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FAQs on Excise Duty and Alcohol prepared by the Alcohol Advisory Council.
Excise Duty and Alcohol - What is the excise duty?
The excise duty is a tax and it is collected on all alcohol imported or manufactured in New Zealand.
Why have excise duty?
Historically, excise duties were imposed on alcohol as a matter of administrative convenience and were regarded as a revenue gathering instrument. In 1875/76 customs and excise duty made up 91.6% of tax revenue!!
In the early 20th century alcohol was regarded as indulgent if not downright evil and the practice was to label excise duties as "sin taxes".
These early approaches have changed over the years. Although the idea of taxing "less acceptable products" remains, there has been movement towards regarding excise duty as a tool to inhibit the consumption of products that negatively affect the general welfare of the population.
By 1988, the Report on the Review of Excise Duties on Alcoholic Beverages and Tobacco Products (the Sullivan Report) identified three possible objectives of excise duty:
- to collect revenue
- to recover social costs associated with the use of these product
- to discourage consumption.
Current approach to the excise duty on alcohol
Currently there are two base rates of excise duty applicable to alcoholic beverages.
$21.096 per litre of alcohol is the base rate for beverages containing up to 23% alcohol by volume while $38.422 per litre of alcohol is the base rate for all other (higher strength) beverages.
Ethanol is the absolute alcohol by volume. The current approach to excise duty (banding) lowers compliance costs by making it easier for those producers who are unable to accurately measure the ethanol content of their product, for example wine producers.
However, the current system results in beverages with higher ethanol in each range being taxed at a lower rate per unit of ethanol than beverages in the same range but with lower ethanol.
This gives an incentive to some producers to target their ethanol content at the highest level of the range, as a means of avoiding tax and lowering their costs.
How can higher excise duties contribute to the reduction of harmful drinking?
First we have looked at what harmful drinking can be best influenced by price. Research indicates that young drinkers and heavy drinkers are the groups most likely to purchase drinks on the basis of the alcohol content.
In these cases the relevant price is the price of ethanol. This suggests that an excise duty that is targeting harm should be primarily concerned with the minimum price of ethanol.
What is the situation with young people and alcohol?
The annual Auckland surveys of young people's drinking show that the average number of drinks consumed on one occasion among 14 to 19 year olds increased from 3 to 4 in 1990 to 5 to 6 drinks in 1999 (before the lowering of the drinking age). The rise was particularly strong at the younger end with the 14 to 17 year olds increasing from 2 to 3 drinks in 1990 to 5 to 6 in 1999. (S. Casswell & K. Bhatta 2001 A Decade of Drinking: Ten-year Trends in Drinking Patterns in Auckland: 1990-1999 APHRU, University of Auckland)
The National Alcohol Survey found that the average quantity of ethanol consumed by 14 to 17 year olds doubled between 1995 and 2000. The survey also found that the 14 to 19 year olds were consuming more on each drinking occasion. (R. Habgood, S. Casswell, M. Pledger & K. Bhatta (2001) Drinking in New Zealand: National Surveys Comparison: 1995 & 2000, APHRU, University of Auckland)
ALAC's Youth12-24 years of age. Drinking Monitor 2002 found that over a third of 17 to 17 year olds considered themselves to be "heavy drinkers".
What sort of alcohol are they drinking?
Research confirms that young people are attracted to the ethanol content in alcohol - "more bang for their buck". Light spirits are the cheapest source of ethanol although beer consumption continues to be an issue for young men in particular.
Anecdotal evidence suggests that young people are increasing their intake of light spirits because of the cost and the effect.
Research shows that young people are extremely price sensitive.
What about heavy drinkers?
Heavy drinking is defined for men, as consuming more than six standard drinks in a typical drinking session, and for women, consuming more than four standard drinks in a typical drinking session. (For further information on standard drinks and recommended drinking levels, see our Standard Drinks section)
Again, high ethanol content is attractive to heavy drinkers. Research shows that these drinkers are also price sensitive.
So how can excise duties on alcohol be used to reduce alcohol-related harm?
High consumption of ethanol is harmful and costly - both for the drinker and for society.
This suggests that an excise duty that is targeting harm should be primarily concerned with the minimum price of ethanol.
Young people and heavy drinkers are the most likely to purchase alcohol based on its ethanol content and price.
Young people and heavy drinkers are the most price sensitive of drinkers.
An excise duty based on ethanol will have a relatively smaller impact on more expensive beverages.
What does ALAC recommend?
ALAC proposes that in future the primary purpose of excise duties on alcohol should be a part of the harm minimisation strategy. Adopting a harm minimisation perspective means that the philosophy behind the excise duty and the way it is implemented needs to be altered.
This doesn't mean, however, that the harm caused by alcohol and the impact of that harm on the government's fiscal position should be ignored. Estimates of the fiscal cost of alcohol-related harm suggest that this could be as high as 4% of government spending. At this rate excise duty revenue doesn't cover the total costs of alcohol-related harm.
We recommend that:
- specific taxes and levies should be placed on alcohol with the primary purpose of reducing alcohol misuse and the consequent harm (this is consistent with the objectives of the National Drug Policy and National Alcohol Strategy) and
- that such taxes and levies should enable the government to recover some or all of the expenditure outlays and revenue losses caused by alcohol harm. This approach will assist in setting an appropriate level for the taxes and levies.
A full copy of the report Taxing Harm: Modernising Excise Duties, which has been prepared for ALAC by Brian Easton is available in our Publications section.