Submission to the Taxation Review Committee

by the

Alcohol & Public Health Research Unit Runanga, Wananga, Hauora me te Paekaka

The Alcohol & Public Health Research Unit is an independent University based research unit in the Faculty of Medicine and Health Science of the University of Auckland. It has a long history of carrying out research on alcohol and drug issues. Funding is obtained from contestable funding pools. The Unit’s research proposals and subsequent publications of findings in international and academic journals are subjected to rigorous processes of peer review.

Introduction

APHRU recognises the scale of the task faced by the Taxation Review Committee, and acknowledges their efforts in attempting to identify the key issues in a wide range of areas. The report produced by the Review Committee investigates how efficient the current taxation system is as a collector of tax revenue (p.1). The Review Committee defines “efficiency” in this context as minimising the costs of imposing taxation, while promoting fairness and continuing to raise sufficient revenue (p.1).

This singular definition of efficient taxation has no doubt assisted the Committee in commenting on a diverse range of issues, about many of which they acknowledge they have no specialised expertise or knowledge. This submission by the Alcohol and Public Health Research Unit (APHRU) focuses exclusively on the alcohol excise tax. APHRU has a long and proven track record in the alcohol research field, and has assisted Treasury on several occasions with the development of alcohol excise policy, most recently with their review of the alcohol excise completed last year (see Barker 2000; Hall 1996).

The Review Committee correctly identifies the inefficiencies of the alcohol excise as a revenue collector (p.52-54). The alcohol excise has a relatively narrow collection base, and alcohol products sometimes have relatively inelastic price elasticises, which mean alcohol taxes are associated with relatively large dead weight losses. The burden of the excise tax is carried by a specific group of consumers, and the price increases caused by the excise cause some consumers to substitute away from alcohol products (i.e. drink less), which undermines the amount of revenue that is actually collected by the tax. The review team concludes the alcohol excise tax is a relatively inefficient means to collect tax revenue compared to a broad based flat tax such as G.S.T. If the goal of the excise were to collect tax revenue the Review Committees analysis would provide a strong argument for its review. However, clearly the purpose of the alcohol excise is not to collect tax revenue, but rather to modify drinking behaviour with the intention of improving individual and community health and social outcomes. APHRU acknowledges the Review Committee seeks further consultation and explanation of the rationale for the excise tax. Consequently, this submission will briefly summarise both the theoretical and empirical foundations for the excise, and then provide detailed answers to the specific questions raised by the Review Committee (p.59). There is a wider public health perspective to alcohol taxation, but as the approach of the Review Committees analysis is clearly economic this submission will focus on the economic rationale for the excise. Briefly, the public health perspective on alcohol taxation is that alcohol related harm should be minimised, and taxation is an effective environmental policy to achieve this goal (see Edwards et al. 1994). The economic rationale for alcohol taxation is found in a branch of economics known as Pigouvian Welfare Economics. This is the perspective that Treasury have used in their reviews of the alcohol excise (see Barker 2000; Hall 1996).

The Economic Rationale for the Alcohol Excise Tax

APHRU accepts that in general broad based, uniform taxes are superior to excises as efficient revenue collectors in the sense they reduce both the opportunity and incentives for tax avoidance (p.1). The alcohol excise is widely held to be an exception to this general principle because alcohol drinkers impose significant external costs on the community. The price of alcohol in the absence of an excise does not fully reflect the real costs drinkers impose on society. If alcohol drinkers are not made to pay the full social cost of their drinking they will drink excessively large amounts of alcohol further reducing the overall welfare of the community. The goal of the excise is to raise the price of alcohol to reflect its true costs to the community, and as a result encourage more moderate drinking and limit the external harms of alcohol use borne by others. The excise tax is referred to as a “corrective tax” in the sense it makes drinkers pay the real cost their drinking imposes on the community. A Pigouvian alcohol tax should be set to influence consumer decisions at the margin (i.e. decisions about their last drink), rather than aim to collect sufficient revenue to cover the external costs of alcohol actually generated. The excise tax that maximises social welfare should therefore be at least as large as the total externality of alcohol consumption (Barker 2000; Hall 1996)

