Alcohol ‘is an article of human consumption which has a legitimate use accompanied by dangerous possibilities’ The Report of the Royal Commission on Licensing 1946
This is the executive summary of a report commissioned by the Alcohol Advisory Council: The views in this report are the author’s and may not be those of ALAC. The full report is available on The ALAC website
SOME PRELIMINARIES (p.4)
EXECUTIVE SUMMARY (p.5) below.
PART 1: THE POLICY FRAMEWORK FOR REGULATING ALCOHOL
The Sale of Liquor Industry Act 1989 (p.13)
Alcohol Advisory Council Act (p.13)
National Drug Policy 1996 (p.13)
The National Alcohol Strategy 2000-2003 (p.15)
The Policy Framework Context (p.16)
PART 2: THE TAXATION OF ALCOHOL
The Early History of Taxation on Alcohol (p.17)
The 1958 Budget and its Aftermath (p.18)
The 1970s (p.19)
The Establishment and Development of ALAC (p.20)
The 1980s (p.23)
Report on the Review on Excise Duties on Alcoholic Beverages and Tobacco Products (The Sullivan Report) (p.23)
The 1989 Budget Reform (p.24)
The Current Excise Tax Regime (p.25)
The Treasury Views 1991(p.27)
The Taxation Review Committee 2001(p.28)
PART 3: THE ANALYTICS OF TAXATION ON ALCOHOL
The Effect of Price on the Demand for Alcohol (p.36)
Estimates of the Price Elasticity of Demand for Alcohol (p.37)
The Role of Market Prices (p.39)
Demerit Behaviour (p.41)
Externalities and Social Costs (p.42)
The Distributional Impact of Excise Duties (p.47)
PART 4: SOME CURRENT ISSUES
New Alcoholic Beverages (p.50)
Legislative Changes (p.51)
Rising Teenage Drinking (p.51)
The Responsibilities of ALAC (p.53)
The Price of Ethanol (p.53)
The Fiscal Cost of Alcohol Misuse (p.53)
PART 5: SOME TAXATION ISSUES
How Can Duties Contribute to the Reduction of Harmful Drinking (p.58)
The Case for an Ethanol Based Duty Regime (p.59)
Concentration and Convenience (p.59)
Duty by Beverage Type? (p.59)
Low Alcohol Beverages (p.60)
Duty Bands (p.61)
The Problem of Taxing Wine (p.61)
The Higher Rate of Duty on Spirits and Light Spirits (p.62)
The Level of Duty (p.63)
An ACC Levy? (p.66)
The ALAC Levy (p.66)
Miscellaneous Taxation Issues (p.67)
Home Production (p.67)
Duty Free Allowances (p.67)
Business Funded Alcohol (p.68)
Indexation for Consumer Inflation (p.68)
Differentiating Between On- and Off-Licence Sales (p.69)
Litter, recycling and waste (p.69)
PART 6: CONCLUSION (p.70)
Since 1989 the broad policy toward alcohol has been based upon the notion that much of its consumption is like the consumption of other products, so a well informed adult makes informed decisions as to the quantity to the be consumed and circumstances in which the consumption can take place. However, some of the consumption is potentially harmful, and there is a necessity of public intervention to minimise the harm. Regrettably, those interventions can also inhibit non-harmful drinking. Public policy therefore has to trade-off harm reduction with a reduction of moderate consumption.
The instruments of public policy to intervene have been based upon such statutes as the Sale of Liquor Act, the Alcohol Advisory Council Act and parts of omnibus acts such as the Health Act, Police Offences Act and the Transport Act. More recently they have been coordinated and prioritised via the National Alcohol Strategy.
Yet these measures need to be complemented by greater attention to the role of prices in the decision to consume liquor. Of course it has been long realised that excise taxes increase the relative price of alcohol and thereby reduce the purchases and consumption of alcohol. But there has been little attempt to coordinate them with the national alcohol strategy and its concern with harm. Insofar as there is a policy view of their purpose they remain primarily revenue raising, although their special status is justified because of the impact of the harm on the government’s fiscal position.
This report proposes that in future the primary purpose of excise duties on alcohol should be a part of the harm minimisation strategy. Setting the levels of duties still requires attention to the impact on the government’s fiscal position, but the philosophy behind the excise duty and the way it is implemented is altered if a harm perspective is adopted.
Adopting a harm approach to alcohol excise duties can reduce potentially harmful consumption, especially that of teenagers and heavy drinkers (but not particularly by chronic drinkers, except that the measures may inhibit heavy drinkers becoming chronic drinkers over time). But it cannot eliminate all harm. Effective harm minimisation involves other interventions. Those other interventions are likely to work more effectively if the excise duty strategy is supporting them.
