Technical Paper 3:
Preventing Alcohol-related harm in Australia: a window of opportunity
4.3 - Taxation and pricing
The price of alcohol clearly impacts on consumption patterns. There are more than 50 studies from around the world showing that when alcohol increases in price, consumption is reduced.[12, 39-42] The World Health Organization (WHO) is one of many international and national health organisations that strongly endorse the use of increased alcohol taxation (higher prices for alcohol products) as an effective preventative strategy to reduce alcohol-related harm.[62] At the same time, it is important to recognise that there is a complex relationship between price and consumption.[63, 64] Patterns of alcohol consumption can vary considerably according to individual factors such as the age, sex and income levels of the drinker. Other factors such as availability, the cultural setting, the marketing and image of the product are also important. Studies consistently show that lower socio-economic groups and people with limited disposable income (young people, Indigenous groups and heavy drinkers) are more directly impacted by the price of alcohol products. Higher income drinkers tend to drink more expensive alcohol, and while price may lead them to reduce their consumption marginally, they are also able to alter drinking preferences to cheaper alternatives.[65, 66]
The nature of the alcohol product is also a key variable. An Australian study identified considerable variations in price elasticity (the amount that price needs to change before it impacts on consumption) for different alcohol products. It concluded that spirits are twice as price sensitive as wine and beer.[67]
Given the complexity of the relationship between alcohol price and consumption, increasing alcohol taxation does not necessarily lead to a linear reduction in the levels of alcohol-related harm. It is important that the relationship between the price of individual alcohol products and consumption amongst particular groups of drinkers is carefully modelled against known price elasticity and existing consumption patterns.
Top of page
While increasing the price through taxation is likely to lead to a reduction in per capita consumption, increasing the price of individual products may not necessarily achieve this goal. In some cases, product-based changes can create opportunities for new products and drinking patterns that increase levels of harm.[68] In this context, it is important to recognise that the production costs of alcohol products vary considerably between product types (eg spirits are relatively inexpensive to manufacture compared to beer and wine products) which in turn has a bearing on the cost price to consumers.
Australia’s alcohol tax system can best be understood as a constantly changing reflection of the history of alcohol consumption in Australia, and the status of various alcohol products. It also reflects changing powers of taxation between state and territory governments and the Australian Government. As a consequence, different products – wine, spirits, beer, ciders, fortified wines – are all taxed differently. The excise duties arrangements can generally be described as a volumetric tax system, because the amount of excise duty depends on the volume of alcohol contained in the particular product. Wine equalisation tax can be described as an ad valorem tax system, because the rate of tax depends on the value of the retail selling price of the particular product. Customs duties are a combination of both volumetric and ad valorem systems. GST is set at a fixed rate of 10% of the product price, on top of all other taxes (see Table 7).
Table 7: Summary of the types of alcohol taxes applied by category of alcohol product
| Beer | Spirits & RTDs | Wine | Cider | |
|---|---|---|---|---|
| GST | Yes | Yes | Yes | Yes | Excise duty | Yes | Yes | No | No |
| WET | No | No | Yes | Yes |
| Customs duty (ad valorem) | No | Yes (imported) | Yes (imported) | No |
| Customs duty (volumetric) | Yes (imported) | Yes (imported) | No | No |
Recent estimates show that the Australian Government will collect over $6 billion as a result of the production and consumption of alcohol during the 2008/09 financial year.[68, 4] However, a substantial disparity exists between the amount of tax revenue received by the Australian Government from risky drinking compared with the overall amount spent in attempting to prevent harmful consumption of alcohol. For example, it has been estimated that Australian adolescents (aged 12–17 years) spent approximately $217 million on alcoholic beverages in 2002, netting the Australian Government approximately $112 million in tax revenue.[69] This means that for every dollar spent on alcohol interventions aimed at adolescents, the government receives around $7 in alcohol tax revenue.[69]
The current taxation rates translate into a wide variety of taxation per standard drink of alcohol (see Fig. 13). For those who argue that alcohol should be taxed according to the amount of alcohol in each product and container, the current system represents a massive distortion of this principle.
Top of page
Figure 13: Tax payable per standard drink* of alcohol, various products, Australia, as at 1 August 2008*
Note: *Includes a 1.15% ABV excise-free concession for beer. WET payable per standard drink of wine is based on a four-litre cask of wine selling for $13 (incl. GST) [‘Cask Wine’], a 750ml bottle of wine selling for $15 (incl. GST) [‘Bottled Wine 1’], a 750ml bottle of wine selling for $30 (incl. GST) [‘Bottled Wine 2’] and a 750ml bottle of port selling for $13 (incl. GST) [‘Port, Sherry’]. A standard drink is equal to 0.001267 litres or 10 grams of pure alcohol.