In a world of perfect information the excise would be levied on each alcohol consumer according to the actual external costs of their last drink. In the real world, the most feasible approach is to impose a uniform excise across all consumers according to the absolute alcohol content of the product purchased (see Barker 2000; Hall 1996). One way to think of the alcohol excise is as an insurance premium paid by alcohol consumers to the government for the additional risk of causing a range of harmful outcomes by drinking alcohol. Hall (1996) has speculated that if health services were funded by private insurers it is highly likely that they would demand a higher premium from drinkers reflecting their greater risk of accident and injury, and alcohol related health problems, compared to non-drinkers.

The external costs associated with alcohol consumption are numerous and in many cases significant. Examples include:

2 - emotional and monetary costs to friends and family as well as innocent victims and their families related to the misuse and abuse of alcohol;

- the costs to third parties of physical violence to person or property;

- police court and incarceration costs resulting from violence or other crime exacerbated by alcohol;

- the cost to society of industrial or recreational accidents caused by alcohol induced physical or mental impairment (e.g. workplace accidents, drunk drivers), including the injury and death of third parties;

- lower productivity of workers affected by their consumption of alcohol (e.g. absenteeism, negligence), which is borne by co-workers (as lower wages), employers (lower profit), or society as a whole (tax revenue required to pay for alcohol related social welfare and sickness beneficiaries), and;

- public health care costs associated with alcohol-related injury, alcoholic poisoning, foetal alcohol syndrome and foetal alcohol disorders, treating people with alcohol problems as well as alcohol related illness including cancer, liver injury, pancreatitis, coronary heart disease (CHD), hypertension, and stroke. There are also educational and other social costs for some of these problems, foetal alcohol syndrome children with learning difficulties, people with chronic alcohol problems on invalid benefits.

Recent Treasury reviews of the alcohol excise have calculated “conservative” estimates of the total annual external costs of alcohol in New Zealand. These estimates have built on the calculation of the net social cost of alcohol consumption in New Zealand produced by Devlin et al. (1997). Hall (1996) calculated the net external cost of alcohol in New Zealand (taking into account the benefits of alcohol) in 1996 to be between $432-$713 million annually ($1996). Most recently Barker (2000) further up-dated this calculation in 2000 to $390–$857 million annually ($1999/00). These estimates do not include:

- the costs resulting from property damage;

- the costs of emotional suffering;

- the costs of third party loss of life and injury from alcohol related incidents;

- the costs of alcohol damage to the foetus;

- the deadweight loss arising from raising tax revenue to pay for increased uses of government services.

Both Hall (1996), and subsequently Barker (2000), has concluded, that at the present level of excise, it is likely that the external costs of alcohol are at least as large, and quite likely more than, the revenue collected. They both recommend that the excise tax should not be lowered.

3 How relevant a drinker is to calculating the “average external cost”, and hence the optimal excise tax, depends on how much they alter their alcohol consumption in relation to a change in the price of alcohol. A drinker who is entirely unresponsive to changes in the price of alcohol would be irrelevant to calculating the optimal excise tax. However, contrary to the common belief that particularly heavy drinkers are unresponsive to price changes, there is considerable evidence that heavy drinkers are just as responsive to price as light and moderate drinkers (Edwards et al. 1994). All drinkers probably respond to price changes roughly proportionately to their level of alcohol consumption (Hall 1996).

Specific Review Committee Questions

(a) Excises and duties appear to be predominately passed on to consumers.

This is entirely appropriate as it is the consumer who generates the alcohol related external costs through their alcohol consumption decisions, and as a result it is their behaviour the excise tax aims to modify. By increasing the price of alcohol the tax encourages people to consume alcohol less often, and to consume less on any given occasion.