The following summarises and consolidates the recommendations in the text, although not necessarily in the text order of presentation.
1. The National Drugs Strategy includes the policy objective of ‘the minimiz[ation] of harm caused by alcohol use to both individuals and the community’ where harm is defined as ‘all adverse effects or outcomes, including harm to health as well as detrimental effects on social and family relationships, loss of actual or potential enjoyment or livelihood, and economic or financial costs.’
2. The report recommends that the specific taxes and levies on alcohol be levied with the primary purpose of reducing alcohol misuse and the consequent harm.
3. A secondary purpose, which assists in setting its appropriate level, is that the taxation should enable the government to recover some or all of the expenditure outlays and revenue losses caused by alcohol harm.
The Effects of Excise Duties: How the Market Can Help Reduce Harm
4. The effect of (an increase in) an excise duty or levy is to increase the price of the alcohol on which it is levied.
5. The effect of an increase rise in the price of alcohol is to reduce alcohol consumption to some extent. The extent varies by type of drinker, by drinking situation, and possibly by the quantity drunk in each situation.
6. The biggest reductions in harm from rising alcohol prices are likely to arise from
– reduced teenage consumption;
– inhibiting moderate and heavy drinkers becoming very heavy drinkers, and
– reduced additional drinking in a session.
7. The strongest economic reasons for extra regulation of the alcohol market (including the imposition of excise duty) are
– externalities and the need to bring market prices in relation to social costs;
– the semi-rational or irrational behaviour of teenagers learning to drink, and of heavy drinkers and addicts (although the latter group may not be particularly susceptible to price signals); and possibly
– inhibiting moderate and heavy drinkers becoming very heavy drinkers and addicts.
8. Excise duties based on ethanol are probably mildly regressive, that is they probably impose proportionally more on the poor than the rich. However the biggest redistributional effect of excise duties is the transferring of spending power from heavy drinkers to moderate drinkers and non-drinkers. This transfer is in the opposite direction to the social costs where heavy drinkers impose on others. Thus the main fiscal effect of excise duties on alcohol is to offset the redistributive impact of social costs of alcohol misuse – that is to reverse (in part) the transfer of social costs which heavy drinkers impose on moderate drinkers and non-drinkers.
9. Higher prices for alcohol impact on different consumers if different ways. The evidence suggests that modest drinkers are not greatly affected, heavy drinkers may cut back their drinking by 1 percent for every 1 percent rise in price, and chronic drinkers are almost completely unaffected on average. Teenagers reduce their drinking in the face of higher prices, and it seems likely that there is less drinking in extended drinking sessions as the price rises. Higher prices may also inhibit moderate drinkers becoming heavy drinkers and heavy drinkers becoming chronic drinkers.
10. In a modern market economy, market prices coordinate the decisions of producers and consumers. To do this effectively, the prices should relate to social costs.
11. While many people are offended by excessive drinking, which in economic terms may classify it as a ‘demerit’ good, this may not be a compelling reason for rasing alcohol prices.
12. While there is some irrationality (or quasi-irrationality) among some alcohol consumers and on some occasions, it is not evident that price policies are particularly helpful in reducing harm from this course. Insofar as irrationality is a problem, other interventions need to be pursued. The report notes however, that teenagers who are being socialised into moderate drinking need special attention.
13. Alcohol is one of a handful of products, where the costs of production do not roughly reflect the overall costs to society of consumption. The excess social costs are substantial. The most comprehensive estimate suggests that alcohol misuse reduces effective GDP by 4.0 percent, may well reduce the effective size of unmeasured (informal) economy by a similar amount, and has also reduced the welfare of New Zealanders via additional mortality and morbidity by 2.0 percent and the population of New Zealand by .8 percent.
14. The excess social costs may be thought of as the economists’ equivalent of harm, in which case the objective of alcohol policy in economic terms is to reduce social costs. Reducing the gap between the prices which individuals make their alcohol consumption decisions and the social cost to the economy will reduce harm, because individuals are less likely to partake of potentially harmful consumption.
15. It is not practical to require alcohol consumer to pay an appropriate insurance for the social costs they may incur with each drink, since the payment would vary markedly by the personal characteristics of the consumer, the drinking situation, and the number of drinks recently consumed. Excise duty is an imperfect practical alternative to the ideal. It will not eliminate all potentially harmful consumption..
16. While the idealised insurance system would generate exactly enough revenue to cover the excess social costs, that rule does not apply for across the board levy. There is even an argument that the levy should generate more than the excess costs, because it should be struck at the level reflecting the most harmful drinking on the margin rather than the average drinking which is less harmful.
