavy, targeted taxation. With the aim of eliminating consumption of these products and financing the health care system, public authorities are planning to increase the tax burden on them.

Since 2013, taxes on beer have risen by 165% in France, and there is talk now of raising taxes on wine. In keeping with Cancer Plan 3, a Senate report may call for taxes on tobacco to rise more than 60% over the next five years.

Despite the stated goals, this type of policy has a mixed record in the area of health. It amounts to a headlong rush that ends up creating a dynamic parallel market, threatening not just the legal sector but also consumer health and government revenues.

Adverse effects on health

A number of studies note that higher taxes are accompanied by effects that reduce their effectiveness in terms of health.

Alcohol taxes: no impact on heavy drinkers; other consumers turn to cheaper and/or stronger drinks, or even to other drugs, such as cannabis.

Tobacco taxes: more intense consumption of cigarettes (more nicotine or tar ingested per cigarette), or substitution by less expensive tobacco products, such as rolling tobacco:

• Consumption of rolling tobacco has risen in many European countries, with sales in France up 52% between 2001 and 2012;

• Rolling tobacco is at least as harmful for smokers’ health: one study found that 77% of rolling tobacco smokers make cigarettes with a higher nicotine level than the maximum in manufactured cigarettes, and in 57% of cases the tar level was higher.

Producing a more “radical” black market

Smuggling and illegal trafficking of alcohol and tobacco are as old as the institution of specific taxes on these products.

This suggests that, beyond a certain point, the legal market and the parallel market operate like connecting vessels. The higher the taxes, the more the black market grows, to the detriment of the official market.

The parallel market in alcohol

According to the World Health Organisation, the parallel market in alcohol remains quite small in France (3% of overall sales), in contrast to high-tax countries: 15% in the United Kingdom, 18% in Denmark, 26% in Norway, 29% in Finland and 54% in Sweden (2003-2005 figures). Sweden is the only country, the European Commission notes, where health goals played a dominant role in setting taxes on alcohol.

Imitating these high-tax countries may be hazardous to the health. For example, vodka made from industrial alcohol was discovered in the United Kingdom in 2013. Loss of tax income there due to the parallel market is estimated at £1 billion annually.

Tobacco taxes and “radicalisation” of the black market

The unlawful trade in tobacco may have risen by 30% in the European Union between 2007 and 2012, according to a report from the European Commission. In France, the overall parallel market has grown substantially since 2003-2004 tax increases and now accounts for a sum equal to about 20% of the official market (due in particular to cross-border sales).

This trade is highly adaptable and takes new forms when faced with efforts at repression.

Smuggling of “cheap whites” (cigarettes produced legally but intended for the contraband trade): rise in the number of seizures and the amounts confiscated of 52% and 17% respectively between 2011 and 2012.

Smuggling from countries outside the EU: use of specific infrastructure such as a tunnel between Ukraine and Slovakia allowing for €50 million a year in tax evasion.

Smuggling within the EU: nine illegal plants discovered in 2011 (with production estimated at nine million cigarettes per day, in some cases with tobacco that is worse for the health), compared to five in 2010.

According to Valentin Petkantchin, the study’s author, “before any further moves are made toward sin taxes, these adverse effects should all be placed at the centre of public debate.”

Title Sin taxes: the example of alcohol and tobacco, the study is available on our website.

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The Institut économique Molinari (IEM) is an independent, non-profit research and educational organization. Its mission is to promote an economic approach to the study of public policy issues by offering innovative solutions that foster prosperity for all.

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Information and interview requests:

Cécile Philippe, PhD

Director, Institut économique Molinari

+33 6 78 86 98 58

L’Institut économique Molinari

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