Friday 22 June 2012

Tax incidence: alcohol edition

Pop quiz: if the alcohol excise tax is charged to consumers rather than to producers, are winemakers better off? The New Zealand Winemakers seem to think so:
While the industry accepted the government has to collect income tax, the excise is not reaching the market as a social policy goal, Smith said.
"We believe it should be shifted to be collected off the consumer rather than off the producer so it becomes a price disincentive as it was meant to be. The tax could still be taken, just at the other end of the cycle," he said.
Standard tax incidence theory says it doesn't matter whether a tax is collected from a producer or from a consumer; the burden of the tax depends on relative supply and demand elasticity rather than who cuts the cheque to the IRD.

There can be good administrative reasons for collecting the tax from one side of the market or the other. Exported product isn't subject to excise; who's best placed to keep track of what's exported and what's domestically consumed isn't obvious. If a winemaker operates a cellar door or otherwise sells to consumers online, he would have to submit an excise bill to the government even if it were retailers that otherwise had to do it. And while it's true that an alcohol producer will have some cash float issues around having to pay excise in advance of receiving payment for his product, it's also possible that administrative costs on the whole increase if all the excise submissions have to be handled by the hundreds of small retailers who might have a few bottles of wine along with other stuff in their shoppes. The opportunity cost of the short-term loan extended from alcohol producers to the government in terms of interest income forgone isn't zero.

I don't know whether having retailers, wholesalers, or producers submit the excise return minimises the aggregate administrative burden associated with alcohol excise; I can imagine it going either way. It's a question best left to the tax accounting specialists.

But this part does seem wrong:
Smith thinks the excise should be collected after GST so when an item is purchased, the excise tax is added on top.
"It sends a clear price signal to the consumer."
Winegrowers chief executive Philip Gregan agreed the excise should be firmly considered in a social policy context. "If you're going to achieve some social policy goals with it, then you're levying it entirely in the wrong place."
Most wineries aren't able to pass the increases onto the retailers and Gregan says their data shows some wineries haven't had a price increase in five years but have to keep absorbing the annual excise adjustment.
First, if excise is compensation to the government for some kind of expected external burden associated with consumption, then those government services included in the product price ought to have GST applied to them; excise should be subject to GST.

Second, levying excise at point of sale either makes no difference where it's included in the sticker price, or leads consumers to expect actual prices to be lower than they are by having sticker prices much lower than the price that will be levied at the till.

Third, if wineries haven't been able to pass along excise increases, they should also expect to bear the burden of a tax assessed at point of sale via similar reductions in demand.

But something that Kiwi winegrowers ought to be watching out for is the potential for changes to Australia's WET. As I understand things, small producers, including small NZ producers, get a rebate on the Wine Equivalent Tariff levied in Australia. I wouldn't be surprised if NZ wineries stopped getting that concession from the Australians.

HT: David Hargreaves. Thanks!


  1. Many years ago I was doing a job in semi-Outback Australia. I'd traveled several hours on a choking dust road until I came to a change in territorial coverage and turned on to a very average tar sealed road. A few metres along this was a large sign put up by the local (Shire?).. can't remember, but the gist of the sign was "This is a Federal road, any complaints about its shocking condition should be directed to the Federal Government".

    I kind of like that attitude towards the sin taxes and fuel, ie, the local bottle store could have a large sign up above the bins saying "Our price to you is 60% of the marked prices.. the remaining 40% are the sneak taxes forced on you by your Govt".

    I hold that the actual cost of Govt should be paid upfront (as much as possible) in income and company tax.. so that people can see the actual cost imposed on them by the Govt.
    I'm sure that would in short time, reduce the Govt Gorilla on our backs to something akin to just a monkey.


    1. That kind of approach is eminently sane.

      Petrol taxes in New Zealand, while high, aren't really objectionable. They're put into a fund for road construction and maintenance; it's not a bad way of running things.

  2. One unintended consequence of these rules may be that New Zealand wineries tend not to cellar stuff for very long. I was once told by a winemaker that they don't cellar much because the excise is levied at the time of bottling rather than the time of sale. That requires a huge amount of working capital, the cost of which eats up the premium you get for aged wine.

    (Pure anecdote - I have no idea of how valid this is.)

    1. Accounting conventions can have real effects - that's a good example.

      What happens if they age it in the barrels for years before bottling?

  3. Not sure about taxes on drugs Eric,
    You can get a bottle of nasty hooch whisky or Rum here in Bangkok at the open market for about 350 bahts, thats $NZ13,
    But you can not buy wine at all it is taxed at 300%, a bottle of good Australian red can hit you for 1000 baht, sweet jesus Yingluck Thaksin,
    good tourist promotion,
    and thats why we get to be whisky alcoholics.
    I said to Wan, you ask that joker in this market here, where I buy whisky, you just ask him,if he pay tax, and she did, and he laughing and laughing, I am taking his photograph already but he laughing so much with the joking