A study by the Estonian Institute of Economic Research indicates that cross-border trade began declining immediately after cuts to the excise duty rate on alcohol were implemented in Estonia in July 2019. The proportion of people who had bought alcohol in Latvia dropped to 33 percent last year, marking the lowest level in the past three years.
This figure stood at 35 percent in 2017 and 2018. Last year's 33 percent is nonetheless still 12 percent higher than in 2016, when cross-border trade began seeing rapid growth, the Estonian Chamber of Commerce and Industry said.
Director General of the Chamber of Commerce and Industry Mait Palts said that this was a textbook example.
"Despite the cuts, revenue from excise duties has remained at the same level as immediately after the excise duty hike," Palts said in a press release. "We have repeatedly said that the effects of tax changes are never linear, and in this case the state has suffered losses both in excise duty revenue as well as in VAT on goods purchased from Latvia."
Palts noted that the gaps have been significant compared with expected tax revenues. The estimated revenue from excise duties on alcohol was €276 million in 2017, while receipts only totaled €222 million. In 2018, the respective figures stood at €341 million and €232 million. The gap in revenue from excise duty on tobacco totaled €36 million over two years. This brings the total for unreceived revenue to €235 million.
Estimated receipts from excise duties have become more realistic, however, Palts noted. In 2019, tax inflow from excise duties was estimated to be €231 million, while actual receipts totaled €225 million.
The director general noted that in order to ensure a more favorable business environment, Estonian and Latvian economic policymakers need to engage in greater communication.
"The market is open, and in the end, it serves everyone's interests that the [business] environment should be stable and that consumption be predictable," he said.
The Chamber of Commerce and Industry said that cross-border trade reached its peak in 2018 and began declining after the Estonian government's decision to lower excise duties on alcohol as of July 2019. Cross-border trade has decreased both as a result of fewer people making dedicated trips to Latvia to buy alcohol as well as due to the amounts being purchased shrinking.
Fewer making dedicated trips
The study by the Institute of Economic Research showed that while people still intend to travel to Latvia to buy alcoholic beverages, the number of people definitely planning to do so has dropped from 14 percent to 7 percent on year.
In 2018, 10 percent of survey respondents traveled to Latvia for the sole purpose of buying alcohol — 4 percent fewer than in 2018, and by that time, the figure had been in decline for three consecutive years. The number of people having traveled to Latvia just to buy alcohol was highest at 18 percent in 2017.
Of the respondents whose monthly income exceeded €1,200, 17 percent had been to Latvia for the sole purpose of buying alcohol. The respective figure in groups earning less did not exceed 10 percent.
Purchasing alcohol for the purpose of resale has also declined to 1 percent of all alcohol buyers. Purchases of up to €100 have increased compared to 2018, whereas more expensive purchases have decreased.
Of those who bought alcohol in Latvia, 57 percent also purchased food and 48 percent motor fuel in Latvia as well. Other additional purchases included tobacco and construction goods, at 27 and 25 percent, respectively. Director General of the Estonian Institute of Economic Research Marje Josing said that Estonians also go to Latvia to buy goods that are unavailable in Estonia, such as heated tobacco products.
Of those who bought alcohol in Latvia last year, 29 percent said that their purchases in Estonia exceed those made in Latvia after the excise duty cuts, and 12 percent said that they now only buy alcohol in Estonia. 55 percent said that cuts to the excise duties have not affected their purchases, and 4 percent will buy more from Latvia than before the hike.
In the institute's estimation, the amount of alcohol brought from abroad may decrease in the future by one fifth.
Also analyzed as part of the study was the effect of excise duty cuts on the retail and wholesale prices of alcohol in Estonian stores. While prices had dropped in all product groups since the cuts, they are nonetheless somewhat higher than the June 2019 reference prices from which had been deducted the excise duty cut and the resulting VAT.
The study by the Institute of Economic Research was carried out among 1,313 residents of Estonia, aged 18-74, in December 2019. The sample is representative in terms of respondents' socio-economic status across all groups and corresponds to the socio-economic distribution of the Estonian population.
The Institute of Economic Research has conducted studies into the volume of cross-border trade with Latvia for four years. The analysis is based on excise duty receipts in Estonia and Latvia, retail price monitoring in the two states, expert interviews with producers and retailers, surveys with residents, and analysis of the Tax and Customs Board (MTA) data.
Editor: Aili Vahtla