17. While a lift in alcohol excise duty will raise prices for all drinkers, many will be better off, insofar as the resulting tax revenue will be recycled back. Under some assumptions, over 70 percent of adults will be better off as a result of this recycling (and also from reductions in harm). This is because heavy drinking is concentrated in a small part of the population. They will be made worse off as a result. On the other hand heavy drinking is the main source of harm, and so the heavy drinkers would be paying for a greater share of the harm they generate.
18. Among the new issues facing strategies to reduce alcohol harm are new beverages, and new legislation which liberalises access and attitudes to alcohol. Excise duties probably can do little to assist with any potential harm these may generate, but it is noted that while in principle ALAC has some of the relevant interventions to meet these challenges and that of rising teenage drinking, it has not had an increase in its funding relative to inflation since 1991.
19. A major new issue is the rising incidence of teenage drinking over the last decade, and the clear evidence that much of its is potentially harmful. Teenagers are sensitive to higher prices. Higher excise duties would reduce their potentially harmful consumption, while they learn to drink like mature adults. (The report also notes that there is also considerable heavy drinking by adults in their early twenties, which would also be reduced by higher excise duties.)
20. A second new development is the introduction of new beverages, for which the cost of ethanol is exceptionally cheap. The report describes light spirits for which the price of a 1.125 litre bottle is as low as $7.95. (If they were selling ethanol at the same market price, a dozen 330 ml cans of beer would cost $6.33, a 750ml bottle of wine would cost $2.76, or a 1.125 litre bottle of spirits would cost $12.85.) Cheapness of light spirits arises from the low excise duty on spirits below 23% aabv, an anomaly in the levying regime (duty is on the basis that the liquor has 18% aabv although the actual aabv is 23%) and the low cost of production.
21. Indicative figures suggest that revenue from excise duty on alcohol does not even cover the costs incurred by the public health sector in dealing with alcohol harm, and may cover only a fifth to a quarter of gross fiscal costs.
22. It is recommended that government agencies be required to regularly estimate the costs they incur dealing with alcohol harm.
The Proposed Excise Duty Regime
23. An excise duty on alcohol can contribute to reducing harm from alcohol misuse by raising the minimum price of alcohol, thus reducing consumption by teenagers and heavy drinkers, and inhibiting the creep of moderate drinkers into heavy drinkers and to chronic drinkers. However, ideally the excise should not impact moderate drinking which is not potentially harmful. In practice this impact cannot be eliminated but it can be moderated by choice of the duty regime.
24. The most effective excise duty with the purpose to reduce harm is likely to be one which is levied on ethanol (the quantity of absolute alcohol), and is particularly concerned with the minimum price of alcohol. A particular merit of this levy regime is that it impacts relatively less on high value (relative to ethanol content) drinks.
25. A strategy which focuses on the minimum price of ethanol requires regular collection of pricing data. Statistics New Zealand should be commissioned to collect the data, as a part of its regular price collection program.
26. It is possible that the excise duty on ethanol could be supplemented by duties based on containers, concentration, or on any other chemical identified as harmful. However, not enough is know about these to justify any positive recommendation.
27. A strategy based on ethanol content would not normally need to differentiate between type of beverage. However the difficulties of assessing the ethanol content of wine requires a modification to the general principle and, as explained in paragraph 30, there is a case for a differential between spirits and the rest to minimise the impact of the excise on moderate drinking.
28. Very low alcohol beverages should be exempted from excise duty on the basis that their consumption causes little harm (as well as reducing compliance costs). Subject to them not being able to be cheaply distilled back to a higher level of ethanol concentration (which would undermine the tax base and could add to harm) it is recommended that beverages with an aabv below 2.5 percent be exempt. (The 2.5 percent comes from definition of low-alcohol beverages used by the Australian and New Zealand Food Authority Regulations.)
29. As far as is practicable, ethanol should be levied on actual content, and the excise rate should not based on duty bands. Where duty bands have to be used, the within band rate should be set at the top of the band in order to avoid suppliers avoiding actual taxation on ethanol content.
30. That bulk wines be taxed at the actual ethanol content or, where that is impractical, at the top of the band. High value wines (say, above $12.00 a litre for production costs plus GST) would be taxed at a set rate independent of their alcohol content – currently $2.1096 a litre. Similar principles should apply to fortified wines and liqueurs.
