EXCISE TAX POLICY FOR ALCOHOL
AND CIGARETTES IN LATVIA,
ITS IMPACT ON STATE REVENUES
AND THE LAFFER CURVE
Andrejs Strateičuks
Diāna Fadejeva
Valters Kaže
11.11.2011
The Laffer curve
does the after-tax
revenue justify
job efforts?
(3; 4)
• entrepreneurial
activity and
motivation to work
reduces
• pre-tax income
declines
• tax evasion boosts
shadow economy
• decline of State
revenue
Excise tax policy for strong
alcohol in Latvia, 2000-2011 (6; 7)
Aim:
 Increase state revenues
 Reduce harmful effect
Sales volumes by alcohol groups, 2007-2010
(12)
4
Share of alcohol groups in total sales volumes
in Latvia, 2007-2010
5
Changes in State revenues from excise tax
(excluding beer) in thousands LVL, 2004-2010 (12)
Excise tax revenues from alcoholic drinks
in Latvia, 2007-2010

Total decrease – 13.7 mln. LVL
In the 1st HY of 2011 – revenue stabilization
BUT
new excise tax increase for strong alcohol followed
on June 1st
7
Changes in alcohol turnover in Latvia,
2008-2010

Total decrease in state revenues from VAT ~22 mln LVL
8
Number of deaths from consumption of alcohol,
2004-2010 (22)
Absolute numbers
Per 100 000 inhabitants
700
600
583
500
400
300
236
+61% ↗284
269
200
196
+27% ↗
176
139
2007
2008
100
0
2004
2005
2006
2009
2010*
16,0
14,0
12,0
10,0
8,0
6,0
4,0
2,0
-
13,6
10,5
+62% ↗ 12,6
10,9
8,6
+28% ↗
7,8
6,1
2004
2005
2006
2007
2008
2009
2010*
9
Changes in Excise tax rate for strong alcohol
per 100l a/a, retail turnover and state
revenues from excise tax, 2006-2010 (6; 12; 13)
Latvia's State Tobacco Monitoring
Programme for 2006-2010
Core aims:
• excise tax harmonisation - Latvian tax rates’
increase till minimum required EU level
• increase public awareness of tobacco’s
negative impact on health
• reduce overall tobacco consumption and
smoking rates
• reduce tobacco availability, etc
Changes in excise tax rates for
cigarettes in Latvia, 2004-2010 (20)
Specific tax,
LVL per
1000 sticks
Ad valorem
tax, % from
MRP*
2004
2005
Jan 1,
2006
Jan 1,
2007
July 1,
2007
Jan 1,
2008
Jan 1,
2009
Jan 1,
2010
6,3
6,9
7,6
8,4
10,0
17,8
22,5
22,5**
6,1%
10,5
%
14,8%
19,2%
25%
32,2%
34,5%
34,5%
*MRP – maximal retail price
** but not less than LVL 48 per 1000 sticks
The average price of the most
demanded pack of cigarettes LVL,
2004-2009 (7)
1.6
1.4
1.2
+ 411%
1
0.8
0.6
0.4
0.2
0
2004
2005
2006
2007
2008
2009
Cigarette sales in Latvia,
2005-2010, thousand units (21)
2006
Legal sales
4 692
4 754
3 324
3 870
2 294
1 772
Illicit trade
247
358
1 750
956
2 075
2 033
4 939
5 112
5 074
4 825
3 469
3 804
5.0
7.0
34.5
19.8
47.5
53.4
Actual consumption
Penetration of illicit trade, %
2007
2008
2009
2010
2005
Cigarette consumption in Latvia,
2005-2010, thousand units (21)
Share of smokers in Latvia, Eurobarometer data:
2006
36%
2010
36%
Excise tax rates for cigarettes and State
budget revenues, 2005-2010 (20)
2005
Specific tax rate, LVL per
1000 sticks
Ad valorem tax rate, % from
MRP****
Excise tax revenues from
cigarettes, LVL million
2006 2007*
2008
2009
as of
2010** 01.07.
2011***
6.9
7.6
9.2
17.8
22.5
22.5
25.0
10.5
14.8
22.1
32.2
34.5
34.5
34.0
73.83 143.10 113.35
89.88
n/a
43.13 56.89
*average annualized rate (till July 1, specific tax rate was 8.4%, ad valorem 19.2%, after July 1, specific rate - 10%, ad valorem - 25%)
** but not less than LVL 48 per 1000 sticks
*** but not less than LVL 52 per 1000 sticks
*** *Maximal Retail Price
State revenues from cigarettes grew by 7% during 1st HY of 2011
BUT new tax increases followed in July 2011
Changes in specific excise tax rate for
cigarettes and respective changes in
State income, 2005-2010, million LVL (20)
Changes in ad valorem excise tax rate
for cigarettes and respective changes in
State income, 2005-2010, million LVL (20)
The impact of various factors on illicit
cigarette market share in European countries
Conclusions and suggestions (1)
• The increase of tax rates does not necessary lead
to growing state revenue
• Latvian alcoholic beverages’ and tobacco markets
- typical examples of the Laffer concept
• 41% excise tax rate increase for strong alcohol
(2008-2010) caused Latvian state budget
revenues in 2010 to decreas by 15%, comparing
to 2008, which was the result of increasing illegal
market
Conclusions and suggestions (2)
• Specific excise tax rate for cigarettes tripled since 2006
while ad valorem rate more than doubled. Respective
state revenues, on the contrary, in 2010 were 37%
below 2008, when tax rates reached their optimal
value
• Tax increases have to be supported by stricter
legislation and more effective complex of border
monitoring, controlling and other activities aimed at
preventing the thrive of illicit market, but in Latvian
case, these were reduced
• Illicit market should be reduced in order to raise the
competitiveness of legal producers
Conclusions and suggestions (3)
• For alcoholic drinks, an optimal excise tax rate for strong
alcoholic drinks would be approximately 650-850 LVL
per 100l a/a, that’s at least 10% below the current rate
(940 LVL).
• For cigarettes, tax increases, were implemented at much
quicker pace than Directives actually required. In future
rapid excise tax increases should be avoided, gradually
reaching the EU target by 2018.
• Set of activities in order to combat illicit sales is
required.
• Until situation in tobacco stabilizes, an increase of excise
tax rates for cigarettes definitely cannot be considered
as a source for boosting state revenues.