Improving excise taxes on "harmful" products taking into account their effects

Tikhonova Anna Vital'evna ORCID: 0000-0001-8295-8113 PhD in Economics Associate Professor; Department of Taxes and Tax Administration; Financial University 15 Verkhnyaya Maslovka str., office 507, Moscow, 127083, Russia samozvanka_89@bk.ru Other publications by this author

According to the position of the UN General Assembly, the prevention of noncommunicable diseases (NCDs) is based on the "5×5" approach: five diseases — cardiovascular diseases, cancer, diabetes, chronic respiratory diseases and mental health problems; five modifiable risk factors — tobacco and alcohol use, unhealthy diet, lack of physical activity and pollution air ^[10]. The World Health Organization recognizes tax increases as the "best option" (that is, a proven cost-effective policy option) to reduce the impact of major risk factors for noncommunicable diseases ^[9]. Alcoholic beverages, tobacco products, and in some cases other "harmful" products and beverages are regularly subject to various excise taxes, sales taxes and value added tax in most countries of the world ^[5]. Although such taxation has historically been motivated by revenue generation for the state, in recent years, in world practice, the rationale for tax increases has increasingly shifted to its function of encouraging people to reduce consumption of harmful products and beverages ^[12]. More In addition, today there is a large amount of evidence confirming the positive effect of increasing excise taxes on health promotion than any other type of government regulation aimed at reducing alcohol consumption and harm from it ^[12]. Nevertheless, the issue of assessing the effects of taxation in Russia remains open, hence the ambiguous options and the validity of further expanding the list of excisable goods in Russia, taking into account the social and budgetary effects of excise taxation. The combination of these circumstances determined the relevance of this study.

Effects of excise tax on "harmful" products in selected countries

From the point of view of assessing the combined (in general for all countries) effects of excise taxes on various socio-economic aspects, a study conducted under the leadership of American economist Randy W. Elder "The effectiveness of tax policy measures to reduce excessive alcohol consumption and related harm" is of considerable interest ^[3]. The scientific work analyzed the results of 72 articles or technical reports that met certain quality criteria and included evaluation results related to public health. We have systematized the main results in table 1.

Table 1 - Assessment of the global effects of excise taxes on harmful goods and beverages

The source is compiled by the author according to ^[3].

Next, the effects of the increase in excise taxes in certain countries of the world are considered.

Australia.

Australian economist Brian Vandenberg analyzed time series figures for 1989-2016 to investigate the impact of the Australian beer taxation policy on alcohol consumption per capita and on budget revenues before and after the tax reform in 2000/01, which introduced a 10% goods and services tax rate on beer with a high alcohol content. The results of the research of scientists have shown that before the reform, the beer tax was effective only as a means of increasing income, and not reducing the level of beer consumption by the population. However, after the reform, higher nominal tax rates on medium and high strength beer had a significant negative impact on its consumption, redistributing only the consumption structure. In general, the result of the beer taxation reform in Australia is as follows: beer consumption decreased between 1989 and 2016, but changes in tax policy in 2000/01 did not have a significant immediate or long-term impact on consumption ^[11].

Belgium.

On November 1, 2015, the Belgian government increased the excise tax on alcoholic beverages (for beer - by 8.5%, wine - 30%, spirits - 41%), this new one was part of the general government plan to shift the tax burden aimed at shifting the tax burden from labor to consumption. Scientists investigating the impact of tax reform on the retail price of six major brands of alcoholic beverages (based on a balanced panel of scanning data from a large supermarket chain) showed that alcohol sales decreased by 14%, and the number of shoplifting increased by 11% in one year. At the same time, it was not possible to significantly reduce alcohol sales, only the consumption structure has changed (from national to foreign products). The tax reform has significantly increased the price of Belgian spirits compared to all neighboring countries (the price of a bottle of gin after the reform was 15 euros in Belgium versus 9 euros in Luxembourg). Considering that 50% of Belgian households live at a distance of 50 km from the border, the effect of "mass cross-border shopping has arisen in the country, while total budget revenues from alcohol excise taxes have remained unchanged for 3 years (taking into account the inflationary factor, they have decreased) ^[6].

eu.

