GRIPE JUICE: LIQUOR TAX FALLOUT INVESTIGATE: JUL 03

Imagine trying to cut the road toll by making it illegal to ride a bicycle. Then imagine trying to reduce teen alcohol consumption by putting a hefty new tax on port and sherry. Little wonder, as HAMISH CARNACHAN discovers, that the wine industry is becoming a whine industry as opposition to the tax grows
Bloodied, battered and intoxicated teenagers line the waiting room, which by 2am looks more like an army field hospital than an accident and emergency centre. Some temporarily tend to their own injuries with gauze dressings thrust at them by overworked nurses, others, passed out on a friend’s shoulder, will stay comfortably comatose until a frantic doctor finally gets a chance to wake them and examine their wounds.


It’s not too hard to find the fallout of youth binge drinking – venture out to any emergency ward late Friday or Saturday night and you’ll discover the bloody aftermath. Some will be less fortunate of course – they’ll end up in hospital proper with injuries more serious than superficial scrapes and cuts – but most will make it safely home and have nothing to nurse but a nasty hangover.
Still, the social and economic cost of such excesses is something to cause concern – a host of studies and statistics say so. But is hiking up the price of liquor the best way of tackling the matter and was the secrecy surrounding the Government’s latest move, the implementation of the so-called “teen-tax”, warranted?
Well, the Government felt that way when, much like medical staff working late into the night, the legislative practitioners hurried an emergency operation through Parliament in an effort to stem the social haemorrhaging – or so they say.
In his capacity as acting Minister of Customs, Jim Anderton spearheaded the procedure to pass the Customs and Excise (Alcoholic Beverages) Amendment Bill. This has effectively increased the excise duty that the government charges on beverages containing more than 14 percent, but no more than 23 percent, of alcohol-by-volume.
Prior to Parliament ramming through the new law, unannounced, some ‘light spirits’ in the 14 to 23 percent alcohol-by-volume range were not charged for their actual content of alcohol. The Government argues that many manufacturers were using the loophole to sell products at the higher percentage end of the bracket whilst still benefiting from an arbitrarily low tax rate.
The new tax increase, says Anderton, is “to promote safer communities by discouraging underage teenagers and children from misusing alcohol”.
Essentially, the ‘light spirits’ Anderton is hoping to target with his new law are the diluted versions of high-alcohol liquor like whiskey, gin and vodka – beverages the minister says are the biggest cause of grief for youths.
“The products that mainly fall into this category are the very cheap light spirits often used by young people,” he says. “This is an important piece of legislation to address a serious challenge being faced by far too many New Zealand families.
“The drinking habits of too many young New Zealanders are of great concern. Recent surveys have shown an increase in the level of heavy drinking amongst the young. This trend is both dangerous and unacceptable to our society.”
Last year the Alcohol Advisory Council (ALAC) commissioned Brian Easton to report on the impact of excise tax on alcohol. A central finding was that alcohol is one of a handful of products where the costs of production do not accurately reflect the overall costs to society of consumption.
“The excess social costs are substantial,” states Easton. “The most comprehensive estimate suggests that alcohol misuse reduces effective GDP by 4 percent, may well reduce the effective size of the unmeasured (informal) economy by a similar amount, and has also reduced the welfare of New Zealanders via additional mortality and morbidity by 2 percent and the population of New Zealand by 0.8 percent.
“The excess social costs may be thought of as the economists’ equivalent of harm, in which case the objective of alcohol policy in economic terms is to reduce social costs. Reducing the gap between the prices on which individuals base their alcohol consumption decisions and the social cost to the economy will reduce harm, because individuals are less likely to partake of potentially harmful consumption.”
Higher prices for alcohol are considered to impact on different consumers in different ways. While evidence suggests such moves have negligible influence on moderate, heavy and chronic drinkers, teenagers tend to reduce their drinking in the face of higher prices.
“It seems likely that there is less drinking in extended drinking sessions as the price rises,” reports Easton.
Fair enough, one might conclude. So what’s got so many in the hospitality and liquor industries gagging then?
Quite simply, they are furious with the “haste and secrecy” surrounding the law change, and are questioning the Government’s social conscience in light of what they say is a fundamentally flawed notion. They are also critical that the move is as watered-down as the products the legislation is supposed to target – nothing more than another tax grab dressed up for public consumption.
While the Alcohol Advisory Committee-commissioned report places a clear emphasis on the social costs of alcohol, it is acknowledged that any measure of the toll the youth bracket imparts on the economy would be far from objective – it’s simply too tough to accurately calculate. If anything, health advocates argue that alcohol consumption should be reduced across the board, not forced upon any one group. The hospitality industry agrees.
“In many ways that’s what light spirits achieve by providing a lower alcohol spirit option,” says Hospitality Association Chief Executive Bruce Robertson. “Light spirits provide an option for spirit drinkers to reduce their alcohol intake in the same way that low alcohol beers do for beer drinkers.”
