The effect of alcohol tax changes on retail prices: how do on-trade alcohol retailers pass through tax changes to consumers?

Abstract

The effectiveness of alcohol duty increases relies on alcohol retailers passing the tax increase on to consumers. This study uses sales data from a market research company to investigate tax pass-through over 11 years for on-premise retailers in England and whether this varies across the price distribution, for different beverage categories and outlet types. Panel data quantile regression analysis is used to estimate the impact of 12 excise duty changes and 3 sales tax changes between 2007 and 2017 on prices. We use product-level quarterly panel data from for 777 alcoholic products. We undertake the regression at all outlets level separating products are analysed in seven broad beverage categories (Beer, Cider, RTDs, Spirits, Wine, Sparkling Wine, and Fortified Wine). We further test sensitivity by disaggregating outlets into seven outlet types. For all seven broad beverage categories, we find that there exists significant differences in tax pass-through across the price distribution. Retailers appear to “undershift” cheaper beverages (prices rise by less than the tax increase) and subsidise this loss in revenue with an “overshift” in the relatively more expensive products. Future modelling of tax change impacts on population subgroups could incorporate this evidence, and this is important because different socio-economic and drinker groups purchase alcohol at different points on the price distribution and hence are affected differently by tax changes. Governments could also potentially incorporate this evidence into future impact assessments.