News - April 2010
New studies on wine tax reform
The Centre has released a set of four working papers on the taxing of wine and other alcohol consumption.
The Henry Review of Australia's current taxation, including alcohol taxes, was delivered to the Government in December 2009, but the Government had yet to release the report or respond to questions about its recommendations.
The consumption of alcohol is taxed for a number of reasons, including the raising of government revenue, covering social costs associated with harmful alcohol consumption, and influencing consumer behaviour through altering beverage prices levels and relativities. Given these multiple objectives, what is the best system of taxing wine and other beverages, and who would be affected by its reform?
Currently in Australia beer and spirits are taxed according to their alcohol content, while the tax on wine is a percentage of the wholesale price - but a rebate applies to a firm's first $1.7 million of wine sales, effectively exempting the vast majority of wineries because of their small sales volumes. This continues our tradition of taxing wine differently and (except for super-premium wines) less heavily than other alcoholic beverages.
The paper by John Freebairn notes that the majority of consumers of alcohol impose little or no external costs on society and are therefore taxed excessively at present. He argues the ideal market failure correction is a specific tax per litre of alcohol, plus a number of other more direct government instruments to correct the identified market failures (including tougher regulations on consumption by the young and on drink-driving).
A paper by Kym Anderson, Executive Director of the Wine Economics Research Centre, provides an international comparison of the consumer tax measures affecting sales of wine, beer and spirits across a wide range of countries. He finds that low or zero taxation of wine is common among major wine-producing countries, as are differing tax rates for other beverages. Australia is shown to have a relatively high tax for fine wines because of the use of a proportional tax rather than the more-commonly used volumetric tax measure: Australia's super-premium wine consumers are taxed three times greater than the OECD average while its consumers of non-premium wine are taxed only half the OECD average. Meanwhile Australia's beer and spirits taxes are about seven times and twice the OECD average, respectively. If excessive (especially binge) wine drinkers consume mostly non-premium wine, and if fine wine drinkers impose no externalities, he argues Australia's ad valorem tax is an especially inefficient way to try to reduce the social cost of socially harmful behaviour.
The paper by Preety Srivastava and Xueyan Zhao uses information from the Australian National Drug Strategy Household Surveys to examine the association between risky drinking behaviour, drinker characteristics, and types of alcoholic beverages consumed. Drinkers of regular-strength beer and ready-to-drink spirits in a can (RTDs) have the highest incidence of binge drinking, while drinkers of low-alcohol beer and bottled (hence mostly premium) wine are least likely to binge drink. Since the former group are most likely to be linked to behaviour leading to property damage and physical abuse, this strengthens the argument for differential rates of taxation across types of alcoholic beverages. The tax on RTDs was nearly doubled in April 2008, making the low consumer tax on non-premium wines seem even lower for those consumers willing to switch from RTDs to wine.
If Australia were to switch to volumetric taxation of wine, how would the embattled wine industry be affected? The paper by Kym Anderson, Ernesto Valenzuela and Glyn Wittwer provides economy-wide modeling results suggesting that a change from the current ad valorem tax to a similarly low volumetric tax on domestic wine sales would cause regional output and income to rise in the cool and warm wine regions but to fall substantially in the irrigated hot wine regions. A switch to a volumetric tax as high as the standard beer rate would have several positive effects: it would raise tax revenue, lower domestic commercial and non-premium wine consumption by more than one-third, and raise output of super-premium wine by 15 percent (as its domestic consumption would be one-quarter higher). On the negative side, however, it would induce a one-third decrease in production of non-premium wine as its consumer price would rise by at least three-quarters - exacerbating the problems of grapegrowers who have had to deal also with water allocation cuts and a halving of their winegrape prices over the past two vintages.
Read the papers:
0710 Srivastava, Preety and Zhao Xueyan, What Do the Bingers Drink? Micro-unit Evidence on Negative Externalities and Drinker Characteristics of Alcohol Consumption by Beverage Types, April 2010.
0610 Freebairn, John, Special Taxation of Alcoholic Beverages to Correct Market Failures, April 2010.
0510 Anderson, Kym, Excise and Import Taxes on Wine vs Beer and Spirits: An International Comparison, March 2010.
0210 Anderson, Kym, Ernesto Valenzuela and Glyn Wittwer, Wine export demand shocks and wine tax reform in Australia: Regional consequences using an economy-wide approach, February 2010.