E LAW - MURDOCH UNIVERSITY ELECTRONIC JOURNAL OF LAW
VOLUME 1 NUMBER 4 (DECEMBER 1994)
Copyright E Law and/or authors

Review of Western Australian State Taxes 1994
Chapter 3 ALCOHOL TAXATION

Introduction
Equity
Efficiency
Simplicity
The Social Costs of Excess Alcohol Consumption
Effectiveness of Present Regulation
Conclusion
Summary of Recommendations
Bibliography

INTRODUCTION

Alcohol is the most widely used drug in Australian Society. The
overwhelming majority of the adult population have tried alcohol and the
majority regularly consume it. Consumed in moderation, alcohol has few
health consequences and some studies have even shown that small amounts may
be beneficial.[1]The seriousness of the problem is such a concern because of
the amount of alcohol that the "Australian Population" consumes. Australia
is in the top ten countries in the world for beer consumption per capita
and the top fifteen for general consumption of alcohol.[2] The repercussions
from this are seen in the amount of alcohol-related problems that are
prevalent in Australian society. These range from general health problems
through to social problems such as domestic violence, marital breakdown and
industrial accidents.How does society cover these extensive costs which
arise from the use and abuse of alcohol? They are mainly covered by
government funding, both State and Federal. That funding in turn depends on
taxation revenue. We will focus on the taxation of alcohol sales
themselves.

Alcohol is taxed at two levels. At the Federal level there is an excise
duty imposed on alcohol. This is a tax on the production of alcohol within
exclusive Commonwealth power pursuant to Section 90 of the Commonwealth
Constitution. These excise taxes are levied on brewing and distilling
companies. Such taxes are in reality, passed on to consumers. The federal
government also imposes a customs duty and a sales tax.

For our purpose the second level of taxation, namely at the state level, is
of prime concern. The state manages to impose a tax on alcohol in an
indirect manner. The indirect tax is in the form of a Business Franchise
License Fee. Business Franchise License Fees are imposed on the alcohol
industry by the Liquor Licensing Act (W.A.) (1988).

These fees are levied on the wholesalers and retailers in the industry.
They must obtain a license before they are permitted to sell alcohol. Is
this fee a tax? In the case of Ryan v Clayton,[3] Justice Pring held that
fees which are payable in respect of licenses are taxes.However, the fee
raised seems to be somewhat more than a mere injection into a consolidated
fund. The Act also addresses the social issues associated with alcohol
which have been outlined above and which will be discussed in more detail
below. According to section 5 of the Act the purpose of the Act is:(a) to
regulate, and to contribute to the proper development of the liquor,
hospitality and related industries in the state;

(b) to cater for the requirements of the tourism industry;

(c) to facilitate the use and development of license facilities reflecting
a diversity of consumer demand;

(d) to provide adequate controls over, and over the persona directly or
indirectly involved in, the sale, disposal and consumption of liquor; and

(e) to provide a flexible system with as little formality or technicality
as may be practicable, for the administration of this Act.

License fees are provided for under Part 5 (Financial Provisions) of the
Liquor Licensing Act. The fee is determined under section 128 by the
Director of Liquor Licensing on the test of "what the director thinks
proper and reasonable in the circumstances."

From the words of section 128, the director has a wide discretion to fix
the amount of the fee. However, there are some considerations which must be
taken into account when determining initial license fees. Under section
129, the director has to take into account such factors as the size and
location of the premises, the nature and scale of the business, the class
of license and other relevant considerations. The fee is then assessed
under section 129(4) by reference to a notional, or imaginary, continuous
trading period of 12 months before the application.

The director is limited in determining license fees which are for periods
after the initial license fee period by section 132. Under section 132 the
fee which is to be assessed, in respect of a producers or wholesalers
licence, is 11% of the gross amount paid, or payable, to the licensee for
full strength alcohol, and 7% for lower alcohol liquor. Section 134(1)(a),
with reference to section 4 of the Act, requires that the director, in
evaluating the gross amount paid for liquor by a licensee must take into
account federal excises and state taxes.