Time series analysis of alcohol consumption in New Zealand has shown that price has a strong effect on consumption (Ashton and Casswell 1987; Wette et al. 1993; Zhang and Casswell 1999). In the decade 1984-96, beer consumption was reduced by real price increases, while wine consumption was increased by real price decreases (Zhang and Casswell 1999). The New Zealand evidence is consistent with the findings from other countries on the influence of price on consumption (Edwards et al. 1994). There is international evidence that alcohol taxes can reduce motor vehicle accident injuries and fatalities (Chaloupka et al. 1998; Edwards et al. 1994). Young drinkers have been found to be particularly sensitive to price, and increases in alcohol taxes have been shown to be effective in reducing the harmful youth consequences of drinking such as traffic accidents, cirrhosis deaths and violence (Coate and Grossman 1988; Edwards et al. 1994).

(b) At current rates many of these taxes appear to be inefficient revenue raisers.

The aim of the tax is not to raise tax revenue but to reduce the amount of alcohol consumed, with the intention of improving individual and community health outcomes. The efficient excise tax is set to reduce alcohol consumption to the socially efficient level. The excise tax that maximises social welfare should be at least as large as the total externality of alcohol consumption.

(c) Patterns of consumption suggest that they impose large horizontal inequities and we view with concern the heavy burden of these taxes on a large minority of (often low income) New Zealanders.

The Review Committee suggests a horizontal equity criteria based on personal income. That is, people of the same income earning capacity should pay the same

4 amount of tax. This equity principle is only relevant if the sole purpose of the tax is to collect revenue. Since the rationale for the alcohol excise is primarily as a health and social intervention the equity criteria should reflect this function.

Alcohol use is associated with a wide range of harmful external costs, including violence, negligent use of machinery and motor vehicles, property crime and damage, neglect of duties of care, and public nuisance. Arguably the most important equity consideration is to ensure that drinkers do not do unreasonable harm to others. It is inequitable that family members and members of the general public should be subject to the violence caused by alcohol, road users should be put at risk of accident from intoxicated drivers, workers should be put at risk of accident from intoxicated work colleagues (or workers hungover from excessive consumption), family members should suffer neglect from intoxicated spouses or parents, and the general public be subject to nuisance and assault from the behaviour of groups of intoxicated individuals.

The alcohol excise is an equitable tax. The excise is levied per unit of alcohol consumed. Those who drink the most alcohol pay the most tax. The vast majority of drinkers only drink relatively small amounts of alcohol and consequently the excise tax represents only a small proportion of their income. Hall (1996) points out the bottom 50 percent of drinkers (ranked by consumption level) drink only 7 percent of total alcohol consumed and therefore only pay 7 percent of the tax. The tax is therefore well targeted. Hall (Hall 1996) calculates abolishing the alcohol excise tax would represent the same amount of tax revenue as reducing G.S.T. on all goods and services by about 1.6 percent. He comments since the distribution of alcohol consumption is very skewed, a large majority even among drinkers would probably be financially better off if G.S.T. were reduced. The alcohol excise tax burden has been estimated to be less than 1% for all income groups (Ashton and Casswell 1989). Those who would pay considerably less alcohol excise tax would be concentrated among the comparatively small number of heavy drinkers.

(d) While the Review is not attracted to the “social spending” argument as a basis for tax policy, we seek further consultation on this approach. What limits should apply to the use of taxes and subsidies to minimise public health costs? Should user charges take account only of health costs or are differential demands on other forms of social spending such as state-provided pensions also relevant in designing an equitable system?

