Australia's Future Tax System

Consultation Paper Summary

11. Taxes on specific goods and services

Overview

In addition to the broad‑based GST, there is also a range of consumption or other indirect taxes levied on narrow bases, including excise collected by the Australian Government, and other taxes collected by the States. Products subject to these narrow‑base taxes, are taxed relatively more heavily than other consumption goods.

The decision whether to tax some consumption goods more highly than others, and the optimal design of a particular tax, depends on the policy objective it is trying to achieve.

The current tax arrangements for beer, wine, spirits, tobacco and luxury cars reflect a range of competing policy goals. They exist in the context of other forms of regulation and the broader tax‑transfer system.

Consultation questions

Q11.1 Is it appropriate to use taxes on specific goods or services to influence individual consumption choices, and if so, what principles can be applied in designing the structure and rates of such taxes?

Q11.2 Can the competing potential objectives of alcohol taxation, including revenue raising, health policy and industry assistance, be resolved? What does this mean for the decision to tax alcohol more than other commodities?

Q11.3 What is the appropriate specific goal of taxing tobacco? Is it necessary to change the structure or rate of tobacco taxes?

Q11.4 If health and other social costs represent the principal rationale for specific taxes on alcohol and tobacco, is any purpose served in retaining duty free concessions for passenger importation of these items?

Q11.5 Are taxes on specific 'luxury' goods an effective way of making the tax system more progressive? If so, what principles should apply to the design and coverage of these taxes?

Q11.6 Should the tax system have a role in influencing the relative prices of different types of cars, including luxury cars and higher polluting cars, and if so, on what basis? What does this mean for taxes on the purchase price of motor vehicles?

Key messages in submissions

In relation to alcohol, many submissions are concerned with the complexity of the existing tax structure, arguing that current arrangements reflect compromises between raising revenue, protecting domestic industry and improving public health. There is some support for reform based on an evidence and principle‑based, alcohol taxation regime.

The health sector notes the significant health problems associated with alcohol abuse, and regards tax as a way of reducing overall consumption and the associated harms. Industry groups stress that harms from alcohol depend on how it is consumed. They argue that programs aimed at specific groups or behaviours are a better option.

Submissions concerned with public health argue that the basis of alcohol taxation should be the alcohol content (and possibly strength) of the beverage — 'volumetric taxation'. In addition, one health public advocate suggests a 'floor price' for alcohol sales. Some submissions note that the current regime violates these principles, for example beer in kegs is more lightly taxed than other beer. One submission notes that 96 per cent of wineries do not bear any wine equalisation tax, on account of a policy to support small producers.

Industry submissions suggest that a revenue‑neutral shift to volumetric taxation would decrease the price of spirits and increase the price of cheap wine. Some submissions oppose volumetric taxation, on the basis that consuming low‑strength alcohol is less risky than consuming high‑strength products, or on the basis that it would allow the introduction of new products that could not then be addressed through specific taxes.

In relation to tobacco, the health sector supports increasing taxes by around $0.075 per stick as an important means of reducing tobacco use and its associated health impacts. It also recommends the abolition of duty‑free tobacco.

The tobacco industry argues that the current regime of tobacco taxation provides certainty for industry, consumers and government, while helping to control tobacco use and providing government with a significant and stable revenue stream.

Both the health sector and the industry acknowledge that higher taxes on tobacco would increase incentives for illicit trade in untaxed tobacco. The health sector believes that tighter regulation and enforcement would be necessary. The industry believes that the risk of more illicit trade is an argument against increasing tobacco taxes.

Motor industry submissions generally support abolition of the luxury car tax (LCT) and, as a fallback, argue that the threshold should be increased to at least $70,000. Other industry submissions argue that the increase in the LCT announced in the 2008‑09 Budget will reduce both sales of luxury cars and LCT revenue.

A considerable number of submissions link the LCT with environmental concerns, arguing either that the tax has no real environmental benefits or that it should be replaced with a tax on cars based on their fuel efficiency.

Some submissions note the relatively narrow base of the LCT and, in particular, that no special tax is imposed on other luxury goods. Most see this as an argument for abolishing the LCT, others as an argument for extending the LCT to other luxuries.