In Europe today, alcohol and tobacco control strategies range from (1) general strategies for the population, which include taxation, accessibility restrictions and marketing bans, to (2) strategies for high-risk groups, such as measures to counter drunk driving, screening, short-term interventions and treatment of alcohol disorders, and also (3) environmental strategies such as education, registration of alcohol production (including industrial alcohol) and informal control using social dynamics (for example, through role modeling or denormalization) to influence alcohol-related behavior ^[2]. European Commission Directive (EU) 92/83/EEC of 1992, last updated in 2020, establishes the structure of alcohol excise taxes for various types of beverages, including minimum rates, as well as general rules and criteria for taxation and exceptions to these rules. However, the member States of the European Union (EU) have the right to levy taxes on alcoholic beverages or grant tax exemptions in certain cases, resulting in a wide range of rates for different types of beverages throughout the region. A survey of alcohol producers showed that changing alcohol rates without taking into account its strength does not lead to proper social and budgetary effects, since it only affects the structure of alcohol consumed and in some cases increases the risks of illegal production and consumption ^[1].

China. Hong Kong.

Although East Asia ranks first in the world in the number of alcohol-related cancers, Hong Kong has abolished taxes on most types of alcoholic beverages in order to position itself as the world center of winemaking in Asia. In 2007, the Hong Kong government halved the 80% duty on wine and 40% duty on beer, and in 2008 abolished all duties on alcoholic beverages with a strength of less than 30%. The results of a Chinese study on 15 years of sales and prices data in the alcohol segment (2004-2018) revealed the following trends. Firstly, the reduction in the rate led to an increase in alcohol consumption per capita from 2.57 liters in 2004 to 2.85 liters in 2018. Secondly, an increase in alcohol prices has a negative correlation with demand, with the exception of wine (which is recognized by the authors as a "luxury", since an increase in wine prices leads to an increase in its consumption). The authors did not evaluate the budget effect ^[7].

Brazil.

Contrary to the current trend of increasing the tax burden on sugar-containing beverages, Brazil reduced taxes on these drinks in 2017 and 2018. Examining the Brazilian market based on panel data on products from 2013 to 2018, Brazilian researchers showed that only large companies producing carbonated drinks transfer reduced tax rates to final prices (a transfer coefficient of 26.5%) ^[8].

Decades of research on the price elasticity of demand for harmful products have shown a negative correlation between the amount of excise taxes and its consumption. However, the results of most of the studies discussed above need to be adjusted, since their estimates are based primarily on interrupted time series or simple panel models, which are often subject to endogeneity. In this aspect, a small number of studies based on the analysis of differentiated data by types of alcoholic beverages have shown that with an increase in excise taxes on certain beverages, consumers do not just reduce their consumption, but engage in cross-product substitution in favor of products subject to lower taxes ^[4].

The results of the excise policy in the Russian Federation

The results of the excise policy on harmful products and beverages will be characterized through an assessment of a number of effects.

Table 2 below provides an assessment of the budgetary effect of changes in excise tax rates on tobacco products, beer and other alcoholic and alcohol-containing products for 2007-23. The minimum excise tax rate for cigarettes with a filter, the excise tax rate for beer with a strength of 0.5 to 8.6%, as well as for alcoholic beverages with a strength of over 9% were selected as an indicator of rates.

Table 2 - Assessment of the budgetary effect of excise taxes on alcohol and tobacco products

Source: compiled by the author according to the Federal Tax Service of Russia.

Notes: in order to preserve the size of the table, some years are not presented, but are taken into account in the analysis.

Data visualization allows you to more clearly assess the budget effect, it is shown in Figure 1.

Source: compiled by the author according to the Federal Tax Service of Russia.

Figure 1. Visualization of the budget effect of excise taxes on alcohol and tobacco products

As the data in table 2 show, tax revenues are closely positively correlated with the size of excise tax rates throughout the analyzed period. The correlation coefficients for tobacco products were 0.99, beer - 0.89, alcoholic beverages - 0.98. Even during periods of sharp growth in rates on certain goods (for example, beer by 3 times in 2010, alcohol by 1.6 times in 2013, cigarettes by 1.4 times in 2010), budget revenues from the corresponding goods grew at a high rate, despite the risks of growth of the shadow economy. The exception is the period from 2007 to 2011 in terms of excise taxes on alcohol, when, with a slight increase in rates, there was a serious decrease in budget revenues. This situation is associated with a sharp drop in sales of strong alcohol caused by the suspension of work of a number of large distilleries in the North Caucasus. In addition, the period 2007-13 was characterized by a low level of control over the turnover of excisable products ^{[18, 19]}. Thus, the budgetary effect of changes in excise tax rates in Russia is strong and direct in direction, which correlates with most studies by foreign scientists.