The rationale for the alcohol excise is much more than the desire to minimise the financial costs of health care. It is concerned with encouraging healthier decision- making and consequently reducing the harm drinkers do to themselves and others. The financial health care costs of an individual can be effectively minimised if they happen to die young, and alternatively a long lived individual is likely to consume large amounts of the health budget, yet neither of these facts are grounds for a promoting health policies that reduce the longevity of tax payers. A health policy must also consider the private and social benefits of a long and productive life. It does not seem appropriate to suggest the alcohol excise should be reduced because drinkers are likely to live shorter lives, and thus draw less from a public pension scheme, which will offset the increased immediate demands for health services by

5 drinkers in the present (see p.59). The tobacco industry recently implied a similar argument with respect to smoking and were widely criticised. The health consequences of alcohol use identified in this financial argument are in fact the rationale for targeted intervention at time of purchase and consumption with the aim of reducing and avoiding the negative consequences of drinking in the future.

APHRU recognises there must be limits applied to the use of taxes to promote healthier lifestyles or social agendas. The Review Committee expresses the concern that the public health arguments for alcohol taxation could be applied to a range of risky or ‘unhealthy’ activities, such as contact sports. Numerous taxes of this type are undesirable from both an economic and a civil liberties perspective. A broad rule with the application of Pigouvian taxes is that the welfare gain from the reduction of the external costs of an activity must be balanced against the losses in consumer welfare caused by a reduction in the activity. Several features of alcohol justify its singling out as appropriate for an excise tax to reduce consumption:

- the scale of the external costs associated with alcohol consumption

- intoxication that undermines short term rational decision making

- dependence that undermines long term decision making

- absence and bias of information (i.e. the alcohol industry provides unbalanced information on the risks of alcohol through significant mass media advertising)

Another issue in the application of pigouvian taxes is that the reduction in the external costs of the activity must be greater than the costs of the government intervention itself. Several features of the alcohol excise cause it to be a cost effective intervention:

- consumers are relatively responsive to price

- ease of administration

- low levels of avoidance through home production (only about 3% of volume of alcohol in New Zealand is home produced (Wyllie et al. 1996).

- public acceptance of the tax

(e) We strongly support educational programmes informing users of the risks of smoking, drinking and gambling and assistance targeted at helping problem drinkers and gamblers to overcome their problems. These are typical responses to public health issues. What makes exclusive reliance on these approaches inappropriate for these problems?

Responses to public health issues that rely exclusively on educational approaches to individual users have been proven to be largely ineffective according to the extensive body of international peer reviewed research in this area (Hill and Casswell 1999;

6 Holder and Edwards 1995; Toomey and Wagenaar 1999). Consistent results over two decades of evaluation and review of school-based alcohol and drug education indicate that education programmes are of limited use in delaying or reducing adolescent use, with only small effects produced by some alcohol and drug prevention programmes (Coggans and Watson 1995; Erickson 1997; Gerstein and Green 1993; White and Pitts 1998; Samarasinghe 1997). Moreover, there has been widespread concern expressed that most individually focused alcohol and drug education programmes not only have limited, unsustainable impact on young people but disproportionately use up scarce resources (Mosher 1996; Wysong et al. 1994).

The most effective public health/health promotion programmes aimed at reducing alcohol–related harm are based on current evidence-based practice utilising a raft of multi-pronged, complimentary strategies, (Casswell 2000; Hingson et al. 1996; Holder et al. 2000; Perry et al. 1996) and include policy initiatives such as tax increases (Laixuthai and Chaloupka 1993).

Work by Wagenaar and Perry (1994) indicates that changing beliefs and perceptions about alcohol via education has little long-term effect if education to drink in moderation takes place in an environment that overtly supports drinking. This includes a tax regime that makes alcohol beverages as cheap or cheaper than other beverages. Wagenaar and Perry (1994) suggest drinking youth are exposed to education for a short time but live in an environment that is pro-drinking for the rest of the time. As a result, effective efforts to reduce youth drinking and harm require a major focus on changing the environmental level factors that encourage early and immoderate alcohol use.

Education also requires a considerable ongoing investment in governmental resources to be appropriately designed and adequately delivered. Due to the constantly changing cohort of young people beginning drinking, it is resource-intensive.

