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Alcohol Tax Reform -

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Norman Swan: A major study, a cost benefit analysis in fact, being released tomorrow morning by the Foundation for Alcohol Research and Education provides strong support for tax reform in the alcohol sector and argues that a minimum of a quarter of a billion dollars a year could be saved as a result. It's part of a consistent and long term push by the public health community to have all alcohol taxed by alcohol content, so-called volumetric taxation,

The analysis of alcohol taxation was performed by economist Dr John Marsden.

John Marsden: It happens at the moment through a volumetric excise on all alcohol except wine. Wine is subject to a wine equalisation tax which is on a value basis.

Norman Swan: What do you mean?

John Marsden: That means that if the wine is a very cheap wine it pays negligible tax, if it's a very expensive wine, a bottle of Grange, then it pays $30 or $60 per bottle tax, whereas the cardboard containers pay almost nothing.

Norman Swan: Why is that a problem?

John Marsden: First of all it's a straight anomaly and it gives a great deal of tax assistance to parts of the wine industry. But in the alcohol context, what it does do is provide a very, very cheap form of alcohol, and we know that high risk drinkers, whether they are middle-aged or whether they are teenagers, the high risk drinkers preferentially seek lowest cost alcohol.

But I think the overall question is not simply a wine question. The real issue is that we know from worldwide evidence that alcohol pricing and taxation is a hugely effective instrument in reducing the harms from alcohol.

Norman Swan: And of course that's what passes the screen test with industry, that when you talk about raising the price they raise the sign of the cross and say the world is coming to an end when they are quite happy to pay whatever they want for education.

John Marsden: We know that education is not highly effective. We know from various reviews...they had basically surveyed all the instruments around the world, what was the international evidence, and the one that comes out continually is availability. There are two forms of availability, one is the price availability, and the second is the physical availability. And they are the two things that work.

Norman Swan: So the advocacy position from people like the foundation and others, through the Preventative Health Task Force and others, has been to actually normalise the tax on wine to make it the same as beer and spirits.

John Marsden: Yes, that was Ken Henry's tax review position as well. What we have done is undertake a benefit cost analysis, and benefit cost analyses are very important, particularly in the Australian context because you should not bring in legislative change without a regulatory impact statement, and the core of the regulatory impact statement is a benefit cost analysis.

Norman Swan: So what did you look at and what did you find?

John Marsden: Firstly we said, okay, if we're looking at the tax instrument, if we're looking at possibly changing tax, what would change? And the first issue is it would generate additional tax revenue and you could improve your total tax efficiency, get rid of the deadweight costs of some of our worst taxes. This is a Ken Henry type of point.

The second thing we're aware of, although we haven't explored, it's a detailed area, is we are giving a lot of assistance to one particular form of enterprise, one particular form of agriculture from that point of view. So we've left that aside. But we do know that there are harms of different types. There are harms to the drinker himself or herself, and there are harms to others. Most of the medical research has focused on the harms to the drinkers. We said this is reasonably well known, let's look at the harms to others because in the economist terms, these are externalities.

Norman Swan: And what did you find?

John Marsden: First of all there has been a very comprehensive study done on harms to others. Recently we took that cost base and we took a hard look at it and said we're only going to use roughly half of it. Can we, by being very conservative still evaluate a case which says taxes ought to be looked at very hard?

Norman Swan: And what sort of harms are you talking about?

John Marsden: First of all we know that 20,000 children a year have been abused in alcohol related abuse. So quite apart from the harm to the child, there is the cost to the taxpayer of running the child protection system. We know that alcohol can induce criminal activity, that's part of the cost base. We know that people have out-of-pocket expenses for looking after family members or friends or even strangers who have damaged themselves or need care, and we know that a lot of people would be willing to pay for not being harassed or abused. There is a 'willingness to pay' concept in there. That is an intangible but it's actually quite real, it's what matters to Australians.

Norman Swan: John Marsden. It's important to note that this cost benefit analysis was about far more than getting wine taxed by alcohol volume.

John Marsden: Yes, that's what we explore. We explore putting wine to the existing beer rate, and then all other excises we increase by 50%.

Norman Swan: And the net effect on price of that would be what?

John Marsden: It's in the report at around I think 15, 16, it depends on how we weight the costs.

Norman Swan: And that's what you've judged your benefits on, which is that overall the price of alcohol goes up and consumption for high risk individuals goes down?

John Marsden: Correct. We removed the anomaly. We said let's price wine at the rate for medium strength beer, and then we said let's raise all the other excises by 50%.

Norman Swan: So essentially what you're doing is what they've done with tobacco.

John Marsden: That's correct.

Norman Swan: And to control use in the highest risk groups.

John Marsden: Particularly in the highest risk groups because we know that they are more price sensitive. One of the issues that often comes up is this universal measure will hurt the light drinkers, the moderates, and it's true that they would be paying more. But we also look to see who suffers these harms to others, and we find that the biggest groups suffering these harms are non-drinkers and moderate drinkers. And so when we take account of both sides of the equation, we find that moderates are the largest single group of beneficiaries.

