Tax rates – Level paying field?

01 August 2006 By db staff writer

“standfirst”>With duty rates likely to rise across Europe, what are the chances of wine taxes reaching equivalence with beers and spirits, asks Tom Bruce-Gardyne

This September, following last year’s agreement by Europe’s finance ministers, the EU Commission is set to announce a rise in minimum rates of duty on beers, wines and spirits by a staggering 31%. This is to update the levels set in 1993 to take account of inflation. With margins already cut to the bone by those price-slashing retail giants, does this latest tax hike spell “The End” for Europe’s drinks industry?

Well, before you sell your Diageo shares and get out of drinks altogether, the answer is … not quite; at least not yet. The truth is excise duty throughout most of Europe is higher, often much higher, than the proposed minimum rates. “In practice it would only affect Cyprus and Slovakia,” admits Jamie Fortescue, director general of CEPS (the European Spirits Organisation). “Though Bulgaria and Romania would also be affected when they join the EU.” As for other drinks, there will be a few slight tax rises for beer and so-called “intermediate products”, while wine will remain gloriously unchanged especially in those countries where no duty is charged whatsoever.

“Wine is a gift from the Gods!” spluttered a Greek politician at the outrageous suggestion that it should be taxed like its distilled cousin, brandy. While this may smack of protectionism to the likes of the Scotch Whisky Association (SWA), there is a genuine, heart-felt belief within the producing regions that wine is different. That it is so much part of the meal and so entwined with the culture and landscape of southern Europe that it cannot be crudely judged in terms of alcohol as though it were Smirnoff Ice or Jack Daniels. These cultural issues are the same that face the EU’s agriculture minister, Mariann Fischer Boel, and her plans to overhaul the European wine industry announced in June. With the crisis of oversupply and the intention of ripping up an eighth of Europe’s vineyards over the next five years, the talk is not going to be about tax. Rather it will be about who will get what of the €2.4 billion (£1.6 billion) compensation package.

In public, the spirits lobby is understandably miffed at zero rates for wine while minimum rates on other drinks are to increase. “Our concern is that it further institutionalises the discrimination against spirits drunk in the EU,” says David Williamson of the SWA. In private, however, many distillers might argue that leaving wine untaxed acts as a break on widening the gap and raising spirits duty in low-tax regimes like Spain and Greece. If such countries, which import vast quantities of Scotch, were to follow the UK and shift in favour of indirect taxes like excise, you can bet your bottom euro they would raise duty rates across the board.

Alcohol is alcohol
Having different tax rates for different drinks runs counter to the principle of equivalence. This sacred tenet of spirits producers worldwide, states that all alcoholic drinks should be taxed only according to their strength whether they be Beck’s, Bacardi or Blossom Hill. The gospel according to Discus – the Distilled Spirits Council of the USA – is that “alcohol is alcohol is alcohol”. Unfortunately this is not how much of society or the media view drink. Whenever Hollywood portray a drunk, invariably he will be clutching a bottle of the hard stuff. And, closer to home, the fact that RTDs account for just 8% of alcohol consumed by 18-21 year-olds was rather lost on the tabloids in their campaign against binge drinking and all-day licensing. In truth, the only place you will truly find equivalence is on the wrong side of a breathalyser.

“In terms of its logic, [equivalence] is accepted by officials in Brussels,” says Fortescue. “However, at a political level in the member states it’s not accepted. Decisions on taxation in the EU have to be taken unanimously in the Council. As long as you have 12 countries who have wine zero-rated, the equivalence argument, however logical it might be, is obviously never going to happen at the EU level, though it may at a national level.”

Europe’s most equivalent country used to be Ireland until the then finance minister, Charlie McCreavy, ramped up spirits tax by 42% in January 2003. “Tax rates were converging, but the spirits rise eliminated that and we’re now at virtually double the beer rate,” said Kieran Tobin of Jameson’s in Dublin who was then a committee chairman at CEPS. Having fallen 20%, the market has since regained a couple of percentage points, but Tobin claims it was basically a “no-win situation” in terms of adding to the government coffers. Then again, it didn’t deplete those coffers and it did appease the health lobby.

Sin-tax
Three packets of Benson & Hedges, a bottle of Bell’s and a fatal heart-attack at 65 – could be an epitaph for the model UK citizen. Assuming all the booze and fags were bought legitimately over here, such a man would have contributed much to the wealth of the nation. Yet he is not a role model any government has ever proposed. Health and morality have always plagued debates on excise duty and explain many of the current anomalies. In the early 20th century Lloyd George waged war on spirits in his crusade to “abolish thirst”, and caused sales to collapse by a third after his 1909 budget. Back in the 1860s his party had accused the Tories of being “more afraid of the working classes when they think than when they drink”. If befuddled with booze, they were less likely to combine and cause trouble. As Andrew Barr pointed out in his book Drink: A Social History of America, the fact that the Russian Revolution occurred just three years after the sale of vodka was banned may not have been a total coincidence. In today’s Europe health has a real impact on duty in only one country, Sweden. According to Fortescue, “A few others said it had some bearing, but the vast majority said ‘no, our decisions on tax rates on alcohol are not driven by health’. Maybe they’ve noticed that higher taxation in Sweden doesn’t mean they’ve drunk any less or differently.” They also may have seen the queues of thirsty Swedes flooding into Denmark and Finland for their 10-litre personal allowance of spirits. Both countries recently slashed excise rates by around 40%. According to the Finnish representative in CEPS, Irmeli Mustonen, her country’s motives for this were first; the raising of personal limits in 2004, and second; the fact that neighbouring Estonia, where the drinks are cheaper, has now joined the EU. As for Sweden and a possible tax cut, she says, “My own personal view is that one day they have to do it.”