Interventions aimed at assisting problem drinkers seen by alcohol and drug services, though necessary for humanitarian reasons, are resource intensive and a considerable added cost to burgeoning health services. There is some evidence of cost-benefit to overall health care costs where a comprehensive range of intervention and treatment services are made available (Edwards et al 1994). However for intervention and treatment services to be organised and implemented for maximum effectiveness they must be made more widely available such as through the justice system, child, youth and family services and in regions where specific services are already non-existent or sparse. If this strategy is relied on exclusively it would require extensive additional resources to develop the capacity of current services and establish new services to meet the demand. There would also be some people experiencing alcohol problems who would not be helped by a treatment system, however comprehensive, making exclusive reliance on treatment problematic.

In summary, alcohol problems and alcohol-related risk-taking behaviours are not just the actions of a group of definable high-risk individuals or actions that arise from distinct sets of defined behaviours. They are the cumulative interactions of complex social, cultural and economic factors. Individual targeting is not effective because drinking is a social behaviour, not just an individual consumer choice. Society is a dynamic system changing and adapting as new groups of young drinkers emerge; as

7 alcohol or tobacco marketing and promotion evolve; and as social and economic conditions, including employment and disposable income change. No single prevention strategy such as education programmes, no matter how well designed, can sustain its impact if system-level changes involving social structures, public policies, community norms and cultural modes of drinking remain unchanged. Alcohol taxation is one of the public policies that can be cost-effectively applied to prevent alcohol-related problems.

References

Alcohol Advisory Council (2001). National Alcohol Strategy 2001-2003. Wellington: Alcohol Advisory Council / Ministry of Health. Ashton, T., & Casswell, S. (1987). Alcohol taxation as a public health policy: The New Zealand experience. Community Health Studies, 11, 108-118. — (1989). Alcohol taxes: Do the poor pay more than the rich? British Journal of Addiction, 84, 759-766. Barker, F. (2000). Alcohol policy in New Zealand. Wellington: The Treasury. Bennett, S., & Coggan, C. (2000). Don't nag me! Young people's perspectives of risk taking and alcohol consumption. Auckland: Injury Prevention Research Centre. Casswell, S. (2000). A decade of community action research. Substance Use & Misuse, 35, 55-74. Casswell, S., & Bhatta, K. (2001). A decade of drinking: Ten-year trends in drinking patterns in Auckland, New Zeland, 1990-1999. Auckland: Alcohol & Public Health Research Unit. Casswell, S., & Zhang, J.-F. (1998). Impact of liking for advertising and brand allegiance on drinking and alcohol-related aggression: A longitudinal study. Addiction, 93, 1209-1217. Chaloupka, F., Grossman, M., & Saffer, H. (1998). Effects of price on the consequences of alcohol use and abuse. In M. Galanter (Ed.), Recent Developments in Alcoholism: Volume 14. The Consequences of Alcoholism. New York: Plenum Press. Coate, D., & Grossman, M. (1988). Effects of alcoholic beverage prices and legal drinking ages on youth alcohol use. Journal of Law and Economics, 31, 145- 171. Coggans, N., & Watson, J. (1995). Drug education: approaches, effectiveness and delivery. Drugs: Education, Prevention and Policy, 2, 211-224. Devlin, N., Scuffham, P., & Bunt, L. (1997). The social costs of alcohol abuse in New Zealand. Addiction, 92, 1491-1495. Edwards, G., Anderson, P., Babor, T. F., Casswell, S., Ferrence, R., Giesbrecht, N., Godfrey, C., Holder, H. D., Lemmens, P., Makela, K., Midanik, L. T., Nostrom, T., Osterberg, E., Romero, A., Room, R., Simpura, J., & Skog, O.-J. (1994). Alcohol Policy and the Public Good. Oxford: Oxford University Press. Erickson, P. (1997). Reducing the harm of adolescent substance use. Canadian Medical Association Journal, 156, 1397-1399. Fergusson, D., Horwood, L., & Lynskey, M. (1995). The prevalence and risk factors associated with abusive or hazardous alcohol consumption in 16 year olds. Addiction, 90, 935-946.

