Wednesday, February 03, 2010

"To highlight how strange tax has become, just turn your attention to brandy"

The West Australian's Shane Wright with a woeful but perhaps-typical tale of public administration:

"Brandy seems a strange place to start, but the way it is taxed highlights just how important it is to continually look at improving the tax system.

Brandy, you see, attracts a different rate of excise than other spirits. The lower rate costs you and I about $5 million a year in foregone revenue.

That’s not a lot of money, but $5 million is money that could be used in a health promotion campaign or to arm a few Australian soldiers or even provide a grant to some company to break into an overseas market.

But how did we come to a situation where brandy gets taxed less than rum, bourbon, scotch or whiskey?...

I’m glad you asked.

The decision to make brandy cheaper than other spirits was made by Robert Menzies in 1954.

For the first time the West Australian can (thanks to the staff as the National Archives) reveal the Cabinet papers of 1954 which have been specially declassified so that we can see the paperwork for this decision.

And its worryingly slight.

It was July 30 1954, Sir Robert and the Liberal-Country Party Coalition had been returned two months early with a margin of just 7 seats, and up before the Cabinet was a proposal to cut the brandy excise rate which would play to grape producing areas in South Australia.

There were no supporting papers (without memorandum in the official parlance) meaning this was a decision made effectively off the cuff.

The Cabinet agreed to cut the brandy excise by 30 shillings a gallon. But, in an example of why changes to tax laws have major ripple effects, Cabinet also decided against cutting duties on matches, wireless valves, beer, whisky crt, gin and rum.

So cheaper brandy was agreed to, but not cheaper beer or rum. Yep, makes perfect sense.

This advantage to brandy producers (and brandy importers) remained intact for another 20 years before the Whitlam government, in one of its few good economic policy decisions, decided to align the tax rate on brandy with other spirits.

But then came 1979 and the Cabinet of Malcolm Fraser.

With South Australia (recently returned to Liberal hands) and Victoria demanding relief for their grape producers, then agriculture minister Ian Sinclair took a proposal to Cabinet to re-instate the tax advantage to brandy.

A Senate committee had found that brandy drinkers bought the tipple when it was appreciably cheaper than scotch, but if they were around the same price then people went for scotch.

That suggests that brandy was being bought merely on cost - not for any other great quality (such as taste).

Mr Sinclair, who estimated the tax change would cost the country $11 million over three years in lost revenue, backed the growers and their demand for tax relief.

"I consider that concern is justified and action should be taken which would assist a reversal of Australian brandy’s declining share of the potable spirits market," he wrote.

And so, for another 31 years, brandy has enjoyed its tax advantage over other spirits. But is it working?

Official figures suggest not.

The Australian Wine and Brandy Corporation reports that in 1989-90 there was about 2.4 million litres of brandy consumed in this country, of which 1.6 million litres were domestically produced.

By 2008-09, there was less than one million litres consumed of which 484,000 litres were domestically produced.

That’s a fall in consumption of more than 60 per cent.

Australians consume about 400 million litres of wine a year - so brandy accounts for less than a quarter of a percent of all wine consumption.

And yet, and yet, there continues to be this tax advantage that was done on political grounds half a century ago and seems to make no sense now.

You could mount an argument that excise on other spirits could be cut to be in line with brandy, but that would run into huge problems with the health lobby which is actually arguing for higher taxes on alcohol.

Ultimately the health lobby is, just like the brandy or the alcohol sector, a vested interest with its own causes and demands.

That is what is going to confront Wayne Swan and Kevin Rudd with their response to the Henry review.

Dr Henry and the rest of his committee have produced a report that has floated above the vested interests. That’s the advantage of doing something behind closed doors.

However, that’s not what awaits the Rudd Government which is going to face some particularly ticklish recommendations.

That is partly why the Government is taking its time to craft a response to Henry.

It does not want to get caught up in ruling things in and out. It also limits the attack from Mr Abbott and his treasury spokesman Joe Hockey because while they argue the report will only support higher taxes, they really don’t know what’s in play.

Whatever the final details of the Henry report, it is going to be a hard slog to make real and positive change.

The key recommendations of the last major tax report, released in the mid-1970s, took almost 30 years to be rolled out.

Let’s hope the Henry reforms don’t take so long to be put in place.

We can all raise a glass of brandy to that."

Related Posts

. Less alcohol in the beer, less cocoa in the chocolate...

. Sunday dollars+sense: Tax alcopops. To extinction.

. Meanwhile, lets go behind the scenes at today's alcopops tax "revolt"