Is the Australian government drunk on alcohol taxes?

Australians have a reputation for liking a drink. As it turns out, so does their government.

Since 1901, Australia’s Federal Government has used a web of excise charges, import duties, taxes and exemptions to extract reliable revenue out of the nation’s thirst for beer, wine and spirits. This has helped make Australia one of the most expensive places in the world to kick back and enjoy a libation.

Deutsche Bank research reported that in 2013 a pint of beer at an average Australian bar cost the equivalent of US$8.20 – which was the third most expensive behind France (US$9.43) and Singapore (US$8.33).

In September 2015, pintprice.com found the Australian beer price had eased to US$6.57, but was still not far behind notoriously expensive places such as Scandinavia and Singapore.

Australia also ranks high on the list when it comes to alcohol taxation.

In an analysis by brewsnews.com.au, in 2013, Australian brewers making packaged full-strength beer faced the sixth highest excise among 33 of the world’s most developed economies – US$105.58 per 100 litres of alcohol. Norway charged the heftiest duty (US$218.49), closely followed by Japan (US$207.72), Finland (US$151.67), the UK (US$135.22) and Iceland (US$108.71).

Australian drinkers of vodka, whisky, gin, rum and other distilled spirits (but not, for reasons explored below, brandy) face an excise of A$80.41 per litre of alcohol, which works out at A80 cents in tax for a standard drink. This is the fourth highest tax rate for spirits among the OECD’s 33 member countries.

How the barman is working for the taxman

While Australia’s drinking habits are changing – per capita consumption of alcohol in 2013-14 dropped to 9.7 litres, a 50-year low – alcohol remains a lucrative earner for the government. In 2013-14, the Commonwealth raised A$5.95 billion from excise and taxes on beer, wine and spirits.

The Australian Government certainly isn’t the first to dip its hand into the drinker’s pocket, but its convoluted tax arrangements around alcohol are in a class of their own.

Australia subjects alcohol to four different tax regimes and two different modes of taxation. In addition, beer is subject to eight different excise rates and brandy is taxed differently to other spirits, while wine has its own special tax arrangements.

Not only this, but some rates are indexed twice a year while others are not indexed at all. And while most imported spirits are subject to a 5 per cent duty, Tennessee bourbon is exempt.

Much like the broader taxation system, Australia’s alcohol tax regime is the result of decades of tinkering driven by diverse and sometimes conflicting policy impulses.

Take, for instance, the treatment of “alcopops” – pre-mixed drinks in which soft drink or fruit juice is combined with spirits or wine. Because the alcohol content of most pre-mixed drinks is held at or below 5 per cent, they were first taxed at rates similar to packaged beer, making them a cheap alternative to spirits.

In 2008, the Rudd Government, expressing alarm at what it saw as the proliferation of cheap alcohol aimed at teenagers, introduced laws to nearly double the excise on these pre-mixed beverages, from A$39.36 per litre of alcohol to A$66.67 per litre of alcohol. This taxed alcopops at almost the same rate as straight spirits.

Why is wine so cheap?

The anomalies in Australia’s alcohol tax system have created common cause between two groups usually at loggerheads: drinks companies and public health advocates. Both complain of the preferential tax treatment of wine, which they say encourages people to consume a cheap cask rather than a beer or a gin and tonic.

They have a point.

In Australia, beer and spirits are taxed according to their alcohol content, but wine and cider are taxed according to value (an ad valorem tax). This makes wine much cheaper per unit of alcohol than other beverages.

Wine can be taxed as little as A30 cents for a standard drink (12.5 millilitres of alcohol), compared with at least A$1 for a standard beer and A$1.50 for a spirit. It’s a situation that alarms health advocates and outrages the distilling industry.

Much like the broader taxation system, Australia’s alcohol tax regime is the result of decades of tinkering driven by diverse and sometimes conflicting policy impulses.

In a study published in July 2015, Dr Elizabeth Manton of the Centre for Alcohol Policy Research, asked why.

She found that in wine-producing countries such as Australia, France and the US, wine is taxed relatively lightly because the structure of the industry – lots of small producers operating in clusters in key regional areas – gives it greater political clout.

There is ample evidence of the industry’s influence in Australia. In 2000, when the Goods and Services Tax (GST) was introduced, the Howard Government established the Wine Equalisation Tax (WET) to replace the wholesale tax. Alone among alcoholic drinks, wine would be taxed based on value not alcohol volume.

In 2004, when it became apparent the WET system was biased in favour of large wine makers, it was supplemented with an annual tax rebate of up to A$500,000 targeted at smaller wine producers. As the Distilled Spirits Industry Council of Australia notes, as at 2011 the rebate gave smaller vignerons an effective tax break on the first A$1.7 million of wine they sold in the domestic wholesale market, and acted as a deterrent to mergers.

Beer and other tax quirks

Similarly, Australia’s pubs and clubs have successfully lobbied for a lower excise on the beer poured through their taps than applies to packaged beer.

But the alcohol taxation picture becomes even more distorted than this.

Both beer and spirits were taxed from the early days of Federation as a way to raise revenue, though beer was slugged at a lesser rate because of a desire to protect domestic producers.

By the late 1970s, concern about the health effects of heavy beer drinking had spurred calls for cheaper tax treatment for lower alcohol beer, which was finally enacted in 1984.

Another shake-up came in the late 1990s courtesy of the Howard Government, which slashed the excise on beer, making it more competitive with wine and much less expensive than spirits.

Some have argued that reducing the excise on beer is a public health measure aimed at weaning drinkers off cheap cask wine. But a more intriguing argument is that administrations cut the price of beer to help hold down the official inflation rate (in the Hawke Government era, full-strength beer was part of the basket of goods measured by the Australian Bureau of Statistics to estimate the Consumer Price Index).

Beer’s competitive advantage over spirits has been further boosted by the government removing the excise on the first 1.15 per cent of alcohol by volume, which means beer drinkers pay less excise on their drinks of choice than those who imbibe pre-mixed drinks.

To add yet more confusion, brandy is taxed at a lower rate than other spirits following a concession granted in 1979 to protect grape growers, and Australia’s Free Trade Agreement with the US exempts US-made bourbon from the 5 per cent import duty applying to all other spirits.

If Australia’s alcohol tax system were a cocktail, it would be a wild, Technicolor explosion in a glass. It is the result of a mix of ingredients – revenue raising, political expediency, public health concerns and industry protection – that defy any unifying taste or theme.

Much like Tom Cruise’s Cocktail, the consensus says it is a dud.