8 Fillmore, K. M., Hartka, E., Johnstone, B. M., Leino, E. V., Motoyoshi, M., & Temple, M. T. (1991). A meta-analysis of life course variation in drinking. British Journal of Addiction, 86, 1221-1288. Gerstein, D., & Green, L. (1993). Preventing Drug Abuse: What Do We Know? Washington, DC: National Academy Press. Grant, B. F., & Dawson, D. A. (1997). Age at onset of alcohol use and its association with DSM-IV alcohol abuse and dependence. Journal of Substance Abuse, 9, 103-110. Hall, T. (1996). The alcohol excise: The Treasury. Hill, L., & Casswell, S. (1999). Alcohol harm reduction: Research based advice for purchasing strategy on public health issues. Auckland: Alcohol & Public Health Research Unit. Hingson, R., McGovern, T., & Howland, J. e. a. (1996). Reducing alcohol impaired driving in Massachusetts: the Saving Lives Program. American Journal of Public Health, 86, 797-797. Hingson, R. W., Heeren, T., Jamanka, A., & Howland, J. (2000). Age of drinking onset and unintentional injury involvement after drinking. , 2000. Journal of the American Medical Association, 284, 1527-1533. Holder, H., Gruenewald, P., Ponicki, W., Treno, A., Grube, J., Saltz, R., Voas, R., Reynolds, R., Davis, J., Sanchez, L., Gaumont, G., & Roeper, P. (2000). Effect of community-based interventions on high-risk drinking and alcohol-related injuries. Journal of the American Medical Association, 284, 2341-2347. Holder, H. D., & Edwards, G. (1995). Alcohol and Public Policy: Evidence and issues: Oxford University Press. Laixuthai, A., & Chaloupka, F. (1993). Youth alcohol use and public policy. Contemporary Policy Issues, 11, 70-81. Mosher, J. (1996). Alcohol policy and the young adult: Establishing priorities, building partnerships, overcoming barriers, Alcohol Policy X Conference: Reducing Risks Among Young Adults. Toronto: Addiction Research Foundation. Pedersen, W., & Skrondal, A. (1998). Alcohol consumption debut: Predictors and consequences. Journal of Studies on Alcohol, 59, 32-43. Perry, C., Williams, C., & Veblen-Mortenson, S. e. a. (1996). Project Northland: outcomes of a community-wide alcohol use prevention during early adolescence. American Journal of Public Health, 86, 956-965. Samarasinghe, D. (1997). Reviewing prevention to plan for the future. Report of a research project: Swiss Federal Office of Public Health. Shanahan, P., & Hewitt, N. (1999). Developmental research for a National Alcohol Campaign. Canberra: Summary report to the Commonwealth Department of Health and Aged Care. Toomey, T. L., & Wagenaar, A. C. (1999). Policy options for prevention: The case of alcohol. Journal of Public Health Policy, 20, 192-213. Wagenaar, A. C., & Perry, C. L. (1994). Community strategies for the reduction of youth drinking: Theory and application. Journal of Research on Adolescence, 4, 319-345. Wette, H., Zhang, J. F., Berg, R., & Casswell, S. (1993). The Effect of Prices on Alcohol Consumption: New Zealand 1983-1991. Drug and Alcohol Review,, 12. White, D., & Pitts, M. (1998). Educating young people about drugs: a systematic review. Addiction, 93, 1475-1487.

9 Wyllie, A., Millard, M., & Zhang, J.-F. (1996). Drinking in New Zealand: A national survey, 1995. Auckland: Alcohol and Public Health Research Unit. Wysong, E., Aniskiewicz, R., & Wright, D. (1994). Truth and DARE: Tracking drug education to graduation and as symbolic politics. Social Problems, 41, 448- 472. Zhang, J.-F., & Casswell, S. (1999). The effects of real price and a change in the distribution system on alcohol consumption. Drug and Alcohol Review, 18, 371-378.

10