A whole four years ago I tried to contribute to a discussion
on the price of beer in New Zealand with this piece.
As an aside in that I wondered whether it would be more fair for everyone if
excise tax were charged at the point of sale rather than when alcoholic beverages
enter the supply chain.
Four years later I’ve been thinking about that idea a bit
more and it still seems really valid. Here’s why.
Excise tax on alcohol has an awful lot wrong with the way it’s
applied. I’ll list a few here, but it’s the third one in particular that I’m gunning for:
- it discriminates blatantly. That is, excise is charged at different rates for different drinks. To the best of my knowledge there is no evidence that a millilitre of alcohol in a whisky is more dangerous than a millilitre of alcohol in a beer. Nor that a millilitre of alcohol in a beer is more dangerous than a millilitre of alcohol in a wine. But our excise rates are calculated as if that is the case. It seems obvious then that what our excise rules are doing is profiling the consumers of these different kinds of beverage and intentionally penalising one category of consumers more than another. If only someone’s choice of drink correlated with religion or sexuality – then the way we apply excise would breach the Human Rights Act. (In fact, if I could suggest that the preferential treatment given to wine drinkers has to do with wine’s biblical/Judaeo-Christian history, then maybe this is a form of religious discrimination. Any lawyers out there want to do some pro bono, human rights work?)
- It assumes that all alcohol entering the supply chain gets consumed. Brewers and other producers have to pay excise whether the beverages they make are consumed or not. If drinks sit on a shelf without being sold for so long that they have to be dumped, no-one gets an excise refund. If drinks are spilled, lost, broken or boiled off in a casserole the naughty tax is still paid. This is even though excise tax is supposed to be a brake on alcohol abuse. As far as I can tell the only way you get your excise refunded is if you export the goods or show that they were somehow tainted at the time of production. (Going off and becoming undrinkable doesn’t count.)
- Finally, as dscussed below, the financial burden of excise tax is multiplied in the supply chain.
Let’s assume that that 330ml bottle of 5% ABV beer was sold
by a brewery to a distributor for $3 (excluding GST) and by the distributor to
a bar for $3.60 (excluding GST) and by the bar to a consumer for $10 (including
GST). And yes, for the distributor and bar to stay in business, those are the
kinds of margin they need to charge.
It’s common to assume that the amount of excise that the
consumer has effectively paid is still 47 cents. But imagine if that excise
hadn’t been applied back at the brewery. The brewery might have sold the beer
to the distributor for $2.53. Assuming the distributor applies that same margin
as before, they’d be selling it for $3.03. And assuming that the bar applies
the same margin then they’d be selling it for $8.42. A whole $1.58 less. So has
excise cost the consumer $0.47 or $1.58? I think the answer is $1.58. What has
been passed onto the consumer is not only the cost of the excise, but the cost
of everyone in the supply chain adding their percentage to it.
The supposed purpose of excise tax is to levy consumers of
this dangerous product (some more than others) and collect the income and put
it to good use. But if the effect of excise is to put a drink up by $1.58, yet
only $0.47 is being collected in tax, something is going wrong.
What’s going wrong is that excise is supposed to be a levy
on alcohol consumption, but it’s collected at the point of production (or for
imported goods at the time of entry into New Zealand). And where is the extra
money being charged to the consumer going? It’s going to whoever funds the
purchases made by the companies in that supply chain. You might think that it’s
the operators of those businesses. But it’s just as likely to be banks. I.e.
excise tax inflates the cost of buying stock for distributors and retailers and
they fund that purchasing from their working capital, which may be their
investors’ money, or may be a bank’s money.
This makes it sound like this is a windfall for those
parties funding this money-go-round. But in reality I think that they would prefer it if these
goods were cheaper and the whole business didn’t have the added risk of paying
all this tax in advance.
Now in the 2015/16 year, New Zealand collected $947M in
alcohol excise tax. Most of this would have been purchased at off-licences rather an on-licences. I’m
going to make a wild guess that 80% of alcohol is sold at off-licences.
Markups at bottle stores and super markets are much lower
than in bars. By the time a bottle of some kind of alcohol is sold at an
off-licence, it’s probably going for about 50% more than the producer sold it
for. But bars and restaurants probably sell goods for 250% more than the
producer sold it at.
Turning these percentages into dollars, I estimate that every
year, excise tax gets inflated by $380M for alcohol sold through bottle stores
and by $470M for alcohol sold through bars and restaurants. That’s $850M sucked
out of the pockets of New Zealand consumers because that $947M of excise tax is
levied at the point of production, not at the point of consumption.
The alternative then, is to levy excise tax at the point of retail sale. Even saying it sounds intrusive, but I think a little scrutiny shows it’s
actually quite workable. It is the 21st century after all and we
have this thing called electronic point of sale software. We use one at Hashigo
Zake called Vend. It knows everything we buy and everything we sell. I’m sure
that its developers would be happy to add functionality – for a fee – that records
the serving sizes and ABVs of all the products we bring in then tells us and Inland Revenue or Customs the
excise payable on any and every sale. It’s only a fraction more demanding than calculating
GST. It would mean that retailers would never pay excise, only collect it and forward it. And because they aren’t
paying excise when buying stock there’s no need to add a margin to it.
There’s $850M to gain every year by doing it this way. That
gain can be split. I.e. excise tax could be increased, perhaps by bringing the
rates for wine into line with beer and cider, so the tax take goes up. But prices
to consumers would fall at the same time. Outlets could pocket a share of the savings
to fund the extra functionality needed in point of sale systems. I believe “win
win” is the appropriate cliché.
Whole industries (brewing, distribution, hospitality) would be less risky. Consumers would save money.
But of course it won’t happen. I’ll try to second guess some
of the reasons.
- Firstly the idea of making excise tax collection more efficient and passing on savings will appal the neo-prohibitionists. They want to punish us for liking a drink. It probably pleases them that an inefficient system needlessly adds cost.
- Secondly "it’s just not done this way". Customs collect excise, not Inland Revenue. How would it be policed? But these are insignificant issues. Every business is already a tax collector (GST, PAYE). For decades we've even been using the tax system to collect, of all things, student loan payments. Every vendor of alcohol already needs a licence and is monitored by city councils and police. The bottom line is that we can organise the collection of taxation any way that we, as a nation, see fit, and a change like this is no more challenging than raising the GST rate.
