Langley-2

Groundhog Day on Wine Tax

The Government’s proposed changes to the WET rebate have opened up a broader tax debate about the style of tax that should apply to wine. And predictably, the advocates for a volumetric tax have surfaced with the usual arguments in support. While a volumetric tax may be appealing to many, there are implications beyond the impact it has on wine pricing.

Of course, this is not the first time this issue has been debated within the industry. The 1993 wine tax campaign (and subsequent Industry Commission Inquiry) gave it a good airing, and the lead up to the introduction of the GST in 2000 was the next major debate. It is probably safe to say that the style of tax (volumetric or ad valorem) is one of the most divisive issues in the industry with little hope of a unified resolution. In fact, the introduction of the WET rebate was the one change in the last 20 years that partially took this issue off the table, due to the fact that the majority of small wineries remitted negligible WET. With proposed changes to the WET rebate, we now face another debate on the style of tax.

Whilst WFA is copping a fair bit of the blame for the Government’s changes, WFA’s intent to reform the WET rebate was based on legitimate concerns relating to its misuse. The audit measures introduced by the ATO in 2013/14 recovered $48M and it is arguable that improved audits, without policy change would have delivered the industry outcomes being sought by many.

But of course, WFA wasn’t the only party in this debate.

The WET rebate reforms were spearheaded by Pernod Ricard and Treasury Wine Estates, two companies that openly stated their support for a volumetric tax at least five years ago. You don’t have to join too many dots to conclude that reforms to the WET rebate were stage 1 in their strategy. Stage 2 will be their resistance to sensible reforms to enable legitimate wine brand owners to retain the WET rebate. And stage 3 will be the implementation of a volumetric tax as the inevitable groundswell from small wineries and brand owners tips the whole industry into a volumetric tax, with those on the sidelines, including the spirits lobby, the beer lobby and the health lobby giving the loudest cheer. And while we will kid ourselves that the new volumetric tax will be struck at an ‘industry-friendly’ rate below beer and spirits, we should be mindful of the fact that a volumetric tax is a tax on alcohol, and if alcohol is alcohol, then all alcohol should be taxed the same. Good luck arguing against tax parity!

While Treasury and Pernod retreat for round two, WFA is left to handle the fallout of the Government’s decision. It’s easy to fire shots now, but WFA has been transparent with its review process, and its policy does not seek to disenfranchise so-called ‘virtual winemakers’. They, rightly or wrongly, took the view that reform was required, and set about the difficult task of initiating those reforms. Unfortunately, when you open up that can of worms with government, you inevitably lose control of the agenda. Government will consult and they will listen to others. I’d bet that the deepest footprints in parliament house over the past five or six years have been those of Pernod Ricard and Treasury, no doubt with a bit of unassociated added support from the beer and spirits lobbies.

If the coalition is re-elected, and they implement their WET rebate reforms unchanged, then in my opinion a volumetric tax will be inevitable. And while an excise would be an unholy administrative and cash-flow mess, in reality a sensible government could introduce a volumetric tax that didn’t bring with it all of the complications that currently apply with beer and spirits excises.

Assuming that a volumetric tax could be implemented in a sensible way, then the real issue at hand is what sort of tax do we believe is right for our industry.

My suspicion is that most in the industry favour a volumetric tax. And who could blame them. For many, they will probably remit less tax if the WET rebate is gone and the stigma associated with having the cheapest form of alcohol in the market will be overcome. Add to this our industry’s premium wine agenda, and surely the volumetric tax is right for our times?

Before we decide what we want as an industry, we also have to be mindful of government. After all it is their tax, not ours. So, why do governments tax products? The primary reason is to raise revenue, and the other main reason is as a policy tool to manipulate consumer and business decisions.

When the GST was introduced in 2000 the intent was to remove a range of other taxes in return for a broader-based tax at a lower rate. At the time we had different rates of wholesale sales tax on wine, beer, spirits, passenger vehicles, luxury cars, many household items, and on fur skins, jewellery and watches! It was a dog’s-breakfast and sensible reforms prevailed with the introduction of the GST.

However, government, addicted to revenue and motivated by a number of lobby groups, elected to retain additional taxes on alcohol, fuel, tobacco and luxury cars. This mess is the government’s doing, not industry’s.

Louis XIV’s finance minister, Jean-Baptiste Colbert famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of economic and political damage”. Staying with poultry, the ‘golden eggs’ in GST reform were alcohol, tobacco, luxury cars and fuel, and the government just couldn’t resist getting their extra bit, all the while justifying their retention by appealing to base political motives- why should luxury cars come down in price? Surely a reduction in alcohol prices will be bad for consumer health?