It is interesting to note here that wine, full strength beer and spirits
are taxed at the same rate, all three types of alcohol coming within the
section 3(1) definition of liquor. The only distinction made is for low
alcohol liquor.

The Liquor Licensing Act operates on a two tier basis.

(1) There are extensive measures to regulate all alcohol related activities
and in this regard the Act operates to regulate community welfare.

(2) There is a large base by which the State Government can raise revenue.

We now turn to a policy analysis of this under the heads of equity,
efficiency, and simplicity. These are the criteria which have traditionally
been considered to characterise an optimal tax.

Equity is satisfied when a burden of a tax is distributed fairly and justly
among all the members of the society. A tax is efficient if its collection
results in a minimum of unintended distortions in the allocation of scarce
resources. Finally simplicity concerns the administrative ease with which a
tax can be understood and complied with by taxpayers, and administered by
the government.[4] In reality, however, few taxes satisfy all (or even any)
of the tests.

EQUITY

Equity takes two forms. Horizontal equity requires that equals pay equally,
whereas vertical equity demands that those with a greater ability to pay
should pay more.[5] Assuming they are passed on to consumers, liquor license
fees are only paid by those who purchase alcohol, and the rate of tax does
not vary in accordance with level of consumption or capacity to pay. In
terms of equity then, the tax is not optimal. That is, as total wealth
decreases the alcohol consumer will pay a greater proportion of that wealth
in tax.[6]However, as far as horizontal equity is concerned there is another
factor to be taken into account - only drinkers pay the tax. Furthermore,
if a tax is intended to compensate for negative externalities, such as
health problems and property damage, caused by misuse, it would be unfair
to have all consumers pay for the loss caused by others.[7] Those who consume
more alcohol tend to produce more problems of this kind. At least it is
they who pay more of this tax in absolute terms.[8]

EFFICIENCY

Demand for alcohol tends to be inelastic. Small increases in prices will
not effect demand for the good.[9] This overall inelasticity can be explained
by the addictive nature of alcohol. In the face of significant price rises,
consumers will opt not to stop drinking but will instead tend to purchase
cheaper alcoholic beverages. What is more, elasticities between products do
differ and therefore taxation can affect product choices causing further
misallocation. Beer and wine are equally sensitive to price changes (the
price elasticity being -.4). Spirits are much more sensitive to the
imposition of a tax (the price elasticity is -1.1). Beer and wine could be
taxed approximately three times more heavily than spirits without affecting
demand.

SIMPLICITY

The fee seems to satisfy the criterion of simplicity since its imposition
only requires the submission of records of sale which are then cross
referenced to producers and wholesalers. It is a fairly straightforward
process to apply the accepted flat rates to the wholesale price of the
goods concerned. Furthermore, the fewer collection points a tax has the
better. Here however the simplicity involved in a purely wholesale tax is
reduced by collection at the retail point of sale, albeit on past sales,
creating numerous collection points.

The administration to support tax collection and control under the present
system requires significant resources. Firstly the cumbersome way in which
the notional first year of trading is assessed leads to vague assessments
and often litigation. In addition, records may often need to be checked by
officers of the court.

THE SOCIAL COSTS OF EXCESS ALCOHOL CONSUMPTION

The social costs of alcohol essentially arise not from the consumption of
alcohol itself but from excessive drinking. Accordingly, it is subset of
the drinking population that gives rise to the costs. However, often these
costs are not only inflicted upon the consumer, but upon other innocent
parties and society as a whole.