Calculating excise can be quite a complex business. Prior to Anderton’s changes, there were seven steps on the scale, depending on the beverage’s alcohol content. In the report, a graph of alcohol content against tax per litre shows a clear drop at the 23 percent mark – a point where the Government decided kids were getting “the best bang for their buck”.
“The Bill puts into effect the recommendation in the Easton report relating to the excise duty on light spirits,” explains Anderton in a statement released after the new law had been passed. “The change means that alcoholic beverages in the 14 to 23 percent alcohol range can be taxed according to their actual alcohol content, rather than all being levied as though they contain 18 percent alcohol by volume. The changes also mean that the products will be taxed at the higher rate – the same rate that full-strength spirits are taxed at. This will remove the tax advantage that the light spirits currently receive.”
However, among other recommendations, Easton’s report suggests a decrease in the tax on higher alcohol spirits and yet the Government has chosen not to implement that. It’s this “selective” reckoning that has inspired talk of a tax grab.
Robertson acknowledges that the tax regime for alcohol is far from perfect and lacking in logic, but he says the Government has reached “new levels of absurdity” with this latest move.
In an article for Food and Beverage magazine Robertson highlights two key influences which, when combined, formed the trigger for the tax hike.
“The first was the formation, following the last election, of a Ministerial Taskforce on drugs and alcohol lead by Progressive Coalition Leader Jim Anderton…This taskforce has therefore been looking as to how they can and can be seen to be making progress to reduce problems associated with young people and alcohol and drugs.
“The other player has been the distilled spirits industry dominated by the overseas brand owners who have been perturbed to see the erosion of their market from ‘ready to drinks’ [RTDs] and the emergence of a light spirits category…one of their strategic objectives has been to remove or significantly dent the light spirits category. So it seems that submissions from this sector to ALAC have argued that as an effective harm minimisation measure light spirits should be taxed at a higher rate.
“The only real winners from these tax changes are the Government with greater revenue and the international full strength brand owners anticipating greater sales. The losers are all those involved in producing products between 14 and 23 percent, and in particular the consumers who enjoyed these products.”
Figures suggest that revenue from excise duty on alcohol does not even cover the costs incurred by the public health sector in dealing with alcohol associated injuries and harm. Does that mean Robertson and others have a point when they suggest the new regime is merely a scheme to line government coffers? Probably not – on current consumption levels the new duty will only net treasury about $18 million. And if Anderton’s prediction is correct, an associated decrease in the drinking of light spirits will result in even less revenue being generated. He repeats that the aim is to reduce young drinkers’ demand for these alcoholic beverages.
“This will mean that young people will not be able to afford as much alcohol as they currently do. Their $10 pocket money won’t be able to buy them a bottle of gin. They’ll drink less alcohol, get less drunk, and cause less harm.”
But caught in the crossfire are the producers and consumers of wine-based products – such as sherry and port. While distilled spirits, particularly light spirits, can be produced at low cost, the same cannot be said of fortified wines. Unfortunately for the latter, they fall within the magic 14 to 23 percent alcohol range and are now subject to the same excise duty.
Many small winemakers have made considerable investments in sherry and port production and because these types of wine typically need time to mature, wineries have substantial stocks on hand.
New Zealand Winegrowers, the industry body for the country’s winemakers and grape growers, says the change in the excise regime will have a striking impact in the market, making it extremely difficult, if not impossible, for winemakers to sell the stock they have on hand.
“The financial impact of this could be disastrous, especially for smaller companies,” says Chairman Peter Hubscher.
Henderson-based Pleasant Valley Wines, the oldest family-owned winery in New Zealand, has been making port and sherry for over 100 years. Owner Stephan Yelas says that while the company has just celebrated a milestone in terms of its centenary, it is the end of an era because they are pulling the plug on fortified wine production.
“We’ll just run stocks out now because we can’t see any money left in it. There’s no margin for profit any longer,” he says.
New Zealand makes 1.2 million litres of port and sherry each year. While that only amounts to about 2 percent of the country’s total wine production, a string of family businesses in the Henderson area, many of which have been established for a long period of time, base their income on fortified wines.
Pleasant Valley will survive through the sale of its mainstay table wines, but Yelas agrees with Hubscher that other companies in the region, particularly the boutique wineries that focus primarily on port and sherry production, are likely to find the new excise duty very tough for business.
Yelas says he found out about the new excise duty like everyone else – “on the news.” So was he annoyed when he heard? He says not as angry as the customers, who it turns out are “100 percent the older pensioners”.
Indeed, the biggest market for sherry and port in New Zealand is the older generation. And that is why many critics say the new legislation simply defies logic, given that it is supposed to target youth drinking. One cynical commentator wrote that it is rather like attacking the high teenage pregnancy rate by taxing Viagra, or restricting boy racers by increasing the duty on diesel.
Hubscher says the elderly are bound to find the price increase of approximately $5 to $6 per bottle very hard to swallow, especially since most of them are on fixed incomes.
