The Australian wine tax regime: Assessing industry claims
There has been much debate recently about the way that wine sold in Australia should be taxed. The proposal by the Henry Tax Review to move from the current ad valorem tax to a volumetric tax, bringing wine in line with other types of alcoholic drinks, has been fiercely challenged by some in the wine industry. To back up its opposition to the change, the Wine Federation of Australia (WFA) has produced estimates of the supposed job losses and financial impacts on low-income households that would result. This paper examines the veracity of these claims and the assumptions on which they are based.
Before discussing the likely impacts of a change in how wine is taxed, it is worth highlighting some key facts about the Australian wine industry. The sector is often portrayed as a collection of small, family-owned vineyards producing award-winning wines, but these kinds of enterprises actually produce very little of the wine sold in Australia. Instead, a great deal of grape production occurs in dry inland regions using irrigation from the Murray Darling River system; these regions are also responsible for producing cheap wines, often sold in casks. Cheap wine is often associated with antisocial or excessive drinking, presumably because it is the cheapest way for consumers to obtain the greatest amount of alcoholic content. One standard drink retails for as little as $0.36 via a cask of red wine, compared with $1.51 for cider, $1.75 for beer and $2.52 for ready-to-drink beverages (RTDs).
It is commonly agreed that Australia is in the middle of a wine glut. Unfortunately much Australian wine production is uneconomic, and a good deal of the grape crop is left on the vine since it is not worth harvesting. The main reasons for the current wine glut appear to be the high value of the Australian dollar as well as increased competition in overseas markets from relatively new producers in South Africa, New Zealand, the US and Latin America.
This paper argues that these various problems – the glut of supply, the use of precious irrigation water by grape growers in the Murray Darling Basin, and the level of demand for cheap cask wine among those who do not necessarily consume alcohol responsibly – can all be traced, at least in part, to the existence of the Wine Equalisation Tax (WET).
The WFA has claimed that tax rates on Australian wine are much higher than in other comparable wine-producing countries, and has produced figures purporting to show that taxes in Australia are substantially higher. These figures were misleading, because they included the Australian GST but ignored the equivalent value-added tax in European countries used for comparison, and failed to account for the fact that many small Australian producers effectively pay zero WET. If the figures are revised to take into account these oversights then it is apparent that the Australian taxation system conforms more closely to other wine-producing countries.
The WFA has also made what appear to be exaggerated claims about potential reductions in production and employment in the event of a switch to a volumetric tax and associated increases in the price of cheap wine. While the price increase is likely to be proportionately highest for cask wine, cask wine will remain the cheapest means of obtaining a given amount of alcohol; red wine would still be cheaper by 47 per cent compared with the next cheapest type of alcoholic beverage. This implies that any reduction in cask wine consumption is likely to translate into an equivalent reduction in total alcohol consumption.
The WFA has expressed concern about the financial welfare of pensioners, who tend to consume modest amounts of cask wine. However, because pensioners spend a smaller proportion of their incomes on wine than average, any increases in the cost of wine (through a new tax or otherwise) will be reflected in the official consumer price index and, via pension indexation, will result in higher pension payments. Indeed, if price increases lead to changes in spending patterns, then the average pensioner could be financially better off.
The final claim made by the WFA relates to the impact of tax changes on jobs, asserting that sales would fall by 34 per cent and that between 5,300 and 12,000 jobs would be lost. However, these figures are based on very unrealistic assumptions about the changes in consumption that could be expected following price increases. Using figures derived from recent empirical studies, we estimate that production could fall by 5.2 per cent and that there may be a loss of 599 jobs – 95 per cent fewer than the WFA claims. These figures include both direct and indirect impacts of lower production in the wine industry itself and in the industries which supply it.