Cross-border shopping has long been blamed for draining government revenue, particularly when consumers travel abroad to buy cheaper alcohol, sweets and soft drinks. But new research from the University of Copenhagen suggests the financial losses may be far smaller than previously estimated, challenging a longstanding argument against raising taxes on unhealthy products.

The study, published in The Scandinavian Journal of Economics, examined Danish households’ shopping habits during the COVID-19 border closures in 2020 and 2021. With trips to neighbouring Germany effectively halted, researchers had a rare opportunity to investigate whether consumers would purchase the same products at home when cross-border shopping was no longer possible.

Their findings revealed a striking difference between official estimates and actual consumer behaviour. While Denmark’s Ministry of Taxation estimated that cross-border shopping cost the government DKK 1.16 billion in 2019, excluding tobacco, the researchers calculated a substantially smaller loss of approximately DKK 415 million. This suggests that the financial impact may be only about one-third of the official estimate.

“The authorities assume that all purchases made in Germany would instead have been made in Denmark if the border had been closed. Our findings show that this is not the case,” explains Magnus Munk Bjerg, a PhD student and study co-author. He suggests that shoppers travelling considerable distances often purchase additional goods to justify the journey, meaning they would not necessarily buy those products at home.

The researchers discovered that geographical proximity played a crucial role in shopping behaviour. Households living within 30 kilometres of the German border increased their spending on products such as chocolate, crisps, soft drinks, beer and wine by 109% in Danish shops during the closures. Across households within 150 kilometres, spending rose by an average of 21%, while those living more than 120 kilometres away showed no detectable change.

These findings suggest that cross-border shopping is primarily a local rather than nationwide phenomenon. Although residents near the border may respond to higher domestic prices by shopping abroad more frequently, most Danish households are unlikely to change their purchasing habits significantly. Consequently, concerns about widespread cross-border shopping may have been overstated.

The implications could be important for public health policy. Governments frequently impose higher taxes on alcohol, sugary drinks and other unhealthy products to discourage consumption while generating revenue. Critics argue that such taxes drive shoppers abroad, undermining both objectives. However, the researchers suggest these policies could remain effective for the vast majority of consumers.

“We are not saying what the tax rate should be,” Bjerg emphasises. “But our results show that cross-border shopping should carry less weight when policymakers decide how taxes on unhealthy foods ought to be designed.” The study offers fresh evidence that governments may have more room to use taxation to promote healthier consumption without sacrificing as much revenue as previously feared.

More information: Magnus Munk Bjerg et al, Sin taxes in a sealed market: dilution and leakage related to cross-border shopping, Scandinavian Journal of Economics. DOI: 10.1111/sjoe.70045

Journal information: Scandinavian Journal of Economics Provided by University of Copenhagen