Tax on wine in BC: What kind should it be?

With the delivery of Parliamentary Secretary John Yap’s report on the BC Liquor Policy Review last week to Attorney General Suzanne Anton, it’s a good time to reflect on one of the hotter issues that emerged from the stakeholder (but definitely not public!) consultation. 

The words “taxes” and “hot” don’t usually go together – nor should they – so I’ll attempt to keep it short, clear and very general.[1] It is striking that within the BC wine industry there emerged two polarised views of what the tax structure should look like.  What we have today is an ad valorem tax structure, where provincial (PST) and federal (GST) value added taxes are levied on the price of the bottle (expressed as a percentage of the price).  In addition, the Liquor Distribution Branch applies a markup which operates on a sliding scale (presently 117% on imported wine – BC VQA wine is exempt through certain sales channels).

An alternate model advanced by various interests is a so-called flat tax, usually based on alcohol content.  This is more akin to an excise tax, which doesn’t vary with the price.  Excise taxes may be expressed as a dollar value per alcohol content, and are “flat” with respect to the end price paid by the consumer.  A tax on the proportion of alcohol in a bottle of wine may be appropriately called a “sin tax” in that it directly places a monetary value on the social cost of alcoholic beverages from a public health and safety perspective.  In some places, revenues raised from such a tax are designated as special purpose revenues, and go toward measures or programs that mitigate harm (e.g. awareness/reduction campaigns about drinking and driving) rather than general revenue.

The debate within the industry between the two tax models is intense because it can make a difference in consumer behaviour, and therefore revenue to the producer or importer.  For illustration purposes only, the table below compares – in very general terms – the effects of the two types of tax at varying price levels, and demonstrates what can happen as the price of a bottle of wine increases.

Table 1: Price Effects of Ad Valorem vs. Flat Taxes[2]

Wholesale Price Ad valorem

(10% PST on alcohol)

Resulting Retail Price Flat tax

($2.00 on table wine)

Resulting Retail Price $10.00 $1.00 $11.00 $2.00 $12.00 $15.00 $1.50 $16.50 $2.00 $17.00 $20.00 $2.00 $22.00 $2.00 $22.00 $25.00 $2.50 $27.50 $2.00 $27.00 $30.00 $3.00 $33.00 $2.00 $32.00 $35.00 $3.50 $38.50 $2.00 $37.00 $40.00 $4.00 $44.00 $2.00 $42.00 $45.00 $4.50 $49.50 $2.00 $47.00 $50.00 $5.00 $55.00 $2.00 $52.00

The simple table above reflects the conventional wisdom of what happens to prices between flat taxes and value added taxes: under a pure flat tax model, cheaper bottles become pricier, and under a value added tax, higher priced bottles are more expensive.  Flat taxes are generally described as regressive for this reason: they represent a higher proportion of the total price at lower levels, tend to discriminate on the basis of income levels, and therefore influence consumer behaviour.

Unsurprisingly, where you stand depends on where you sit.  Those producers, suppliers and retailers who sell larger volumes of lower priced wines tend to be in favour of a value added model, as it adds less to their products.  Those producers, suppliers and restaurants who serve and sell a larger share of higher priced wines tend to be in favour of a flat tax. In their (publicly available) recent submissions to the BC Liquor Policy Review, the BC Wine Institute reflected the interests of its members by making the case for the existing value added/ad valorem tax structure, and the Canadian Restaurant and Foodservices Association made the opposite case for a flat tax, as this is in the broad interest of its members. Some BC wineries who aim for a premium market are also in favour of a flat tax.

Who is right, and what should the system look like?  First, in the real world, it is nearly impossible to determine the consumer behaviour effect due to the tangle of federal/provincial taxes and LDB markups – beyond the obvious face-value maximum price point that a given consumer is willing to bear. Second, wine is what economists typically call a “snob good” (yes, that’s really a technical term), because its perceived luxury qualities can actually encourage sales at higher price points.

The best solution is likely a system that is based on a flat tax, but which mitigates the regressive effects at lower price points.  The CRFA’s proposal is of interest, as it combines a flat tax with a revised discount structure (for both on-premise and licenced retail stores)[3].  An alternative way to address the regressive effect of a flat tax is to bring the concept of Social Reference Pricing into the discussion.  SRP is deployed in British Columbia to ensure that minimum prices are set to avoid extremely low retail prices, to discourage alcohol abuse.  Since a flat tax essentially raises minimum price levels, it could serve the same purpose as SRP, while simplifying the tax system, avoiding penalising producers of premium wines, and increasing price transparency for consumers.

In whatever form, taxes on wine clearly have a public policy and revenue-raising role, and won’t be going anywhere soon.  Prices for some BC wines appear to be reaching the threshold of tolerance by consumers (evidenced by quarterly LDB sales data and other sources). But this is a supply/demand matter between producers and their customers, not for the tax system to influence – which it presently does under the ad valorem tax structure.

-Karen Graham

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[1] The tax and markup structure on wine in BC is complex – any errors or omissions are mine.

[2] Lots of caveats here: this is NOT meant to model the real-world taxation and LDB markup structure in BC.  The provincial sales tax on alcohol is 10%; federal GST of 5% is omitted. For the sake of argument, a $2.00 flat tax per bottle of table wine (ranging from 8-14% alcohol by volume) is used.  For a good sense of the effects of the LDB tax and markup structure on imported wine to BC, plug various retail or wholesale prices into Mark Hicken’s Wine Marketing Wine Retail Calculator, found here.

[3] The wholesale discount quagmire is beyond the scope here, but it has a price effect that is presently un-level across wholesale categories, and is not transparent to the consumer.