As noted above, Australia has been through a continuous process of change in relation to the taxation and pricing of various alcohol products. There are three changes that are particularly interesting to note. In the late 1980s, states and territories adopted various forms of licensing for all alcohol sales. As part of this system, most jurisdictions offered low-alcohol beer (less than 3.5% alcohol by volume) for a significant concession in fees. The license fee concession translated into cheaper low-alcohol beer and, in combination with intense market competition in the beer market and the introduction of harm-reduction measures such as random breath testing, created an ideal environment for low-alcohol beer. Producers recognised the benefit of investing considerable developmental and marketing investment into low-alcohol beer.As a consequence, low-alcohol beer increased its sales very significantly and captured approximately 20% of the total Australian beer market.[70]
The Northern Territory’s ‘Living with Alcohol’ program provides another example of how changes in price through government taxation increases contributed to a reduction in per capita consumption. In 1992, the Northern Territory government used a hypothecation approach by placing a levy of 5 cents per standard drink on the sale of alcohol products with more than 3% alcohol by volume and used the revenue to fund a range of alcohol-prevention measures in the territory.[71] Evaluations of the ‘Living with Alcohol’ program found that the increase in price had contributed to a major reduction in the level of alcohol-related harm within the Northern Territory.[72, 73]
Over the last 15 years, there have been a series of changes in the level of excise and taxation applied to various forms of the ready to drink (RTD) product segment of the Australian alcohol market.
Top of page
These changes have resulted in major shifts in drinking patterns across Australia, particularly in relation to brown spirit pre-mixed drinks (mostly around 5% alcohol by volume in 375ml cans) and white spirit pre-mixed bottled drinks (mostly around 5% alcohol by volume in 375ml bottles). With each price change, sales of these RTDs have increased or decreased quite significantly. While there is considerable evidence that these increases and decreases in sales represent shifts in product preferences (market share) rather than shifts in per capita drinking, the patterns of consumption have clearly been directly influenced by taxation and pricing. There is substantive evidence that the higher the price, the lower the consumption of these products, and the lower the price, the higher the consumption of these products. Perhaps just as importantly, the shifts in consumption patterns are more marked amongst the young and lower social-economic groups.[2, 68, 74]
The principle of alcohol taxation reform most often discussed by public health advocates is usually that of applying excise taxes to all categories of alcoholic beverages. That is, taxing the beverages on their alcohol content, as a mild discouragement of consumption. Along with taxation reform of this kind, there have been calls to raise the price of the cheapest forms of alcohol. This is referred to as the floor price of alcohol. Given that price is being used as the lever, it is the floor price that should be given more attention in order to achieve a real shift in per capita consumption, rather than just product preference. Within this context, it is important to acknowledge that the impact of any increase in the floor price for alcohol will impact more on young people, Indigenous communities, heavy drinkers and lower socio-economic groups.
It appears that the most likely model that can effectively reduce alcohol-related harm would be based on an across-the-board excise model that also includes regulating the floor (minimum) price, especially with regard to small containers. The excise tax could be scaled within different product types to ensure there were strong financial incentives for the production of lower alcohol products (for example, low-strength beer, wine and RTDs), and so that the highest-risk alcohol products (i.e. spirits, which can more easily cause overdose) are taxed at an appropriately higher rate. In combination with a volumetric taxation system, in which all products are taxed according to alcohol content, all products could effectively have a floor price based on their alcohol content in a 300ml container.
Modelling this alcohol taxation system would be a very challenging exercise, particularly when health advocates have very limited access to actual sales data. As noted above, competing in the alcohol market requires extensive market testing and monitoring. This generates a level of detailed information that is not available to health researchers and policy makers. Perhaps just as importantly, this model would have a negative impact on some segments – particularly cask wine and cider – while advantaging other market segments – spirits and spirit-based RTD products. It would be very difficult to gain broad political support for such a model, given the level of public and political opposition from powerful alcohol producers. There has been some modelling undertaken that considered a range of alcohol taxation scenarios that would move the alcohol excise and taxation system closer to a true volumetric base, while remaining revenue neutral within each market segment. These models are publicly available, but have attracted limited support as they increase the price of cask wine and ciders while more expensive wines are reduced in price.[36] Until public health researchers and advocates have access to accurate sales data, and economic modelling can be implemented on the combination of floor price and a more volumetric approach to alcohol taxation, it is difficult to strongly put forward a particular model. At the same time, there is a substantive history in Australia that illustrates the danger of changing taxation levels of particular products without considering the implications both on consumption patterns and the development and marketing of alternative alcohol products.