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10/1/2008
The impact of increased wine tax on wine grape growers
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CONSIDERING THE FULL IMPACT ON THE COMMUNITY OF AN INCREASE IN WINE TAX
Recent calls to the Government for a sharp increase in wine tax levels as a means of tackling alcohol abuse in the community, have focused on a shift from the current ad valorem tax regime on wine to a volumetric (or excise) tax method, with a substantial increase in wine tax levels to bring wine taxation in line with the levels of tax applied to beer.
WGGA emphasizes that the Australian wine grape sector is concerned with abusive consumption of alcohol, but supports targeted measures to address this problem within the at-risk sectors of the community, rather than blanket wine tax measures that disadvantage the whole community, and particularly impact on the wine grape growing and winemaking community.
WGGA, as the peak industry body representing Australia’s 7500 wine grape growers, reiterates the points made to the Government in the recent joint letter from WGGA and Winemakers Federation of Australia:
There is no evidence that wine consumption is significantly implicated in the problems of alcohol abuse within the Australian community – in particular in the primary focus area of underage binge drinking. Wine is predominantly consumed with food and in moderation – meaning the nature and pattern of wine consumption differs significantly from other alcoholic beverages. Use of wine taxation as a blunt instrument to alter community consumption patterns is not proven to be effective against abusive use of alcoholic beverages in Australia or overseas, but would penalize the overwhelming majority of wine consumers who consume wine in moderation. Calls to implement sharp increases in wine taxation ignore the fact the 25% of the cost of an average bottle of wine is already contributed as tax – at an annual level of over $800 million. Most importantly, calls for sharp increases in wine taxation ignore the fact that wine is an agricultural product on which 7500 wine grape growers, 2600 winemakers, and 60,000 direct and indirect employees rely for their livelihoods – spread across 65 regions of Australia. Any wine tax increase would have a deep impact on one of Australia’s key primary industries and on the prosperity of rural Australia.Therefore, WGGA submits that the Government should not consider increases in wine taxation or a change in the method by which wine tax is applied without a full and factual public inquiry into the impact of any increase in wine tax levels on growers, winemakers, industry and associated sector employees and the many regional communities which rely on the jobs and economic activity generated by the wine industry.
A VOLUMETRIC TAX (OR EXCISE) ON WINE – WHAT IMPACT ON THE GROWER SECTOR
A change in the taxation of wine to a tax on the volume of alcohol, rated similarly to the beer excise rate, would have the immediate effect of doubling the price of wine casks.
Wine cask (or softpack) consumption of wine in Australia in containers of 2 litres or larger accounts for 39% of Australian domestic wine consumption or 178 million litres (at June 2007). Wine cask production utilizes 250,000 tonnes of grapes a year, harvested from the equivalent of 12,500 hectares of vineyard, predominantly located in the Riverland (SA), Murray Valley (Vic & NSW) and Riverina (NSW) wine regions – the ‘Inland’ regions. The Inland regions are the production heartland of the Australian wine industry where 3200 wine grape growers or 42% of the national grower community live - producing the grapes for 64% of Australia’s annual wine production (2007).
Another 3000 people are directly employed in these regional vineyards, and many thousands more in regional businesses reliant on the wine grape and wine sectors.
Cask wine production utilizes 27% of the Inland region wine grape production valued at $87 million at farm gate and over $500 million of economic activity when the value of that grower revenue is multiplied within the community. The value of the vineyard infrastructure utilised in wine grape production for wine casks is $312 million.A doubling of the cost of wine casks would decimate the wine grape industry in the Inland regions through an immediate crash in the level of cask wine sales. The ‘ripple effect’ of this would flow on to the whole industry:
Causing an immediate collapse of Inland grape prices flowing from a sharp drop in demand from wineries, as they seek to quit existing wine stocks previously destined for the cask market. Driving the industry into chronic oversupply of both wine grapes and wine, which will negatively impact the economic viability of wine grape growers and winemakers in all regions, as the flood of excess wine stocks undermines the price of wine grapes in other regions and undermines wine prices on the domestic market. Undermining the profitability of Australia’s existing wine export markets (worth a total of $3 billion annually) through the consequent flood of excess wine stocks and lower priced bulk wine onto export markets. The main impact would be felt by the popular premium bottled wine segment which accounts for 80% of Australia’s wine exports, and is also predominantly sourced from Inland region wine grapes.KICKING GROWERS WHILE THEY’RE DOWN
A large number of Australia’s wine grape growers are currently struggling with serious dual economic challenges.
Grower revenues have already suffered wine grape prices at or below costs of production over the last 4 years or more. Drought has already had a serious impact on Inland growers and others who relay on water from the Murray through limited irrigation water allocations over the last 2 years – sharply reducing vineyard yields and grower incomes; increasing the financial outlays for the purchase of additional water; and eroding the longer term health and production capacity of drought affected vines.The effect of any increase in tax levels that negatively impacts on the demand for grapes and wine grape prices from wineries would exacerbate these serious existing challenges to vineyard businesses.
The combination of low wine grape prices and the impact of drought mean many growers are already on the very edge of viability.
A 2002 economic impact study of wine grape growers in the Riverina showed 50% of growers at immediate risk of financial failure and a further 25% at intermediate risk, without a sustained improvement in grape prices and grower revenues. A sustained improvement in grape prices has not since materialized. A 2007 socio-economic study of the Riverland region has reported that the impact of low prices and drought on wine grape and citrus production saw a decline of $73 million in gross revenue in 2006/2007 compared with 2004/2005. A similar study in the Murray Valley showed $122 million in lost horticultural industry revenue to that region in the last financial year. In the last irrigation season (to February 2008) Murray Valley and Riverland growers spent in excess of $75 million to purchase additional irrigation water to secure their vineyard income – largely through loan finance. It is estimated that Riverland grape growers alone spent more than half their previous 12 months gross income to purchase water prior to the 2008 vintage. There are now serious doubts being expressed by regional grower groups as to whether a significant proportion of their grower communities will either be able to access loan finance or have the capacity to service additional debt to cover water purchases this year, with the Riverland and Murray Valley once again facing critically low water allocations ahead of the 2009 vintage.WGGA estimates up to 1000 growers in Inland regions remain at immediate risk of financial failure, with a further 1000 at intermediate risk – representing 30% of Inland growers severely impacted by the recent wine grape price downturn and now the compounding effects of the drought.
A move to increase wine tax – particularly through a change to volumetric taxation that would impact most heavily on the wine cask market - would decimate Australia’s wine grape sector; impacting most heavily on the wine grape growing communities and regional economies of the Riverland, Murray Valley and Riverina. However, no wine grape grower or winemaker will be immune from the downturn that would be precipitated in the Australian wine industry by any decision to increase the level of tax on wine.
AUSTRALIA’S WINE GRAPE GROWERS ASK THAT THE RUDD GOVERNMENT:
NOT INCREASE THE LEVEL OF TAX ON WINE. NOT ALTER THE METHOD OF APPLYING TAX TO WINE FROM THE CURRENT AD VALOREM SYSTEM TO A VOLUMETRIC TAX SYSTEM. NOT CONSIDER ANY FUTURE AMENDMENT TO THE SYSTEM OF WINE TAXATION WITHOUT A PUBLIC INQUIRY INTO THE IMPACT ON GROWERS, WINEMAKERS AND REGIONAL ECONOMIES.
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