The major social problems associated with the misuse of alcohol can be
summarised under the following three headings.[10]1) The damages to persons
and property associations with drink driving: In 1992, the influence of
alcohol represented the single most important contributing factor in fatal
road crashes in Australia. 32 per cent of fatal crashes involved a driver,
rider or pedestrian who had been drinking alcohol. Approximately one in
four (27 per cent) of fatal crashes involved a driver, rider or pedestrian
with a blood alcohol content over the 0.08 per cent level. Nearly one in
every three people killed (29 per cent) on Western Australian roads in 1992
died in a crash where alcohol was involved.[11] 2) The damages associated
with behaviour under the influence of alcohol in places other than roads:
Reports indicate that a high number of assaults, bodily damage and general
complaints reported to the police are alcohol related. As many as 72 per
cent of assaults,[12] 86 per cent of homicide offences[13] and 50 percent of
sex offences[14] are committed under the influence of alcohol. As many as 62
per cent of offences investigated by the police are classed as alcohol
related.[15] The costs to society in terms of pain, suffering, loss of life
and the increased burden placed on the legal system are massive.3) The
costs of drug dependence arising from the poor health of the drinker: Many
health problems have been linked to the misuse of alcohol. These vary from
high blood pressure and increases in body weight to strokes, cirrhosis of
the liver and psycho-social problems that arise from alcoholism and drug
dependence. The cost to society is once again considerable. It is estimated
that in 1989, 6 800 people died in Australia due to the effects of alcohol,
representing six per cent of all deaths.[16] A 1990 study estimated that the
annual economic cost associated with alcohol abuse during 1988 was greater
than $6 000 million; $3 245 million in tangible costs such as health care
or loss of production, and $2 782 million in intangible costs such as loss
of life and human suffering.[17]In analysing the types of costs of
consumption various economic notions have been employed.[18]The first is that
of externalities; that is, costs imposed unwillingly on non-consumers.
Examples here include the result of alcohol related assault or drink
driving. The effects of alcohol abuse can clearly be seen as negative
externalities.Another economic consideration is that the consumers in the
market for alcohol do not possess perfect information. This "paternalistic
view" suggests that drinkers are either unaware or have misconceptions as
to the costs of consumption to their own health and to those around them.
Those who subscribe to this theory cite it to support restrictions on the
availability of alcohol and, presumably, better education for drinkers.

The concept of negative demerit goods has also been relied upon. Demerit
goods are those for which the societal evaluation of the goods is lower
than that of the individuals who consume them. In other words, while the
individual derives some benefit from consumption, society as a whole
disapproves of the level of consumption which results.

Finally, the notion of consumer irrationality due to addiction must be
considered. Economists have suggested that the addict's behaviour is
irrational in that a long run utility function does not exist to explain
the long run demand function of the heavy consumer. Coupled with the notion
of misinformation, it may be said that increased consumer awareness of the
possibility and consequences of addiction could lead to consumers modifying
their consumption patterns.

EFFECTIVENESS OF PRESENT REGULATION

Having identified the social costs of alcohol, let us examine the way in
which the Liquor Licensing Act seeks to address these problems. Section 5
states that the Act aims to provide adequate controls over the sale,
disposal and consumption of liquor. Although the ensuing sections regulate
consumption in the sense that liquor can only be purchased in certain
places at certain times and purchases by juveniles are banned, misuse is
not directly addressed. Nor are these provisions related to the taxing
provisions of the Act.

Furthermore, it must be noted that there is no provision in the Act
specifically earmarking revenue raised from the tax for educational
projects, alcohol abuse centres or other schemes that exist to deal with
the social costs of drinking. The Health Department of W.A. produces the
"Drinksafe" campaign and in conjunction with other states and the Federal
Government runs the National Drug Offensive. Through Health Department
funding, the Western Australian Alcohol and Drug Authority, the Alcohol
Advisory Council of W.A. and other government grants and subsidies,
considerable public funds are spent on this problem. It can therefore be
said that despite the fact there is no earmarking, there is still some
indirect link between revenue raised from liquor tax and money spent
addressing the social problems caused by alcohol. Put quite simply, the
liquor tax is an excellent revenue raiser and contributes significantly to
the consolidated revenue fund. If the tax did not exist then such funding
would have to either come from somewhere else or be reduced. Having said
this, it must also be concluded that as a piece of legislation, it is
dubious whether the Act has the social costs of alcohol as its underlying
purpose.

This raises the question whether it is possible for a tax on alcohol to be
an effective instrument in controlling the social problems associated with
alcohol consumption.

