Evidence on Alcohol Taxation and Public Policy in Mexico

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URL corta: https://ciep.mx/IcAg

Alcohol use is associated with more than 200 health conditions, including various types of cancer, heart disease, cirrhosis, diabetes, epilepsy, digestive disorders, unintentional injuries, road traffic accidents, poisoning, falls, fires (WHO, 2018), and fetal impairment, along with other social consequences such as violence, vandalism, criminality, and reduced productivity. These health and social consequences associated with alcohol use result in losses of at least 2.6 percent of GDP annually in both middle- and high-income countries, including health care, criminal justice costs and losses in productivity (Manthey et al. 2021, cited in Solovei et al., 2022).[1]

Worldwide, alcohol consumption killed 2.44 million people in 2019. Men account for 2.07 million deaths attributable to alcohol consumption, while 0.37 million are women (GBD, 2019).

Additionally, binge drinking,[2] especially among young people, can have consequences including loss of memory, increased risk of falling victim to physical or sexual assault, falls, becoming involved in fights, workplace and school absenteeism, legal problems, risky sexual practices, consumption of other drugs, alcohol dependence, and sadness or depression (Villatoro et al., 2023).

Globally, 39.5 percent of the population over 15 years of age has engaged in binge drinking, including 45.7 percent of those aged 15–19 and 48.5 percent of those aged 20–24. Lower-income groups are most likely to engage in binge drinking (45.4 percent, versus 38.7 percent among higher-income groups).

In Latin America, alcohol use among the population aged 12–65 is greatest in Argentina and Uruguay, with percentages close to 52 percent, while the rates are much lower in El Salvador and Ecuador, at just 9.5 percent and 13 percent, respectively. (Villatoro et al., 2023).

In Mexico in 2016, Reséndiz et al. (2018) found that prevalence of lifetime use of alcohol among the youth population (ages 12–17) was 39.8 percent, while past-year use was 28.0 percent and past-month use was 16.1 percent. From 2011 to 2016, rates of binge drinking in the last month among youth rose from 4.3 percent to 8.3 percent, and daily use increased from 0.2 percent to 2.6 percent.[3]

As for the adult population (ages 18–65) in Mexico, prevalence of lifetime alcohol use as of 2016 was 77.3 percent, while past-year use was 53.3 percent and past-month use was 39.9 percent. Binge drinking among adults also grew significantly from 2011 to 2016, increasing from 13.9 percent to 22.1 for past-month binge drinking, from 6.3 percent to 9.3 percent for weekly binge drinking, and from 0.9 percent to 3.0 percent for daily binge drinking (Reséndiz et al., 2018).

According to data by Ramírez et al. (2023), the prevalence of alcohol consumption in the adolescent population (ages 10–19) in Mexico is 20.6 percent (22.0 percent for males and 19.2 percent for females). Within this population, 13.9 percent engaged in binge drinking in the last 12 months (15.0 percent for males and 12.7 percent for females), while past 30-day binge-drinking prevalence was 5.2 percent (6.1 percent for males and 4.2 percent for females).

In the adult population of Mexico, the prevalence of alcohol consumption is 55.5 percent, with a higher rate among men (67.3 percent) than women (44.6 percent). Among adults, 40.4 percent engaged in binge drinking in the last 12 months (53.3 percent of men and 28.4 percent of women), while past-month binge-drinking prevalence was 19.1 percent (28.8 percent of men and 10.1 percent of women) (Ramírez et al., 2023).

A recent simulation by the Organisation for Economic Co-operation and Development (OECD, 2021) estimates that life expectancy in Mexico over the next 30 years will be one year lower across the entire population due to the effect of women consuming more than one drink a day and men consuming more than one and a half drinks per day.

This paper reviews evidence on alcohol taxation and public policy in Mexico and presents research findings on the impacts of taxation on alcoholic beverages in Mexico as well as other measures aimed at reducing alcohol consumption.

For the most part, these studies were drawn from a matrix developed by Tobacconomics[4] and focus primarily on examining how consumers change their behavior in response to tax increases and the impact of such tax increases on revenue, health, tax incidence, tax evasion and avoidance in the sector, illicit trade, and alcohol outlet availability. Also included in the Appendix is a summary table with the different price elasticities of demand of alcohol beverages to facilitate comparison of the findings of the various studies.

  1. Relevant questions
    1. How do consumers change their consumption of alcoholic beverages in response to increases in tax on alcohol and other measures?

  

Key messages:

 

Mexican consumers drink less alcohol when prices increase.
Taxation can be an effective tool for curbing alcohol use and its harmful consequences.

