There are two types of tax that are included in the price of alcohol sold in New Zealand: 1) Good and Services Tax (GST) and 2) alcohol excise tax.
Like most other products in New Zealand, alcohol is subject to GST, which adds 15% to the sale price. Any business that sells alcohol will have to pay GST, although tax credits can be claimed to ensure that businesses only pay GST on the value that they have added to the product.
In addition, all alcohol sold in New Zealand is subject to the Health Promotion Agency (HPA) levy. Alcohol is the only product that is subject to this levy. The HPA levy rates are substantially lower than the rates for alcohol excise tax. For example, the HPA levy equates to ~2.6 cents on a bottle of wine, 0.5 cents on a 330ml can of beer, 13.3 cents on a 1L bottle of spirits, and 0.7 cents on a 250ml can of 7% RTD. The money raised by the HPA levy (about $11 million each year) is used to fund the Health Promotion Agency to undertake activities to reduce alcohol-related harm.
Excise taxes on alcohol
When alcohol prices increase, people drink less, and alcohol harm (to the drinker and others) decreases.Like cigarettes, our Government puts a tax on alcohol which is sold in New Zealand. Unlike GST, alcohol excise tax is not based on the total price of the product. Instead, for some types of drink (e.g. beer, spirits>14% of alcohol by volume (ABV)), it is charged by the volume/amount of pure alcohol in the product, and for other types of drink (e.g. wine), it is charged by the total volume of the product.
The tax is collected on all alcohol (≥1.15% ABV) imported into or manufactured in our country by New Zealand Customs. It is not paid by New Zealand exporters of alcohol. Every year, at the start of July, the alcohol excise rates are adjusted for inflation. The amount of excise tax paid by drinkers will vary considerably - heavy drinkers pay more, lighter drinkers pay less.
Excise duties and special levies are imposed for two reasons. Firstly, they are intended to increase the price of product to reduce its consumption. When alcohol prices increase, people drink less, and alcohol harm (to the drinker and others) decreases. Besides, these taxes are also designed to raise money for the government to help to pay for costs caused by the product. This is why excise duties and special levies are often ‘hypothecated,’ which means that revenue raised must be used in a particular way. The HPA levy is an example of hypothecation. So is petrol excise. Alcohol and tobacco excise taxes are not hypothecated.
The Government collected ~$1.1 billion from alcohol excise taxes in the last financial year. This compared to ~$2 billion from tobacco excise taxes. Like smoking, it is important to note that this revenue does not match the excessive cost of alcohol harm in our society.
The amount of tax is mostly determined by how much alcohol is in the product which is being sold. Alcohol excise tax represents around 15% to 22% of the price paid for wine and beer, and around 58% of the price of spirits. These figures are lower than the tax paid on cigarettes – whereby ~64% of the retail price of cigarettes is excise tax.
Click here for the current excise rates in New Zealand.
Tax increases are not always passed on to the consumer
It is alcohol companies that are required to pay excise taxes. If excise taxes were increased, they may not always pass this increase in price on to the consumer. This happened in New Zealand when the prices of cigarettes increased; the tobacco companies absorbed some of these increased costs.
This is important to remember - just because a 50% increase in excise tax should raise the retail price of alcohol by 10%, the real price paid at an outlet may not go up by 10%.
How much do prices need to increase?
In 2010, the Law Commission recommended that excise taxes needed to increase by at least 50%, which would raise the overall price of alcohol by around 10%. This equates to increasing the retail price of 12 packs of beer by $2.7, a bottle of wine by ~$1.3, and a litre of spirit by $11.7 (2019 prices). This level of increase was estimated to reduce overall alcohol consumption in society by around 5%.
In 2014, the Ministry of Justice estimated that an excise tax increase of 82% could reduce the amount of alcohol consumed in an occasion by 9% in the population (and by 11% in heavy drinkers).
How do price increases harm those on low incomes?
Many groups (including decision-makers and community members) are necessarily cautious about the effects of tax increases on those with low incomes. However, those on low incomes may actually benefit the most - they are more sensitive to the price of alcohol so may reduce their consumption the most when prices go up. They also experience more harms from their alcohol use so have the greatest potential to benefit.
Price increases may put some people under financial pressure and highlight issues concerning their alcohol use. Therefore, it is important that there are appropriate and accessible treatment and intervention options available.
Cost savings to society from tax increases
Increases in excise tax generate extra revenue for the Government to spend on important areas such as Health and Education. Savings are also made as a result of reduced consumption and alcohol-related harm.
The Ministry of Justice estimated that raising the excise tax by 82% is expected to result in savings to New Zealand society of $339 million in the first year and $2.4 billion over a ten-year period. All this from just raising the average price of a bottle of cheap wine from $7 to $8.90 and a 12 pack of beer from $10 to $14.88 (2014 prices).
To date, there has been no action taken by Government to increase the price of alcohol substantially. Although excise tax rates are adjusted annually for inflation, further increases are needed to reduce consumption and alcohol-related harm. Lastly it must be noted that there are anomalies in New Zealand’s alcohol excise tax structure that also need to be addressed to create a more effective and fairer approach to tax.