Laffer Curve spotted in Estonia and Latvia

Estonia came third in this year's Nanny State Index, rising up the table by twelve places. This was largely thanks to its huge alcohol tax rises in the last two years, but these were accompanied by unintended, but hardly unpredictable consequences, as I explained at the time...

Estonia’s taxes on beer, wine and spirits have been higher than the EU average for years and have risen sharply since the first Nanny State Index was published. Between 2016 and 2018, spirits duty rose by 30 per cent, wine duty rose by 50 per cent and beer duty doubled. This has led to a textbook illustration of the Laffer Curve as Estonians travel to neighbouring Latvia for their booze shopping and Finns – who have long made the trip to Estonia for theirs – go elsewhere. The government expected alcohol revenues to rise from €251 million in 2016 to €276 million in 2017. In fact, the tax rise caused revenues to fall to €229 million and had a devastating impact on small shops in poor regions close to Latvian border which relied on alcohol sales.

It has been a sobering experience for the Estonian government which has now dropped plans to introduce further tax hikes on alcohol in 2019 and 2020.

As it turns out, the government has gone further than merely dropping its planned rises. It has cut alcohol duty. By a lot.

As Estonia tries to recover its alcohol customers lost to neighbouring Latvia due to high excise duty, the parliament in Tallinn has passed a 25% cut in excise duty rate.

The cut came into effect on 1 July and led to more good news, this time in Latvia...

Following the slashing of excise duties by 25 percent on beers, ciders and strong alcohol which came into effect in Estonia at the beginning of the month, Latvia has responded with the 15 percent cut of its own, as previously promised and to come into effect on Aug. 1.

Arguments in favor of cutting Estonia's duties, which had seen successive waves of excise duty hikes, were mostly concerned with halting the cross-border alcohol trade which had seen Estonian, and even Finnish, customers heading to Latvian border towns such as Valka to stock up on drink, thus hemorrhaging Estonian tax receipts as well.

Latvian Prime Minister Krišjānis Kariņš (Unity) said on the eve of the Estonian law coming into effect that it was not how neighbors should behave towards one another, citing damage to its own alcohol retail sector.

Boo hoo.

The Latvian finance ministry projected the effect on state budget arising from the Estonian law to be €92 million, and recommended cutting excise tax on strong alcohol by at least 15 percent in order to offset said effects. The ministry said it expects the tax cut to reduce the negative fiscal impact to €32 million.

 The laws of economics win again.

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