Ameida (1999) conducted research into the price elasticities and cross-price elasticities of different alcoholic beverages (beer, tequila, and other spirits) and found that, in general, the magnitudes of the estimated elasticities for each good are relatively low, supporting the possibility of raising the prices of these goods through corrective taxation that counterbalances the externalities associated with drinking.

A study by Catalán and Moreno (2016) found that in the short term, a marginal increase of one percent in beer prices only reduces demand by 0.25 percent, whereas applying the same increase to wines and spirits achieves a demand reduction of 0.58 percent. In the long term, however, this marginal price increase reduces demand for beer by 1.23 percent and demand for wines and spirits by 1.48 percent. Over the long term, demand is thus elastic.[1]

A review of income elasticity by Catalán and Moreno (2016) found that a marginal increase of one percent in income leads to a 0.61 percent increase in demand for beer, but a 1.08 percent increase in demand for wines and spirits in the short term. Meanwhile, long-term demand increases by 3.04 percent for beer and 2.75 percent for wines and spirits, reflecting high elasticity in both cases.

In addition, a comparison between beer prices and apparent domestic consumption per capita conducted by Guerrero-López et al. (2013) found that increases in consumption in the previous decade coincide with falls in prices and that recent drops in consumption are associated with price increases. This led the authors to conclude that an increase in tax on alcohol may prove to be an important tool in lowering consumption. They also raise the suggestion that tax policy should take into account adjustments for inflation in the amounts levied, while also prohibiting promotional pricing and introducing effective measures to combat tax evasion and illicit trade.

Separately, Huesca et al. (2019) used data from the 2016 National Survey of Household Income and Expenditure (ENIGH) to identify different household responses to rates of IEPS excise tax levied on alcoholic beverages in Mexico. The data were analyzed by income quintile, . Broadly speaking, their research highlights the relevance of levying excise taxes to correct for negative externalities and the need to allocate IEPS revenue to address these externalities in poorer households. It was also found that in the border region families spend an average of seven percent of their income on alcohol, compared to six percent in the rest of the country.

In addition, poor households are more responsive to taxes than wealthier ones. For the income quintile, it was estimated that a 10-percent increase in alcohol prices would result in a drop in consumption of 3.0 percent in the border region and 3.4 percent in the rest of the country. Wealthier families, meanwhile, would reduce their consumption by 1.8 percent in border states and 1.2 percent elsewhere. Thus, these taxes have a greater corrective effect within poorer households.

A study by Moreno-Aguilar et al. (2021) on beer consumption in Mexico found an elastic response to price variations: increases in beer prices result in a proportionally greater reduction in the quantity demanded. In particular, a one-percent increase in the price of beer leads to a drop in consumption of 1.31 percent in the short term and 1.40 percent in the long term.[2]

Other studies have explored cross-price elasticity, on the basis that increases in the price of tobacco and soft drinks have an impact on demand for alcohol. Huesca et al. (2021) found low cross-price elasticity between alcohol and tobacco. A 10-percent change in cigarette prices reduces consumption of tobacco by 7.57 percent and that of alcohol by 0.22 percent. A 10-percent increase in the price of alcohol reduces alcohol consumption by 7.7 percent. A 10-percent increase in the price of soft drinks results in a 1.09-percent decrease in quantity of alcohol demanded. These findings lead the authors to recommend that any increase in taxation of these goods be applied simultaneously to bring about sharper decreases in consumption levels.

A study carried out by Martínez (et al., 2023) found a price elasticity of demand for beer of -2.36 and an income elasticity of demand for the same product of 5.04. The study concludes that a fiscal policy must be implemented with the purpose of reducing beer consumption in the country.

For authors like Solovei et al. (2022), alcohol taxation is not the only effective measure. Other approaches like screening, brief intervention, and referral to treatment (SBIRT) are effective strategies to reduce a population’s alcohol consumption. In Mexico, it was found that a 10-year implementation of this program would yield positive returns on investment of between 21 percent and 110 percent due to decreases in health care expenditure, while averting more than 16,000 alcohol-related deaths.

One further measure has been proposed by López Olmedo et al. (2023), who conducted an experiment in 11 Mexican states to test the potential impact of including labels on alcoholic drinks warning of the health risks associated with consumption. Their research concludes that using these types of warnings can lead people to think of the potential harm caused by alcohol, lessen the appeal of these products, and reduce purchase and consumption intention.

 

  1. What impact does an increase in alcohol tax have on revenue, consumption, and health?
Key messages:

 

Increases in tax are associated with higher revenue.

Higher taxes result in higher prices, reducing consumption of alcohol and limiting its harm to health.