31. Distilled spirits (especially light spirits) can be produced at a considerably lower cost than other forms of alcohol. In order to maintain realistic minimum levels for the price of alcohol, either the base excise duty rate for all alcohol has to be raised, or a differential maintained between spirits needs to be introduced. This report recommends the latter option. The recommended differential is lower than the current differential of $17.32 for full spirits and would result in a reduction in their prices, but it would raise the price of light spirits.
32. The application of the rates based on the principles in this report (including raising the excise threshold, lowering excise duty on spirits, increasing it on light spirits, and a better application of the existing rates) will not alter revenue by much. The proposals are essentially a rebalancing exercise, to reduce harm.
33. The base level for excise duty is a political judgement to be made through the parliamentary process. That it is a political judgement suggests the need for a wide public debate on the appropriate excise duty rate. An important consideration in setting the base rate is the extent to which the total excise duty should contribute to gross fiscal costs of alcohol harm.
34. However, it would be understandable if the government decided to recover a high proportion of the fiscal costs generated by alcohol misuse by a higher excise duty rate. At the same time that would reduce alcohol harm, while the additional revenue could be recycled for priority fiscal purposes.
35. To assist the public discussion an example is given below of the impact if the excise duty was increased the report explores an increase of $6.00 a litre of ethanol (exclusive of GST), which would be about the amount to require the excise levy covered public health costs generated by alcohol misuse. The additional revenue would be about a $120m a year.
36. The report does not recommend further hypothecation, that is the practice of tying revenue from a taxation to a particular spending program. This is under consideration by the government at the moment (in regard to a health levy), and the issue may be revisited after the decision is made. The report does, however, look at some existing hypothecation.
37. The Accident Compensation Commission already levies various activities to fund its program. It should be invited to consider whether it should place a levy on ethanol, reducing its other levies
38. It is recommended that ALAC should receive an increase in its levy revenue to enable it to more vigorously contribute to a reduction in harm from teenage drinking. As far as possible, the levy should be on ethanol content in parallel to the excise duty.
37. Until there is evidence of home production causing significant harm it is unnecessary to impose excise or other special duties on it.
38.The international practice where alcohol is not included in the de minumus (where the duties and indirect taxes in imported goods for personal use are exempt from a levy up to $50) should be followed (as it is for tobacco). Whether the duty exemption for Trans-Tasman travellers is consistent with Closer Economic Relations between Australia and New Zealand should be reviewed.
39. There is a need for a continuation of a vigorous host responsibility program for businesses which supply their staff with free liquor, given that any price restraint to harmful drinking does not apply.
40. GST should continue to be levied on excise duty to simplify compliance costs. As a general rule the statements about excise duty should be explicit whether they include or exclude GST.
41. The regular adjustment of excise duties to changes in consumer prices should be continued (and the practice applied to spirits if the new lower rate is introduced). However, every three to five years the levels should be reviewed for the effect of economic, fiscal, and social changes other than inflation, with particular attention to the minimum cost of ethanol.
42. The voluntary labelling regime needs to review the information displayed about alcohol content (Including on websites and in advertisements). Business may chose to include excise duty information on the label if they wish.
43. While there is a case for on-licence sales to be excised at a lower rate than off-licence sales, there seems no practical way to do this.
44. Litter, waste, and recycling issues need to be addressed as part of a comprehensive program for all litter, waste and recycling, rather than specifically for alcohol.
45. The main argument of this report is that excise duties on alcohol should have the primary purpose of reducing harm, but that also entails contributing to the gross fiscal costs the harm generates.
46. In the course of this report, the application of the principles have resulted in some recommendations to the excise system. The main changes are summarised in the following table. The last column indicates the impact were the government to require the revenue from the excise duty on alcohol to cover the full costs of the public health system caused by alcohol misuse.
Summary of Recommendations on Excise Duties
Price increase as a result of rebalancing and reducing harm
|Low Alcohol (2%aabv)||12c a 330 ml can lower|
|Other (4% aabv)||No change|
|Bulk (13% aabv)||71c a litre higher|
|High Price||No change|
|Light (23% aabv)||$5.22 a 1125ml bottle higher|
|Full (37.2% aabv)||$1.83 a 1125ml bottle lower|
Note: The changes are excise duty impact only. Suppliers may also change their margins in response.
Further price increase if duty increased by $6.00 a litre of ethanol.
|Low Alcohol (2%aabv)||No change|
|Other (4% aabv)||9c a 330ml can higher|
|Bulk (13% aabv)||88c a litre higher|
|High Price||66c a 750ml bottle higher|
|Light (23% aabv)||$1.75 a 1125ml higher|
|Full (37.2% aabv)||$2.83 a 1125ml bottle higher|
Note: The changes are excise duty impact only. Suppliers may also change their margins in response.