Consider, for example, an alcohol tax designed to reduce the damage done to
the health of those individuals who over consume alcoholic beverages. In
principle, the socially optimal level of alcohol consumption can be
achieved by a tax based upon the alcohol content of the particular beverage
that is being consumed.

But in practice such a tax is less than perfect as a control. It
unrealistically assumes that each consumer places the same value on their
health. Furthermore it requires that the government is aware of how alcohol
consumption affects each consumer's health. Such personal data are not
available to our government.

How effective is the current system of alcohol taxation in reducing the
social problems associated with the over consumption of alcohol? If it were
effective, one would expect taxation to reduce the aggregate consumption of
alcohol. However, in Australia there is little empirical evidence that this
is what actually occurs.[19]Even if aggregate consumption were reduced this
would not necessarily lead to the conclusion that alcohol related problems
have correspondingly been reduced. In fact, only those who are not
responsible for any of these problems may have reduced their consumption.
The result would be a decrease in the welfare of society as a whole - those
who do not cause problems no longer enjoy a socially acceptable level of
consumption, while those who are responsible for the problems to be so.

How effective taxation is in reducing such problems as personal assault or
domestic violence? Even when one assumes that specific individuals who over
consume can be taxed heavily, this would not necessarily mean that these
problems will disappear. The reasons that cause any particular individual
to be violent are bound to extend beyond the consumption of alcohol. The
environment, pressures etc that they are subjected to contribute to these
problems significantly. Given the inelasticity of demand for alcohol
products, greater tax levels may actually exacerbate the financial
pressures produced by alcohol abuse and lead to an increase in domestic
pressures.

What alternatives to taxation exist for our government as effective
instruments to combat social problems that are alcohol related?

The restriction of licensing hours has been effective in doing this in some
rural areas. This has been attributed to the fact that those residing in
these communities purchase the family necessities before they have an
opportunity to indulge in the consumption of alcohol. In such communities
this may be the answer, however where the community is somewhat larger and
private consumption is a common occurrence one can see how ineffective
restriction of licensing hours might be.

Some may suggest more drastic solutions, such as rationing and prohibition
for what they perceive to be a drastic problem. The political
unacceptability and the costs of enforcement of such measures somewhat
preclude their implementation. One only has to look at the social problems
that dominated the 1930's in America to dismiss prohibition as an
acceptable solution.

CONCLUSION

Ultimately, taxation is too blunt an instrument to effect the government's
desired objective of reducing alcohol related social problems. No one
measure can effectively combat such a variety of problems. However,
implementation of other measures is necessarily going to require government
funding and we would suggest that this is the most appropriate objective
that can be attached to the taxation of alcohol. However, the tax may be
deemed appropriate as a revenue raiser given the redirection of a portion
of the revenue raised to addressing the social costs of alcohol.

RECOMMENDATIONS

We would suggest that the following reforms may substantially assist in the
prevention of alcohol-related social problems:

* Mandatory re-education programs for persons convicted of alcohol related
offences;

* More severe penalties and an increase in public expenditure on the
detection of drink drivers. Statistics indicate that steps taken by the
government in the past in this regard have had a marked effect on the level
of road traffic deaths due to alcohol;

-of 3730 road traffic deaths in 1978, 50% were due to alcohol;

-of 2933 road traffic deaths in 1985, 40% were due to alcohol;

-of 2888 road traffic deaths in 1988, 31% were due to alcohol;[20]* Stricter
policing of licensees who sell alcohol to already drunk patrons. This is a
section of the Act which appears to be flaunted by most publicans;*
Improvements in law and court procedures which make common law actions
available to a large number of injured parties;* Education as to
information about the incidence, causes and costs of alcohol-related
problems.

BIBLIOGRAPHY

CLEMENTS, K.W. "The Economics of Drinking and Smoking" (1993) May Economic
Research Centre, Department of Economics, The University of Western
Australia, pp1-15. (This text was useful for considering the specific
aspects of how elasticities are relevant to the demand for alcohol.)

LLOYD, P.J. "The Economics of Regulation of Alcohol Distribution and
Consumption in Victoria" 1985 1st Quarter The Australian Economic Review
16. (This reference was particularly useful for the underlying
considerations of the negative externalities flowing from alcohol misuse.)