“This inflicts unnecessary hardship on people who have been contributing to our country for many decades and who are not part of the problem the new law purports to address,” he says.
One suggestion in the Easton report states: “In order to maintain realistic minimum levels for the price of alcohol, either the base excise duty rate for all alcohol has to be raised, or a differential between spirits needs to be introduced. This reports recommends the latter option.”
Winegrowers CEO Philip Gregan says essentially this proposes that light spirits should be taxed higher than other alcoholic beverages that fall within the 14 to 23 percent alcohol range. He says this would have made more sense than the adopted approach.
“There’s a fundamental difference between fermented beverages and distilled beverages,” says Gregan. “That’s been recognised in past excise regimes. To be consistent, that logic needed to be carried through here. They haven’t though and by incorporating fortified wines they’ve blurred the line between distilled and fermented beverages.”
Anderton’s rationale is that “this is necessary to ensure that these products [fortified wines] do not become an alternative source of low-priced, higher alcohol content beverages…”
Gregan thinks that is absurd. “Kids don’t drink fortified wines. The whole marketing profile and flavour profile is wrong.”
And this isn’t the only reason Winegrowers is disgruntled. While the Government claims to have pushed the Bill through Parliament under such urgency so as to prevent one company gaining an unfair advantage over its competitor, Hubscher says the complete lack of discussion was a clear breach of a promise made by Anderton three months earlier.
“To make matters worse, this ill-conceived policy was rushed through without consultation – consultation the industry was promised in writing on more than one occasion by Jim Anderton in February of this year. It is a serious injustice that this promise was not kept,” says Hubscher.
Investigate asked Winegrowers for a copy of Anderton’s letters but the request was declined on the basis that “it’s not in the public domain”. However, we did find the following excerpt on Winegrowers’ website in which Anderton advises: “If we are to find the solutions to the problems we are exploring then it is crucial that these should be ones upon which as many as possible of the stakeholders can reach agreement. If we don’t take this approach then I doubt that we will succeed in our endeavours.”
It is important to note that while the Government has adopted approaches outlined in his report, calling Easton the villain, as some commentators have alluded to, may not be the most objective reaction. Featured in the paper are recommendations and examples to “assist public discussion”. In fact, he highlights it as an imperative.
“That it is a political judgement suggests the need for a wide public debate on the appropriate excise duty rate,” writes Easton.
But since Anderton’s February correspondence, Winegrowers says it has had no consultation with the Government about the matter.
“We are fully supportive of the Government’s commitment to resolve the issue of excessive drinking by young people,” says Hubscher. “We also agree with Mr Anderton’s letter that consultation with stakeholders is central to successful policy outcomes. Like him, we believe that the new regime will fail in its objectives because he has not taken key stakeholders with him on this issue.
“The policy will put some small winemakers out of business. It will make no contribution to solving the youth drinking problem.”
By using less juice or less soft drink in the mix, young drinkers will get much the same effect as before, says Hubscher, and he predicts that the producers of light spirits will simply change their products to have 13.9 percent alcohol to bypass the new rules.
Independent Liquor, New Zealand’s largest light spirits producer, has done exactly that. It has reformulated its range of drinks to have an alcohol content of 13.9 percent in a move reported to have been “unashamedly aimed at beating” the teen-tax.
And if concern about the social impact of youth drinking is the real issue, why has the Government not attacked teenagers’ “drink of preference” – the sickly-sweet, brightly coloured, lolly-water beverages referred to as alco-pops or RTDs?
“Light spirits are of greater concern at the moment than alco-pops as the price of light spirits currently allows young people to purchase a greater quantity of alcohol for a less amount of money,” is Anderton’s reply.
There’s a clear consensus, spoken on talkback radio and voiced in the odd editorial – the new tax will prompt a short-term reduction in youth binge drinking but it is not a long-term solution.
“Government should be addressing the question ‘why do young people or indeed any New Zealanders binge drink?’” says Robertson. “Instead they have a simplistic view that the price they pay for alcohol is their major driver to binge and it will be fixed by increasing the price, and that’s simply not the case.”
Groups opposing liquor advertising aimed at young people report that it is the commercials that have lead to more teen binge drinking. Given that the Herald recently revealed that liquor companies received “mate’s rates” from government-owned Television New Zealand, to encourage intense advertising, it is hardly surprising that people are struggling to understand the logic behind the latest move.
Robertson is one of many who argue that the Government would be concentrating on more fundamental questions if social interest was the priority. Others see it as a little contradictory that a ‘conscience vote’ in Parliament led to the lowering of the drinking age in the first place, and some say the lack of consultation was a flouting of the democratic process.
However, it is hard to argue with the underlying principle, or indeed the statistics, that teenage binge drinking is a serious concern, not just for the healthy development of that cohort, but also for society as whole. And yet, it is an issue that most agree necessitates action that actually hits the mark – a more measured response than the impromptu measures carried through a sleepy Parliament that night. Instead, says Robertson, “Government has used a sledge hammer and missed the target.”