Taxing alcohol & tobacco products

I found this webpage from the Australian Taxation Office on excise charges on alcohol and tobacco products very useful. Taxes ideally should reflect damages of these products which are presumably related to alcohol and carcinogen content respectively. With respect to alcohol this is volumetric taxation rather than ad valorem taxes levied on product value.

All forms of alcohol except wine are taxed volumetrically - at least as excise taxes – though there are quantity discounts for larger volumes sold, I assume in pubs and bars:

1. Low alcohol beer (less than 3% alcohol) in containers less than 48 litres is taxed at $32-78 per litre of alcohol exceeding 1.15% of volume. In larger volumes (greater than 48 litres) the tax drops to $6-54. Low alcohol beer on tap at the pub should be a comparative bargain!

2. High alcohol beer (greater than 3.5%) is taxed at $38-20 in low volumes and at $26-85 in larger volumes again per litre of alcohol exceeding 1.15% of volume. Not such a great bargain at the pub!

3. Other spirits are taxed at $60-42 per litre of alcohol.

Drinking spirits seems to attract an exceptionally high volumetric charge. If damage is proportional to alcohol content it would seem to make sensed to reduce the tax on spirits and raise it on beers. There would also seem to be no obvious basis for the quantity
discounts given to pubs.

Beer has three rates (full, medium and light) purported to encourage responsible drinking, resulting in $0.33 and $0.22 per standard drink. Spirits come out to be $0.75 per standard drink (except for brandy, which for some historical reason is $60.42). The per standard drink rates are taken from an information sheet put out by the Alcohol and other Drugs Council of Australia. So, given that firstly, the tax is paid on alcohol volume, and secondly that the rates are higher for higher alcohol drinks, the system is not only volumetric, but has built in incentives to consume lower alcohol drinks.

Wine is taxed on an ad valorem basis based on value. For cheaper cask wines this means a much lower rate of tax per unit alcohol than other alcoholic beverages.

Wine is thus treated quite differently from beerm, spirits and RTDs.

The problem seems to be mainly with wine. When the GST was introduced and various taxes done away with, the Wine Equalisation Tax was set such that prices didn’t change too dramatically. The WET rate is 29 per cent of the wholesale sale value (ad valorem). This makes it difficult to compare with the rates for other drinks, but the ADCA fact sheet quotes the WET to be about $0.22 per standard drink on bottled wine ($0.69 on a bottle selling for $32, according to a submission to a 2002 Senate Inquiry on the topic) and $0.07 on cask wine.

Wine has a higher alcohol content than beer or RTDs (which must be less than 10%), but the lower tax for most wines could in theory be due to the positive health affects that are attributed to wine. I don’t have any evidence for this next statement, other than the occasional headache after drinking cheap bubbly, but it is possible that the tax system encourages the consumption of wine with greater impurities including methyl alcohols, and hence worse health effects. Whether this is true or not, the very low tax on cask wine is out of proportion to other taxes and is a very weak disincentive to over-consume.

GST is payable on the price including excise or WET (I think paying a tax on a tax is a bit of a rort).

However, despite the volumetric tax which is applied to most alcohol products, it still gets plenty of airplay: “Dr Herron said taxation of alcohol should also be restructured with the aim of reducing harm in the community. ‘The basic taxation should be one determined by the volume of alcohol in the product with the necessary adjustment to promote responsible consumption.’ ” from SMH 31 Jan 2007

With respect to tobacco products:

1. Tobacco is taxed at $0.24301 per stick (for sticks not exceeding 0.8 grams) irrespective of tobacco composition. On a pack of 25 this is $6 per pack.
2. Other forms of tobacco (wet snuff, loose tobacco) the charge is a massive $300 per kilogram.

This isn’t ‘volumetric ‘in intent at all given that there are strong arguments for believing smokeless tobaccos are much safer than cigarettes. Cigars and pipe tobacco also see safer than cigarettes.

Even if damages are more difficult to map in terms of the composition of tobacco this does not seem a sensible arrangement.

Economists would also say that these taxes, in a second-best world, should be larger the less elastic are demands since then the excess burden or deadweight loss associated with raising a given amount of revenue is minimised. Since demands for alcohol and tobacco are quite inelastic this suggests a case for high taxes.

On the other hand some of these goods are often consumed by low income people so, to that extent, the taxes are regressive.

This post might be obvious to people working in these industries but some of these ideas are new to me. I would greatly appreciate knowing if I have got the interpretations wrong.