While health issues may have little or no direct impact, how they are reported in the media definitely does. It was not lobbying by doctors, but a scathing documentary on Irish television about binge drinking in Dublin that led to McCreavy’s pre-emptive strike on spirits. And in the UK spirits companies feared a tax rise in the latest budget as a sop to the press campaign against Booze Britannia and its all-day pubs. Media pressure also explains why the Wine & Spirit Trade Association’s (WSTA) campaign to cut the tax on sparkling wine is probably doomed. Though the Treasury privately admits that taxing bubbles is an anomaly, any reduction would inevitably provoke bad headlines. As Jeremy Beadles, chief executive of the WSTA says, “Think of ‘Champagne Gordon!’ splashed across The Daily Mail. He’d love that!”

Back on the issue of equivalence, Beadles questions why the big drinks companies with interests in all sectors would support such a policy through the SWA. It’s a good point. Taxing Guinness or Blossom Hill simply on their abv like Smirnoff, wouldn’t necessarily help Diageo, or indeed the on- and off-trade in the UK. Yet spirits are undoubtedly penalised, paying one and a half times the rate of beer per unit of alcohol and slightly less than that for wine depending on its strength. With spirits tax frozen in six of the last 10 budgets and wine and beer tax edging upwards in line with inflation, the SWA reckons equivalence could be achieved within two parliaments. Whether wine would ever be taxed according to its strength is another matter. “Having to look at every single wine sold would be a hugely more complex and costly process,” says Beadles.

Two pints of lager

“Two pints of lager”, the familiar cry of the eighties has decreased in volume with UK beer sales down 17% since 1979. With sales lost to the competition, particularly wine – up by over a half since 1997 – the British Beer & Pub Association (BBPA) has decided to hit back. In its 2006 budget submission it explains how the average bottle of wine has become increasingly potent. “However, this has resulted in no extra revenue for the Treasury and means each year wine is becoming less taxed relative to beer … if the increase in average strength since 1990 had been accounted for, then the extra revenue (from still table wine) would now be well over £200 million per annum,” it argues.

So far there is no evidence that Gordon Brown is about to heed this thoughtful advice, though if he did it could seriously shake up the wine market. It could be just what the Old World needs. While bottles of blockbuster Shiraz and Californian Zin would gather dust on the shelves, the likes of Muscadet and Mosel would fly as never before. Although, of course, the New World would quickly adapt by picking early to keep alcohol levels and shelf-price down (or removing alcohol through cone technology, reverse osmosis).

Like any sector within the drinks trade trying to stave off a tax rise, the brewers claim that the price elasticity of demand for what they produce, i.e. beer, is at or near breaking point. Any increase in price through extra duty would cause such a drop in sales that the law of diminishing returns would kick in and tax receipts would fall. They suggest the buoyant wine market is much better placed to take the hit and absorb a rise in excise duty. They may well be right, though whether this would really reverse the long-term decline in beer sales is another matter. Meanwhile, just like wine, beer faces stiff competition from across the Channel.

When the Single Market began in 1993 and the first booze cruise set sale for France, there was a belief that our days as a high-tax regime were numbered. The chancellor could bleat all he liked about the sovereign right to fix taxes, but market forces would prevail and he would soon be forced to bring excise rates down to continental levels. This never happened of course, though the scale of duty lost to France, both legitimate and otherwise, must have unnerved the Treasury at times. At its peak, an estimated 10% of wine drunk in the UK was bought cross-Channel, while the ferries became floating tobacconists and spirits merchants. That ended with the abolition of duty-free, and the trend in cross-Channel shopping is now in steady decline. Yet it is still big business and continues to distort the market. Fraud remains widespread, and no-one but the government believes strip stamps on spirits is really going to solve
the problem.

Lacking Eurovision
As for Europe as a whole, “You still see huge divergence,” says Fortescue, who believes harmonisation is politically impossible.“ Given they still can’t talk about maximum rates because the Scandinavians won’t accept that, and still can’t move wine off zero, the EU’s hands are tied and it’s just not going to happen.” Yet, given the level of cross-border shopping, governments have lowered rates to staunch the flood of alcohol and revenue lost to neighbours. “I’m sure the Mandarins of the EU rub their hands with glee that these pressures exist towards harmonisation,” says Tobin. Here, the chancellor faces less pressure because of the Channel. Being an island still not quite “in Europe”, he can play King Canute and hold back the tide. Especially since duty rises are so often absorbed by the trade. Until the day they are passed on to the end consumer, excise will remain a tax on margins.

However, he does accept there has been a degree of convergence, with rates in Spain increasing and the sharp drop in Finland and Denmark.  Ever since, a huge flood of alcohol has flowed back and forth across borders depending on who is offering the best deal. Meanwhile, some governments have continued to try to stand firm against the tide, just like King Canute.

© db August 2006