By Laura Lakics
Europe wants its citizens to live longer healthier lives, but its budgets are hooked on their bad habits. Taxes on alcohol, tobacco and gambling have a dual purpose: they discourage use through monetary incentives, while providing governments with a stable tax base thanks to their inelastic demand. For finance ministries across the EU, “sin taxes” generate predictable, necessary revenue. Some countries take things further by directly nationalising the sale of these products, profiting not just off taxation but sales. As a result, the fiscal incentive to permit the sale of alcohol and tobacco is a powerful competitor with the clear public health benefits of disincentivising their consumption. If governments succeed in encouraging healthy behaviour, their budgets lose out, raising the question of whether health is truly a priority – and, how far these taxes can be pushed.
Using taxes to fight externalities is underpinned by a long history, going back to 17th-century British taxes on tobacco. Yet many cases show how rather than welfare, the motivator for these charges is profit. In Sweden, in addition to extreme taxes (the tax on a bottle of vodka amounts to €14 or over half of its price) and import restrictions, the government owns and gains revenue from the Systembolaget: the only chain allowed to sell alcohol beverages over 3.5% ABV. Similarly, the Hungarian state monopoly on the tobacco industry limits availability while filling the pockets of government officials and their allies. These states profit directly from the sale of harmful goods, blurring the line between government regulation and opportunistic participation. Economic arguments for taxes can even verge on the morbid: in 2001, a study funded by a US tobacco giant found the early deaths of smokers helped the Czech government save considerable money in healthcare and housing.
In some EU countries, taxes on alcohol and tobacco contribute up to 6.2% of total revenue, likely enough to cause budgetary pain if lost. This is a strong stream of tax revenue to support areas like healthcare, pensions and social spendings, which would otherwise be easy for politicians to cut. However, governments cannot boost their income by encouraging people to drink, smoke or gamble more – paradoxically, this unhealthy behaviour would also undermine their own public health goals.
And this paradox is coming to life in Europe. In 2009, 29% of EU citizens identified as smokers; by 2023 this statistic had fallen to 23%. EU statistics show taxes on alcohol and tobacco have increased, but not enough to offset the fall in sales tax revenue from 7.2% in 2013 to 6% in 2023. While this change is not large, the consistent downward trend suggests future fiscal strain. However, healthier people need less healthcare and make better contributions toward production and productivity. The WHO argues current tobacco tax rates are far from a revenue-maximising point, meaning governments can both improve health and preserve budget stability – they may just have to push harder.
But next to alcohol and tobacco, other problem areas emerge where consumption shows no sign of slowing. Online gambling has surged since the pandemic and many EU states are capturing this new stream of revenue. Spain and Malta opt for a 20% tax on operator profits (Gross Gaming Revenue), and while restrictions are increasing, some countries aim to profit further from this new trend. Northern countries like Finland and Sweden run state monopolies, while Hungary’s Szerencsejáték Zrt is one of its most profitable state-owned enterprises, contributing €450 million to the country’s budget in 2024. Meanwhile, in Italy, online gambling revenues topped €4.6 billion in 2023. This growing dependence on gambling raises the same question as tobacco and alcohol: are governments really invested in curbing harmful behaviours, or in cultivating a steady fiscal stream?
The Economist warns that politicians may get too addicted to taxing: taxes on planet-warming petrol are already common, and if current bad habits decline, states will have to find new “sins” to take their place. Some candidates are already emerging: governments are proposing and implementing levies on sugary drinks, aviation, meat and tourism. Perhaps any nuisance can be taxed to help the budget, but true public health success would mean planning for a loss in budget from “sin taxes” and finding more sustainable revenue sources. The question for Europe is whether its fiscal system can ever be truly healthy, or whether it will always remain, in one form or another, addicted to our addictions.
The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.
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