IFS - Minimum unit pricing works better if implemented alongside reformed alcohol taxes
The UK government has put out a call for evidence, seeking views on how well the alcohol duty system currently works and how it could be reformed. In new IFS research – funded by the European Research Council and the Economic and Social Research Council and published last week- we show that minimum unit prices for alcohol are reasonably well targeted at heavy drinkers, but come at the cost of hindering competition and reducing tax revenues. A minimum unit price, combined with a more coherent set of taxes on alcohol, would be just as well targeted at heavy drinkers and would limit the fall in revenue for the exchequer.
As of May 2018, Scotland became the first nation in the world to introduce a minimum unit price for alcohol, making it illegal to sell alcohol for less than 50p per unit. This policy was motivated as a way to deal with the social costs of heavy drinking.
Using data on millions of alcohol purchases made by Scottish and English households, the analysis shows that:
- Prior to the introduction of the minimum unit price, half of all transactions for alcohol bought in shops in Scotland were below 50p per unit. The minimum unit price led to a 5% increase in the average price per unit, but some very cheap products saw their prices double, while more expensive products were unaffected.
- This led to an 11% fall in units purchased per adult per week, with larger falls for more heavily drinking households.
Although well targeted at heavier drinkers, the minimum unit price reduces competition in the alcohol market, reducing tax revenue and creating windfall revenues for the alcohol industry. The analysis finds that if the 50p minimum unit price were extended to the whole of the UK under the existing system of alcohol taxes, then tax revenue would fall by around £390 million per year.
However, the UK government is currently gathering evidence on possible reforms to the system of alcohol duties. Now that the UK has left the European Union, there is scope to improve the way that alcohol is taxed. The research compares the impacts of tax reform and minimum unit pricing to find that:
- Not having a minimum unit price, but instead replacing the current system of duties with a two-rate structure that taxes alcohol in proportion to its alcohol content, with a higher rate on strong spirits, would be almost as well targeted at heavy drinkers as a minimum unit price and would lead to an increase in tax revenue of over £70 million.
- Combining this two-rate tax structure with a 50p minimum unit price would be as well targeted as the same minimum unit price applied on top of the current system of taxation, but would lead to much smaller falls in tax revenue.
Kate Smith, Associate Director at IFS and an author of the research, said:
‘The current system of alcohol duties is incoherent – for example, if you prefer a pint of beer to cider, you may currently pay more than twice as much tax for a drink with the same alcohol content. Brexit offers a valuable opportunity to improve the way we tax alcohol. A simple reform that taxes drinks in proportion to their alcohol content, with a higher rate on strong spirits, targets the purchases of heavy drinkers while raising tax revenue.’
Martin O’Connell, Deputy Research Director at IFS and an author of the research, said:
‘The Scottish minimum unit price reduced alcohol purchases of the heaviest drinkers – those whose drinking likely creates the largest costs to society and themselves – but this comes at a cost of reducing tax revenue. Reforming the way that alcohol is taxed can limit the reduction in tax revenue caused by minimum pricing.’
IFS Working Paper W20/37: Price floors and externality correction
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