As can be noted according to Table 2, the sharpest relative increase in rates was observed in the period from 2010 to 2016, in connection with which we pay attention to the structure of the sale of alcoholic beverages in kind (Table 3).

Table 3 - Structure of alcohol sales in 2010-16, %

Source: compiled by the author independently according to Rosstat data.

During the period of the sharpest change in excise rates, there have been some shifts in the structure of alcohol consumption in the direction of increasing the share of cheaper products (Figure 2).

Source: compiled by the author according to Rosstat data.

Figure 2. Visualization of the consumer effect of excise taxes on alcohol and tobacco products

The share of beer increased from 75 to 79%, while vodka decreased from 10 to 8%. At the same time, the total volume of alcohol sales decreased in physical terms by 19% in 2010-16, and the volume of alcohol consumption per capita from 8.9 to 6.6 conventional liters (different types of alcohol are converted to absolute alcohol using special coefficients agreed with the Federal Alcohol Regulation Agency).

According to the survey "National Survey of Health and Economic Security in Russia", the prevalence of tobacco smoking among men in the mid-1980s was 46-48% (among women – less than 5%), in the mid-1990s - 50-55% (among women – 12%), and in the early 2000s - 60-65% (among women – more than 20%) (http://kursk-rost.ru/wp-content/uploads/2020/04/ОБЖ60420-Соц-е-ЧС.pdf?ysclid=m0bch30vxt372050741 (date of application: 08/26/2024)). The same indicator in 2009 ranged from 39.1% to 60.2% (depending on the region) for men and 21.7% for women (Global Adult Survey on Tobacco Use. Russian Federation, 2009 Country Report); in 2022 – 34.6% for men, 8.3% for women (Healthcare in Russia. 2023: Stat.sat./Rosstat. - M., Z-46 2023. – 179 p.).

Thus, as the analysis showed, in general, there is a reverse reaction to the increase in excise rates, manifested in a decrease in the volume of consumption of "harmful" products (the reaction to tobacco excise taxes is more pronounced than to alcoholic products). In addition, an uneven increase in rates on excisable products leads to a substitution effect that changes the structure of consumption.

Proposals for improving excise taxation

As the analysis of Russian and foreign experience has shown, there is a significant fiscal effect in the growth of excise tax rates, which seems to be an extremely important circumstance in modern conditions. An important direction for the growth of budget tax revenues in the modern economy is to increase the rates of existing taxes, as well as changes in the mechanism of forming the tax base and calculating taxes in order to strengthen their fiscal potential. Starting from January 01, 2025, this direction will be implemented through the introduction of a progressive personal income tax rate; an increase in the corporate income tax rate from 20 to 25%; an expansion of the composition of excisable goods (pharmaceutical substation), as well as the introduction of the obligation to pay VAT for USN payers in case of excess of sales revenue over 60 million rubles.

Currently, there are reserves of the fiscal potential of excise taxes due to the further expansion of the composition of excisable goods. Taking into account the topic of this study, excise taxes on harmful products can achieve a "three-fold effect" in public policy by reducing problems related to alcohol consumption, reducing costs for the health system and increasing budget revenues. In this context, it is important to note that a sharp increase in excise tax rates (at a rate higher than the inflation rate) on already taxable goods is impractical, as it leads to a slowdown in the growth rate of budget revenues. This is clearly demonstrated in Figure 1 for tobacco products (2018-19), alcoholic beverages (2013-14), and beer (2012-13). The expansion of the list of excisable goods as a source of additional tax revenue is used by the state in two cases:

1) if necessary, the withdrawal of excess profits, which took place in 2022 in the metallurgy industry after the introduction of excise taxes on liquid steel;

2) when looking for additional resources to increase the excise tax burden, for example, when introducing excise taxes on sugar-containing beverages in 2023.

