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What is the relationship between taxes and prices?

The link between alcohol taxes and alcohol prices is often assumed to be straightforward: raising taxes should automatically mean prices go up (and vice-versa). However, in practice, taxes are charged to producers, who may choose to pay an increase in taxes out of their own profits (or retain any cut in taxes), rather than passing these on to consumers by raising prices. Conversely, producers may choose to increase or decrease prices by a greater amount than the change in taxes, perhaps because a change in taxes gives them an opportunity to renegotiate with retailers.

One recent analysis found that cheaper drinks are more prone to ‘under-shifting’ (changing prices by less than the change in tax), while ‘over-shifting’ (changing prices by more than the change in tax) is more common for expensive drinks.[1] Under-shifting was found to be more common for beer and cider, while there was less evidence of it for wine and spirits. Overall, the pass-through rate varied from 78% for lower priced beers to 124% for higher priced ciders (where 100% would mean that the price increase was equal to the tax increase).

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[1] Ally A K et al (2014)., ‘Alcohol tax pass-through across the product and price range: do retailers treat cheap alcohol differently?’, Addiction 109:12, pp. 1,994–2,002