Fighting Downturn, East Europe Boosts Alcohol, Cigarette Taxes

From The Wall Street Journal (wsj.com)

By Sean Carney and Leos Rousek

Cash-strapped Central and Eastern European governments are turning to a time-tested strategy of raising taxes on cigarettes and alcohol as the recession takes its toll on the region's public finances.

A few countries are seeking other ways to bolster such "sin taxes." Slovakia has formulated a so-called bottle-cap amendment aimed at stemming tax evasion by bar owners who sell bootleg liquor; Hungary is considering a new tax on poker.

"All countries, not just [those in] Central and Eastern Europe, are forced to do something with widening fiscal gaps, and the first thing to think about is lifting excise taxes," said Miroslav Plojhar, an economist at J.P. Morgan.

Firemen in Budapest on Monday protest austerity measures in the country's 2010 budget aimed at meeting a deficit level agreed with the International Monetary Fund. Central and East Europe have been hard hit by the downturn.

Poland is set to lift its excise tax on cigarettes by 2.6% to 228.80 zlotys (USD 81) per 1,000 units as of January. That compares to a planned 43% increase in Bulgaria's excise tax on cigarettes, to EUR 76 per 1,000 units as of 2010.

Bulgarian Finance Minister Simeon Djankov defends the proposed cigarette-tax increase on public-health grounds, and dismisses claims that the government is only interested in increasing tax revenue. Critics of the increase argue that it will lead to growth in the smuggling that has plagued Bulgaria for years.

In the Czech Republic -- ranked among the top consumers of beer -- planned new taxes on the brew are drawing controversy. Starting next year, the tax on beer, whether brewed locally or imported, will rise 33%, to 32 koruna (USD 1.85) per 100 liters. The government will raise its tax on spirits by 8% next year. It expects the two alcohol taxes together to boost state tax revenue by 1.7 billion koruna (USD 99 M) in 2010 alone, Finance Ministry spokesman Jakub Haas said.

Russia, meanwhile, aims to raise its tax on beer over the next three years. The bill, calling for a 200% increase next year, followed by rises of 11% and 20% in 2011 and 2012, still needs President Dmitry Medvedev's signature.

Slovakia is grappling with a different situation: As much as 10% of liquor sold in Slovak bars and restaurants is believed to go untaxed because bar owners pour liquor produced by illegal distilleries into used bottles on which taxes have already been paid, selling it as the genuine article.

To reclaim that revenue, the Finance Ministry has proposed that all liquor sold in bars and restaurants be packaged in special, nonrefillable bottles with state-of-the-art caps.

Critics argue that the proposed change would reduce consumer choice and be difficult for companies to provide. The change could also be construed as tacit support for Slovak producers, prohibited under European Union competition law.

Meanwhile, in Hungary, where hundreds of clubs devoted to poker have sprung up without regulation, a proposal to regulate poker games and tax the winnings would bring the game in line with the country's rules on other forms of gambling.

The Hungarian Poker Association argues that a tax on winnings will drive players toward online games. Instead, the government should introduce a fixed tax per table, similar to the one in neighboring Slovakia, association President Gergely Tatár said.

• 1