The best-performing interventions include a combination of taxation; brief interventions; advertising control; reduced availability, business hours and outlet density; and responsible retailing.

A study by Medina-Mora et al. (2010) assessed the following seven alcohol-abuse-control scenarios: 1) maintaining the status quo, 2) a 25-percent increase in consumption taxes, 3) a 50-percent increase in consumption taxes on high-proof alcohol products, 4) reduced availability of high-proof alcohol products, 5) regulation of associated advertising, 6) brief preventive and persuasive interventions at the primary level of care, and 7) random testing for motorists (breathalyzer tests). The research found that all tax-based interventions resulted in more than 150,000 disability-adjusted life years (DALYs) averted each year. Increasing taxes was the most cost-effective measure, but the best results were obtained by combining tax increases with delivering brief interventions to a greater proportion of individuals, advertising control, and reduced availability achieved through measures concerning an increase in minimum customer age, reducing business hours and outlet density, and responsible retailing.

In a study of 2019 figures in Mexico, Rodríguez and Foncerrada (2022) report that switching would increase revenue by ten billion pesos (from 15 billion to 25 billion pesos), reduce loss from tax evasion and illegal practices by 8.5 billion pesos, and simplify tax collection.[4]

Meanwhile, Rendón et al. (2022) note that ad valorem taxes boost the production and consumption of high-proof, low-quality beverages, since lower prices encourage consumption. Ad quantum taxes, on the other hand, generate more revenue and encourage production of higher-quality beverages with lower alcohol content, as higher prices produce the opposite effect. The authors point out that taxes levied on beer in Mexico have not succeeded in reducing beer affordability, and the IEPS excise tax does not curb the acquisition of alcoholic beverages by children, adolescents, and young adults and has instead provided an incentive for smuggling and the production of counterfeit and adulterated beverages.

To see answers to other relevant questions and more information download the document

Here

We also have available an alcohol tax simulator which you can download here.

This tool allows to make estimations about the fiscal and economic impact on different tax scenarios. For using the simulator, we recommend you to unlock the file for permitting the execution of the macros responsible for resetting parameters. For that, redirect to the file searcher, open the format option and in the general tab, make sure to enable the option «unlock». With those settings, the file should work without inconvenients.

Referencias:

[1] Globally, 43 percent of the population over the age of 15 (just over 2 billion individuals) has drunk alcohol at least once in the past year. Annual per capita consumption of pure alcohol stands at 15.1 liters; alcohol is first consumed before the age of 15 and is a gateway drug for the consumption of other, illegal substances (Villatoro et al., 2023).

[2] Binge drinking is defined as having consumed, on a single occasion, 4 or more drinks for women and 5 or more drinks for men in the previous 30 days (or having drunk 60 grams or more of pure alcohol on a single occasion in the previous month) (Villatoro et al., 2023).

[3] “Past-month binge drinking” refers to people who have consumed in the past month five or more drinks on a single occasion in the case of men or four or more drinks on a single occasion for women. In the case of weekly binge drinking, it refers to people who have consumed once a week five or more drinks on a single occasion in the case of men or four or more drinks on a single occasion for women (Reséndiz et al., 2018).

[4]  See https://tobacconomics.org/research/alcohol-evidence-matrix-mexico/

[5] For beer consumption, the authors found that consumers prefer present consumption and obtained a time preference of 1.64, meaning that consumers are more likely to sacrifice future units of beer consumption in favor of present consumption. The authors note that this is dangerous because beer consumption is given priority over other goods and is not as elastic to changes in price. Meanwhile, wines and spirits yielded a time preference of 0.42, indicating that consumers place greater value on future consumption than present consumption. This makes consumers of wines and spirits more sensitive to price changes and more likely to reduce their present consumption in order to maintain future consumption. Changes in prices had a small impact in reducing short-term demand but a greater impact over the long term. Catalán and Moreno (2016) stress that alcohol pricing policies are not that effective and alternatives should be found to reduce alcohol consumption.

[6] Similarly, Urzúa (2013) found that given a 1.0 percent increase in the price of beer, consumption in urban households would fall by 1.082 percent, and by 1.462 percent in rural households.

[7] In general, taxes on alcoholic beverages are applied in two ways. Ad-Valorem taxes are charged on the value of the product; that is, a fee is applied to the price. While Ad-Quantum taxes consider the amount of alcohol contained in the product, for which a fee is charged.

[8] Anderson (2020) notes that ad valorem taxes, variable by type of alcohol, tend to be progressive due to the fact that “premium” beverages are mostly consumed by wealthier individuals. At the same time, in wine-producing countries, these taxes may incentivize wine exports.

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