O'HAGAN, J.W. "The System of Taxing Alcohol: Some Issues" British Tax
Review 171. (This reference was useful in considering the differing affects
of ad valorem and specific tax rates on alcohol.)

COMMITTEE FOR ECONOMIC DEVELOPMENT IN AUSTRALIA, "Tax Reform in Australia:
A Business Perspective on Problems, Progress and Prospects", CEDA
publications, (1990) July. (This reference considered general concerns of
business to tax reform but was only relevant to the aspect of tax policy
criteria.)

WARREN, N. The Distributional Impact of a Change in the Tax Mix in
Australia, Australian Tax Research Foundation, Sydney, 1987. (Useful
general underlying concerns for policy issues and how a tax mix can be
useful to the development of an optimal tax system.)

BAUMOL, W.J. & BLINDER, A.S. Economics: Principles and Policies, Harcourt
Brace Jovanovich, Sydney, 1988. (Useful for considerations of externalities
and economic analysis of demand.)

JACKSON, J. Economics (2nd ed), McGraw-Hill Book Company, Sydney, 1980.
(This text gave particular insight into the application of elasticities of
demand and excise taxes.)

CHAN, S. Road Crashes in Western Australia 1992: The Statistics. Traffic
Board of Western Australia. (Helpful for Statistics.)

THOMMENY, J. "The Crime Cocktail: Licensed Premises, Alcohol and Street
Offences" in (1993) 12 Drug and Alcohol Review 143. (Helpful for
Statistics.)

HOLLIS, W.S. "On the Ethology of Criminal Homicides - the Alcohol Factor"
(1974) 2 Journal of Political Science Administration 50. (Used only for
statistics - the figures are now somewhat dated.)

AMIR, M. Patterns in Forcible Rape University of Chicago Press, 1971. (Used
only for statistics - the figures are now somewhat dated.)

ALCOHOL: THE FACTS, The Drug Offensive Australian Publishing Service,
Canberra 1992.

(An excellent source of current Australian statistics, especially given
that state figures were very difficult to find.)

Notes:

[1] The Bulletin, August 24 1993 at p.33.

[2] The West Australian, February 28, 1992.

[3] 20 SR (NSW) 524 at 528.

[4] Committee for Economic Development in Australia. "Tax Reform in
Australia: A Business Perspective on Problems, Progress and Prospects",
CEDA publications, (1990) July.

[5] Warren, N. "The Distributional Impact of a Change in the Tax Mix in
Australia", Australian Tax Research Foundation, Sydney, 1987 at p.11.

[6] Jackson, J. "Economics" (2nd ed), McGraw-Hill Book Company, Sydney, 1980
at p.114.

[7] Baumol, WJ & Blinder, AS. "Economics: Principles and Policies", Harcourt
Brace Jovanovich, Sydney, 988 at 634.

[8] Lloyd PJ. "The Economics of Regulation of Alcohol Distribution and
Consumption in Victoria" 1985 1st Quarter The Australian Economic Review 16
at p.18.

[9] Clements, K.W. "The Economics of Drinking and Smoking" in (1993) May
Economic Research Centre, Department of Economics, The University of
Western Australia, pp1-15 at p.8.

[10] Supra note 8, at page 22.

[11] Chan,S. Road Crashes in Western Australia 1992 The Statistics. Traffic
Board of Western Australia at p.33.

[12] Thommeny, J. `The Crime Cocktail: Licensed Premises, Alcohol and Street
Offences' in (1993) 12 Drug and Alcohol Review 143.

[13] Hollis, W.S. `On the Ethology of Criminal Homicides - the Alcohol
Factor' (1974) 2 Journal of Political Science Administration 50-53.

[14] Amir M. `Patterns in Forcible Rape' University of Chicago Press, 1971.

[15] Supra n.11.

[16] Alcohol The Facts, The Drug Offensive Australian Publishing Service,
Canberra 1992.

[17] Ibid.

[18] Supra n.9.

[19] Ibid.

[20] Supra n 11.