Norman Swan: Because they are not harmfully drinking themselves but they are being harmed, just like the rest of us, by those externalities, as you describe them.

John Marsden: Absolutely correct. And that's been a missing part of the debate in Australia where people say, quite rightly, what about the moderates. Well, we believe we have answered that question; the moderates are advantaged, not disadvantaged.

Norman Swan: And what net benefits did you find?

John Marsden: Our estimate of net benefits is essentially a minimum. So what we are finding is we're getting estimates about around a quarter of a billion a year, but if we acknowledge that the top 4% of people who are really consuming at very harmful levels and they never drink in a regular basis that many of us would drink at, every time they drink it is basically bingeing, then what we find is benefits in excess of half a billion a year going towards a billion a year.

Norman Swan: So, you've just got to watch here, because moderate drinkers do go on binges, tens of thousands of binges a year, so they'd stand to benefit even more. Economist Dr John Marsden talking about an important cost benefit analysis on alcohol taxation, to be released tomorrow morning by the Foundation for Alcohol Research and Education.

An increase in price means lower sales for alcohol manufacturers, but it's the wine industry that has been screaming against volumetric taxes very effectively and they have scared politicians on both sides. But what would happen to the wine industry if the suggested changes take place? Michael Thorn is chief executive of the foundation.

Michael Thorn: Our current tax regime is not good for anyone. From a public health perspective we are concerned about drinkers and those around them who are affected by this, but equally it is not good for the industry. It's encouraging the production of cheap bulk wine, it is acting against Australia's export interests. Clearly in a high-wage, high-productivity nation, the only way that we are going to be able to compete on the export field is with quality products, and that's where one would have expected that we would want the wine industry to be directing its effort.

Norman Swan: And have you allowed for the doom and gloom scenario for loss of income to the wine industry, the impact on the wine industry and so on, that they won't be able to get rid of their wine lake anymore?

Michael Thorn: We released a report in the last fortnight that in fact shows that the glut is over. We have also done research which shows that the impact on the wine industry will be marginal. So the Australia Institute did some work for us last year to show that the claims by the wine industry that these changes will cost something in excess of 12,000 jobs is more like 600 jobs. And this is the sort of typical rent seeking that we see from industry sectors that have been beneficiaries of these sorts of effective subsidies from government.

Norman Swan: And what does the cost benefit analysis say about the future cost of a bottle of wine? Michael Thorn again.

Michael Thorn: I think there are probably three good examples. Firstly we would expect to see your cheap cask wine doubling in price from about $10 to $20. We would see the clean skins, the $2 and $3 bottle of wine that we are currently seeing in bottle shops increased to $8 to $10. And at a tipping point of around about $20 for premium wines, we would expect to see reductions in the price of those wines.

The other interconnections are the grape growers, so people who grow grapes but don't make wine, and this is all tied up in issues like water reform in the Murray Darling Basin. And those grape growers are producing grapes for that lower end of the market, making cheap bulk wine. And so there is a need to think really hard about how this reform of alcohol tax fits in with Murray Darling Basin reforms, and the sort of things that we are suggesting here actually marry in quite nicely, and we need to focus on some industry restructuring efforts and get those grape growers out of that business into something more productive.

Norman Swan: Michael Thorn is CEO of the Foundation for Alcohol Research and Education. Here is economist John Marsden again.

John Marsden: Much of the wine industry will benefit because it will remove the cheaper product which undercuts much of the medium and higher quality. In fact there are a number of people in the wine industry who have argued that position quite strongly.

Norman Swan: So it provides a market signal which encourages the production of premium wine.

John Marsden: Premium and mid quality wine, yes.

Norman Swan: Do we know what effect this price increase has on adolescents and teenagers and potentially underage drinkers? Because it is known for tobacco that if you increase the price, that's the group that tends to start smoking later because the price is so high, they are the most price sensitive.

John Marsden: That's highly likely to occur in this case. We do not have good Australian evidence on this. We have evidence from England and Wales where this has been studied in quite some detail. There we know that it's the heaviest drinkers and, if you like, the illegal drinkers, that is, the teenagers who are just starting to drink and who have limited budgets, they are very highly price sensitive, and it will have a bigger effect. We in our modelling have not picked that up, so that's another source of understatement in our results.

Norman Swan: So in other words if you get an effect on teenage drinking, it's actually a bonus beyond your estimates so far.

John Marsden: Yes, that's correct. We believe that we've provided essentially a prima facie case for the tax issue now to be considered fully by government. And the Productivity Commission would be a good place for that to occur.

Norman Swan: Dr John Marsden is an economist and author of Bingeing, collateral damage and the benefits and costs of taxing alcohol rationally, to be launched tomorrow in Canberra.

Dr John Marsden
Marsden Jacob Associates
Consulting Economist
Michael Thorn
Chief Executive
Foundation for Alcohol Research and Education (FARE)