excise – “a hateful tax…”

Posted by Robin Ransom on 18 July 2011 | 0 Comments

Excise is the tax administered by the Customs Department which levies alcohol products, tobacco and petrol. Excise taxes have a long history, having first been imposed under that name in England in the mid-17^th Century. Samuel Johnson in his 1755 Dictionary of the English Language describes excise as “A hateful tax levied upon commodities and adjudged not by the common judges of property, but wretches hired by those to whom excise is paid.” An excellent description, although I am sure Customs Department staff do not see themselves as “wretches”.

Excise taxes were not popular from the outset, being seen as a cynical exercise in government money grabbing, generally under the guise of protecting the populace from harm, presumably via the notion that higher prices will mean lower consumption. Products and services such as alcohol, tobacco, prostitution and gambling have historically been taxed, although “everyday” products have also been targeted. Salt for example was subject to excise tax in England into the 20^th Century.

The idea that the monies generated by these taxes were used to mitigate harm caused by these products has long since been consigned to the realm of myth. And if it were not myth, there would be strong justification for imposing excise tax on, for example, sugary soft drinks and fatty fast food. The myth that excise on alcohol is an exercise in harm-mitigation is highlighted in New Zealand by the fact that the monthly cheque we send to the Customs Department contains a separately calculated component which is paid to the Alcohol Advisory Council.

In July the rate of excise tax was increased, as it is every year, but this time by the biggest margin in 20 years. This means $2.04 of the cost of a bottle of wine is excise tax, more than 10% of the price of a $20 bottle (the Alcohol Advisory Council tax is additional to this). GST is in effect levied on top of excise – a tax on a tax, and when the excise and GST figures are combined, more than one quarter of the price of a $20 bottle of wine goes to the government. Because excise is volume-based this percentage is even higher for cheaper wines, so more than 40% of the $7.99 bottle you see in the supermarket is tax. This probably means either that wine is being used as a “loss leader” or else the wine producer is so desperate for cashflow they are selling it at a very large loss.

It has been argued that increasing the price of alcoholic beverages reduces consumption and thereby mitigates the harm caused by excessive drinking. If this were so and if there was a direct inverse correlation between price increase and consumption decrease amongst “abusers”, I might have some sympathy for increasing taxes on alcohol. But such claims are misleading and inaccurate. People who cause harm to themselves and the community by excessive alcohol consumption are not deterred by relatively small increases in tax. Even astronomical levels of tax don’t work amongst hard-core “abusers”. This is amply demonstrated by the fact that a large minority of the population still smokes tobacco despite the enormous excise component in the price of cigarettes.

There is a range of effective ways to mitigate the harm caused by alcohol in the community, but an inflation-adjusted annual increase in excise tax is not one of them. Not least because winemakers generally do not pass on excise tax increases to wine buyers, a fact demonstrated in a survey conducted by the Wine Institute of NZ last year.

Excise remains in my view the “hateful” tax grab it has always been.

Robin Ransom

(published in Mahurangi Matters, August 2011)