How fair are government taxes on wine around the world?
Government tax rates on wine differ significantly between countries and it is difficult and complex to accurately compare them. Different considerations and challenges such as economic, cultural, political and legal determine how taxes are applied. Whether they are fair or unfair depends on your point of view. The wine industry constantly fights to avoid increases in excise duty in order to protect their sales and profits. Producers that rely on local demand call for higher import tariffs in order to protect their domestic wine industry. Alternatively, those relying on exports call for free trade or tax rebates in order to sustain and grow their business. Consumers are principally against any type of tax. Whereas governments rely heavily on tax revenue, yet never seem to be satisfied.
There are huge differences in government taxes. For instance excise duty rates vary from €6 per bottle of wine in Norway to zero in Hong Kong. On the first glance, this significant rate difference seems unfair. Why should consumers pay so much for their favourite tipple in one country while others enjoy much lower pricing? However, comparison of taxes is complicated as the value of rates is based on different cultural, political and economic philosophies of countries. Following a period of alcohol prohibition, Norway’s high taxes are linked with strict restrictions by the government alcohol monopoly Vinmonopolet. Whereas Hong Kong, thanks to its global connectivity has had zero tax since February 2008 with a view to economic dynamism and liberalism.
However, even within the European Union where the majority of members share the same currency and similar economic goals, the excise duties vary so remarkably it can hardly be considered fair. The United Kingdom is one of the highest tax paying countries at £2.05 per bottle in comparison to traditional wine producing country such as France which only charges €0.03 per bottle. So if you buy £5 bottle of wine in the UK (being the average price), 57% is tax and about 28% is retail margin and the liquid is barely 25%, making it poor value for money for consumers. No wonder then that thousands of Brits travel across the channel every year to take advantage of the bargains in Calais.
Governments can receive a significant amount of funding through wine taxes. Some of this revenue is used to offset the cost of crimes and health damage that are related to alcohol abuse. The wine industry in the UK paid over £15 billion in duty and VAT to the government in 2010 yet the Institute of Alcohol Studies claims that alcohol related harm was estimated to cost society (England) £21 billion in the same year. This includes £3.5 billion of NHS cost, £11 billion of alcohol-related crime and £7 billion of lost productivity due to alcohol. This estimate suggests that alcohol consumption brings more financial losses then benefits to the government. However an accurate estimate of the economic cost of alcohol consumption is difficult to calculate due to the number of variables involved.
From the wine industry’s point of view, there is a danger that taxes reach a level where reduced consumption materially impacts sales and profits. In order to avoid this, the UK duty increase was postponed in 2014 (as a result of the Call Time on Duty initiative). It was estimated that action will save the industry £175 – 230 million and protect over 6,000 jobs. On the other hand, the French government (starting from a much lower base) is keen to drastically increase the tax from €0.03 to somewhere between €0.30-0.60 per bottle, estimated to bring an extra €2 billion to the state government.
Taxes vary depending on whether wine is imported or locally produced. For example in Shanghai, tax for imported wines adds 48% to the cost of a bottle compared to domestic wine which only adds 30% to its cost. This protects the local industry. However, in India, the import tax is so high (a whopping 150% of the value of the wine), that a bottle of Jacob’s Creek costs US$40. Imported wines are therefore incredibly expensive and difficult to access for an average consumers. In order to make imported wine more available and pricing more affordable, discussions about reducing the duty to 40% are underway.
In Australia the tax is the same for wines regardless whether they are imported or locally produced. Thanks to the WET rebates, New Zealand wine exports to Australia have increased by 139% since 2005 when it was introduced. This is currently causing a lot of issues for local producers despite its fairness in free trade terms. In order to protect the Australian wine industry and control overseas competition, the Winemakers’ Federation of Australia is calling for Wine Equalisation Tax reform to address this issue. It is believed that the reform could earn the Australian government AU$25 million a year.
The notorious complexity of US taxes have been known to discourage wineries from trading directly to consumers. The original idea to lift restraints of the three-tier system in 37 states (including California) was to help the availability of wines produced by small and less known wineries and to promote selling wine directly to consumers. Whereas federal excise duty tax is fixed according to alcohol level, and for still wine up to 14% abv is charged at $0.21 per bottle of wine, state tax is much more complicated. Each state has its own rules and regulations, each requires different record keeping and payments. This challenging tax regime limits the number of states that wineries are prepared to work with and limits consumers’ choice of wine from other states.
Keeping tax systems simple and consistent may seem to be a good idea from administrative point of view. But when it comes to the link between taxes and the alcohol level of wine, there are some who call for more versatile tax bands. It is no coincidence that the majority of red wines do not reach an alcohol level over 15.5%. For example, in the UK still wines with alcohol between 5.5% and 15.5% are taxed the same. The result is that nearly all wines end up being taxed by the same amount which may be considered unfair. In order to encourage responsible drinking, promote lower alcohol wines and introduce fairer trading, many producers together with the Wine and Spirit Trade Association are therefore proposing a different alcohol tax band between 9% and 12% abv.
Government taxes on wine are so sensitive and impactful that their fairness and subsequent challenges or benefits are being reviewed constantly. Arguably, many governments struggle to balance fairness when applying their taxes. What some producers may view as fair trade others view as a threat to their profits and a limit to their growth. What some view as a restriction of free choice others view as beneficial control of alcohol consumption. However, what is certain is that hardly anyone believes that taxes on wines are fair to them and there will always be groups who lobby for change.