And this gets us to the other reason for taxation, which is to curb consumer and business expenditure. There is little doubt that higher tax on tobacco, combined with other measures has been an effective health policy tool. If you apply the same logic to alcohol, then a tax on the alcohol content makes sense, hence the logic for a volumetric tax. Taken to its logical conclusion, there should be other health volumetric taxes such as on sugar, fat, and whatever else a nanny state might deem that we shouldn’t be consuming. The same logic applies to a carbon tax, and these taxes are all volumetric taxes, because they target the ‘problem’ whether it is tobacco, alcohol, sugar or carbon.

If this is what the industry wants, then it should have it. But make no mistake, a volumetric tax, nominated by the wine industry is an admission of guilt. We will be saying that our product harms people, that they need to be consuming less of it, and that tax is an effective policy tool to achieve this outcome. Again, if that is what the industry really thinks, then we should have the volumetric tax. An ad-valorem tax is very different. It is, in effect, a luxury tax, and is consistent with the vast majority of other taxes in the economy. GST, income tax, company tax, stamp duty – these are all progressive ad-valorem taxes, where the higher the price of a product (or the higher the income), the higher the $ collected. And to understand why they are struck at their respective rates, it is probably best to consider the French goose outlined earlier.

So, back to the volumetric tax. We need to stop excessive consumption of alcohol, and we know that casks are the big problem, right? After all, the health lobby has constantly told us that wine is cheaper than bottled water (not true) – and our own industry is now repeating those lines.

The government’s National Drug Strategy Household Survey 2013 identified that 6.5% of Australians consumed alcohol daily, that 18.2% of the population exceed lifetime risk  guidelines and that 26% of the population exceed single occasion risk guidelines at least once a month. All of these measures of risky consumption are in decline. This picture is not rosy, but it does present a problem for policy-makers.

Unlike tobacco, where all consumption is categorically risky, risky alcohol consumption applies to a much smaller proportion of the population. So, a sin tax would apply, even though the majority of consumers are not sinners!

Nobody likes to have their product associated with alcohol abuse, and it is undeniable that cheaper wine is the lowest cost alcohol form in the market. But I think we need to be extremely careful here.

From a public policy perspective, governments would intervene if increasing the tax on wine would lead to a tangible improvement in public health. Where is the evidence that cheap wine is abused more than other alcohol products? If risky consumption was all about price, then more risky consumers would be drinking cask wine! Where is the evidence that an increase in tax on wine will lower alcohol abuse, versus the alternative that it will simply shift the problem to another form of alcohol? Stripped to the real issue, our industry’s concerns are more to do with association, and a volumetric tax will get the problem out of our backyard.

While we’re at it, let’s have a go at debunking a few more myths:

We need a volumetric tax to bolster premium wine sales.  Actually, no. premium sales are currently increasing and cask sales are continuing their steady decline. What’s more, there’s plenty of evidence to show that rising incomes have a greater influence on premium wine consumption, not price. Accordingly, premium producers should be just as focused on the impacts on the growth of the economy than on wine taxation.

The warm irrigated regions are not sustainable and their demise would free up much needed water for the Murray. This argument is nonsensical. Why not also have a volumetric tax on beef, or milk, or table grapes, or mineral sands to engineer the same outcome. Or alternatively, assign property rights to water and regulate the market, which is exactly what governments have done. The best way to determine if a region or sector is sustainable is for governments to get out of the way and let them get on with business. Environmental issues should be managed with environmental policies.

We can have a volumetric tax and a WET rebate. Remember, a volumetric tax is a sin tax. Alcohol is alcohol. Where is the policy logic that says that alcohol from a small winery is not as harmful as alcohol from a large winery?

At the end of the day, most people in Australian wine want a volumetric tax if it suits their business model, and most want an ad valorem tax for the same reason.

Personally, I believe that signing up to a ‘sin tax’ would be a grave mistake, and in my opinion, there is no other way to look at a volumetric tax. The public health advocates that want it should put up more than their flimsy evidence before the wine industry jumps on that agenda. And if we do sign up to it, then we need to accept that there is no room to move on differentiating ourselves from beer and spirits (alcohol is alcohol) and no room for a WET rebate (alcohol is alcohol).

We should be very careful what we wish for.

Published in the Australian Wine Business Magazine – July / August 2016 Edition