All Animals are Equal, but Some are more Equal Than Others in the Excise System

The principle that taxes should be equitable in nature is at the heart of every well-established tax system. It forms the basis of tax policy and plays a key role in any design or re-design of tax systems across the world. It is based on the understanding that the type of tax imposed should present an equal burden on all taxpayers in the same economic condition. A tax should therefore not favour one group over another, so that one of them receives a tax benefit at the expense of the other.

To paraphrase George Orwell's novel, Animal Farm, it should remove any risk of a situation developing where some taxpayers find themselves to be "more equal than others". In other words, the principled position would be to prevent, any signs of preferential or unequitable treatment that may find its way into the development of any given tax system.

But when it comes to the excise system as it pertains to the alcohol industry,  it would seem that a different set of rules is applied to ensure that some are most decidedly "more equal than others".

We have highlighted the distortionary nature of the excise tax framework as it currently exists. Our main argument has been that at its heart, an excise tax system should be based on the alcohol strength of the product. What should be strived for therefore, is a situation where all products are viewed through the same lens by the tax authority, with only their alcohol content being a differentiating factor.  This is not only to uphold this long-standing, egalitarian principle of tax, but also because there is something fundamentally rational about placing all alcohol beverages on an alcohol content-based excise system.

For one, given that ethanol consumption is the primary driver of the health, economic, and social consequences of excessive drinking, taxing alcoholic beverages based on ethanol content may be more effective in promoting health than taxing based on volume. To some extent, the taxation of alcohol content does play out in part in the South African excise tax system, where beer is taxed based on alcohol content, making its excise duty rate lower than that of spirits. This ensures that that beverages with lower alcohol content have a relatively lower tax burden compared to those with higher levels.  The problem though is that this is done only in part, and not equitably applied across all alcohol beverages. Here the resounding wise words of tax principles that form part of the greater past, but rightfully embedded into the present and more than likely into the future, beg the question: “Where is the equity in it all? And why has it been so aptly forgotten in the SA excise tax system?” The effect has been to reduce the effectiveness of the excise system where cheap alcohol with high alcohol content has become more accessible to heavy drinkers. The World Health Organisation has stated that: “It (is also recommended that) basing alcohol taxes on alcoholic strength…is not only sound public health policy but will also assist in improved epidemiologic monitoring.”

When the evidence on the harms from a particular ingredient are clear, taxation based on that ingredient will almost certainly produce better health outcomes given the incentives for consumers to switch to less harmful products and given the incentives for producers to reformulate their products in an effort to reduce the tax they pay. These supply-side responses we have already seen, following the government’s shift to a beer excise tax system based on ethanol content rather than on volume alone. Given the demand side and supply side responses, ingredient-based taxation has the most potential to produce better health outcomes in South Africa.

A system, which taxes alcohol products based on alcohol strength, is far more effective in improving health rates. Not least, because it is well known that drinkers can consume a greater volume of alcohol more quickly through stronger products. As a consequence, these products have been closely associated with heavy episodic drinking and intoxication. In some cases, the production and distribution costs of products with high alcohol contents may also be lower, with the unintended consequence being that they may be sold more cheaply than products with lower-alcohol levels.

Other countries are cognisant of these discrepancies, with many pushing for changes to their excise systems to level the playing fields and distortionary effects in their respective excise systems. A good example of this is the UK government, which on 1 August 2023, implemented a major restructure of its alcohol taxation system. Its previous system, had many flaws, in in particular that wine and ciders were not on an alcohol content-based system, creating three times more duty rates in the system than the current one.  The structure of various duties under the old system also varied across, and often within categories. This often resulted in different products at the same alcoholic strength being taxed at significantly different rates. There was broad consensus that the system needed to be reformed and simplified. The governing principle of the current UK excise tax system is that stronger products (with a higher alcohol content) will pay a higher rate of alcohol duty. It made little “tax sense” to have favourites when the intention was to ensure a rational excise tax system that achieved its main objectives effectively.

There is something fundamentally rational about placing all alcohol beverages on an alcohol content-based excise system. This all begs the question then, does preferential treatment belong in the excise policy on alcohol beverages? The answer is no.  Rather, it is essential and fair that the long-standing tax principle of equity should prevail. All indications are that the correct path is to tax all alcohol beverages on an alcohol-content based excise system, where South Africa has a clear opportunity to have a system that is in line with international best practice, as well as the ambitions of global health organisations.

Fatsani Banda is the Senior Excise Tax and Public Policy Manager at SA Breweries