Heterogeneity in the tax pass-through to spirit retail prices: Evidence from Belgium

On 1st November 2015, the Belgian government increased the excise tax on alcoholic beverages. For spirits with 40% of alcohol and bottle size of 70cl, this tax change is equivalent to an amount of 2,43€ per bottle of spirits. This paper studies the impact of this tax reform on the retail price of six major brands of spirits, using a difference-in-differences method. The estimation is based on a balanced panel of scanner data from a major supermarket chain and uses the retail prices of the same brands sold in France by the same supermarket chain as a control group. Having information on each store geographical location, we can further test for heterogeneity in tax pass-through according to the intensity of local competition and the scope for cross-border shopping. We find that the tax was quickly passed through spirit retail prices already during the first month of tax implementation and that it was mostly over-shifted. Unlike the (nearly) uniform pricing in US retail chains, we show spatial variation in prices across stores, and we find a large heterogeneity in tax pass-through linked to variation in local competition and price elasticity of demand. Although the tax reform has considerably increased the relative price of Belgian spirits with respect to all its neighboring countries, we find a lower tax shifting only in stores bordering on Luxembourg. Which is the neighboring country with the lowest spirit prices before the alcohol tax reform. These findings have important implications for alcohol control policies as they highlight the risk that the health benefits of alcohol taxation can vary greatly across households according to where they live.