In this context, a possible direction should be recognized as the expediency of increasing the tax burden on non-alcoholic beer, which, unlike carbonated drinks, is currently subject to excise taxes at the rate of 0 rubles. It is proposed to set the tax rate at the level of sugar-containing beverages of 7 rubles per 1 liter, to amend subclause 17 of clause 1 of Article 193 of the Tax Code of the Russian Federation. Thus, the rates of excise taxes on beer will look like this (Table 4).

Table 4 – Proposed beer excise tax rates for 2025

Source: compiled by the author himself.

The estimated amount of tax revenue from this type of excise taxes will be approximately 1.4 billion rubles. It is determined based on the share of non-alcoholic beer in the market (2% - https://www.if24.ru/bezalkogolnoe-pivo-nastupaet /) and total beer sales ( 9.77 billion liters in 2022 – "Analysis of the beer and beer drinks market in Russia in 2018-2022, forecast for 2023-2027 under sanctions", BusinesStat.ru ).

In addition, it seems reasonable to expand the list of excisable goods for which an excise tax rate similar to sugar-containing beverages will be established - 7 rubles/l:, for the following items:

- non-alcoholic tonic drinks containing caffeine and other tonic components and packaged in consumer packaging (in accordance with GOST R 52844-2007 "Non-alcoholic tonic drinks");

- non-alcoholic energy drinks (non-alcoholic tonic drinks with a mass fraction of dry substances of at least 10%), packaged in consumer packaging (in accordance with GOST R 52844-2007 "Non-alcoholic tonic drinks");

- sugar-containing beverages packaged in consumer packaging, which include aspartame, acesulfame potassium, potassium saccharinate, calcium saccharinate, calcium cyclamate, sodium saccharinate, sodium cyclamate, saccharin, aspartame-acesulfame salt, cyclamic acid (in accordance with GOST R 53904-2010 "Food sweeteners").

At the same time, the volume fraction of ethyl alcohol in these drinks should not exceed 1.2 percent inclusive.

Discussion of the results obtained

The results of the analysis showed that in the Russian Federation, the manifestation of an increase in excise tax rates on harmful products is an increase in budget revenues. However, such a positive fiscal effect is achieved only against the background of increased control over the turnover of alcohol and tobacco products, which was justified by the results of earlier studies ^{[20, 21]}.

Consumer and redistributive effects are ambiguous. As the analysis showed, the uneven growth of tax rates for different types of excisable products leads to a substitution effect in the presence of substitute goods (for example, strong alcohol is replaced with beer, expensive brands of cigarettes with cheap ones).

The identified consumer effects, consisting in a decrease in sales and consumption of "harmful" products, are uneven. In particular, a higher rate of reduction in the consumption of tobacco products than alcohol has been achieved; at the same time, excise tax rates for the first type of excisable goods increased 31 times in 2007-23, while for the second – 4 times. Thus, the presented scientific study has a significant limitation: it does not provide an assessment of other factors affecting the consumption of "harmful" foods and beverages. The fact is that tax effects are often offset by long-standing situational and cultural norms that affect the consumption of alcohol and tobacco products among the population. This thesis forms the basis for further expansion of the present problem and its research.

Thus, the results obtained are generally consistent with the results of advanced Russian and foreign studies ^{[14, 15, 16]}.

Conclusions

The validity of the proposals of this work (in addition to the obvious fiscal effect) is contained in the previously identified fiscal and redistributive effects. In particular, the analysis showed that an increase in excise taxes on one type of drink relative to other analogues may not have the intended effect on public health due to the replacement of consumer preferences ^[17]. In particular, as a result of the introduction of excise taxes on sugar-containing beverages in Russia from July 1, 2023, many manufacturers switched to the production of juice drinks, drinks based on artificial sweeteners, which changed the consumption structure. This, in turn, had a negative impact on excise tax revenues to the budget. Initially, when justifying the bill, it was assumed that the annual volume of excise tax receipts for sugar-containing beverages was about 35 million rubles, but the actual receipts for the half of 2023 amounted to only 7 billion rubles. Proposals regarding the taxation of drinks with artificial sweeteners will help to even out this effect, non-alcoholic beer in this aspect does not have obvious substitute products.

The scientific novelty of the article consists in substantiating and developing directions for improving excise taxation in the Russian Federation based on consumer, redistributive and fiscal effects of excise taxes on "harmful" beverages and products.