CASE FOR A REDUCTION TO THE EXCISE DUTY ON BEER

Transcription

1 PRE-BUDGET SUBMISSION TO THE HOUSE OF COMMONS STANDING COMMITTEE ON FINANCE CASE FOR A REDUCTION TO THE EXCISE DUTY ON BEER June 2015 Ottawa, Ontario

2 INTRODUCTION The purpose of this document is to support a formal request for an excise duty reduction on beer that is fair and consistent with the Federal Government s past efforts to foster value-added growth and private sector jobs in the beer economy. Specifically: Reduce the tiered excise duty rates on beer by 13.5 percent. This action would reduce the excise duty burden on the brewing industry by an estimated $85 million, correct the tax bias enjoyed for some years by the wine and spirit based single-serve products (coolers) and fulfill a recommendation under Canada s National Alcohol Strategy. The proposal that follows in this document is submitted by Beer Canada on behalf of its 31 members: BEER CANADA MEMBERSHIP Bierbrier Brewing Inc. Cassel Brewery Company Ltd. Fort Garry Brewing Company Ltd. Great Western Brewing Company Kichesippi Beer Co. Lake of the Woods Brewing Company Mash Paddle Brewing Co. Moosehead Breweries Limited Nelson Brewing Company Limited Olds College Brewery Perth Brewery Company Pump House Brewery Rideau Valley Brewery Storm Brewing in Newfoundland Ltd. Village Brewery Yukon Brewing Company Brick Brewing Co. Limited Drummond Brewing Company Garrison Brewing Co. Howe Sound Brewing Company Ltd. Labatt Breweries of Canada Magnotta Brewery Molson Coors Canada Muskoka Brewery Inc. Niagara College Teaching Brewery PEI Brewing Company Picaroons Traditional Ales Quidi Vidi Brewing Company Sleeman Breweries Ltd. Tree Brewing Co. Wellington County Brewery Inc. Founded in , Beer Canada is a voluntary national trade association, mandated to advocate on behalf of member brewing companies. The 47 breweries operated by these member companies span the country, from Newfoundland to British Columbia and into the Territories. In total, Beer Canada members account for 90 percent of domestically produced beer. 1 Beer Canada was first named the Dominion Brewers Association and later, Brewers Association of Canada. 2

3 Beer is a sensible beverage. It is low in alcohol and 90 percent of sales are in portion-controlled singleserve containers. Beer is also the most popular beverage alcohol product enjoyed by Canadian adults, making up 44 percent of combined sales across the beer, wine and spirits categories. A 2013 Conference Board of Canada study found that the beer economy generates more than $14 billion in economic activity. Domestic brewing companies account for 85 percent of all beer sold in the country, one of the few Canadian food industries that has a significant share of its home market. According to Statistics Canada, the Gross Domestic Product generated by Canada s brewers is three and a half times the combined impact of spirit and wine producers. Beer sales at retail amount to $9.2 billion annually and the total of municipal, provincial/territorial and federal taxes generates $5.8 billion each year from the brewing industry and its consumers. With commodity and sales taxes accounting for 50 percent of the retail price on average, Canadian beer drinkers pay the third highest tax rate for their beer in the world. Over the past two decades, the Canadian brewing industry has experienced changes both in its structure and its operating environment. The number of brewing facilities increased from 62 in 1990 to approximately 520 today. During this same period the number of individual and distinct brands available to the Canadian consumer has grown from 400 to 3,500. Consumer thirst for variety has fuelled the growth of new beverage alcohol products and, as a result, there has been a proliferation of new domestic offerings, some of which are alternative refreshment beverages (coolers) offered by the vintners and distillers. Adult per capita consumption of beer in Canada currently sits at 76 litres, compared to the historical high of 115 litres in Beer Canada's proposal to reduce the rate of excise on beer by 13.5 percent is fair and consistent with the Federal Government s past efforts to foster innovation and growth in the beer economy. It also alleviates some of the tax inequity introduced in 2006 through the elimination of duty on qualifying wines and wine products including coolers. Finally, it fulfills a recommendation under Canada s National Alcohol Strategy. 2 Statistics Canada, "The Control and Sale of Alcoholic Beverages in Canada", CANSIM Table , Ottawa, April

4 HISTORICAL OBJECTIVES FOR LEVYING EXCISE DUTIES Internationally, excise duty on beverage alcohol is a common form of taxation. Typically, these duties are imposed and the rates set to meet one or more of three objectives: control for social policy reasons, provide tax revenues, or influence the economic contribution generated by a particular sector. Canada s early history is replete with examples of control objectives. As early as 1664, a royal ordinance was passed charging duty on spirits imported into the colony. When the duty failed to control the importation of wine and brandy by the settlers, Intendant Jean Talon built a brewery in order to substitute beer for the consumption of ardent hard liquor. A brewery which M. Talon is having built will also contribute not only to the public welfare by forcing a decrease in the use of intoxicating drinks, which occasions a great lawlessness here; that can be obviated by using this other drink, which is very wholesome and not injurious. It will also promote consumption of the superabundance of grain which has sometimes been so great that the laborers cannot find a market for it. Brewed in Canada, Ottawa 1965 The objectives of the first excise levies imposed in Canada 1867 appeared to have shifted focus from control efforts towards revenue generation. Beverage alcohol products, viewed as luxuries, were deemed suitable candidates for the imposition of a voluntary tax since they were not necessities of life, it was argued that those who chose to buy the products were voluntarily paying the imposed duty. 3 Twentieth century excise changes were driven by revenue objectives, initially to fund wartime efforts and later for general revenues. The purpose of the two most recent excise increases was to achieve revenue neutrality within each beverage category that might have been affected otherwise by other unrelated tax measures: first replacing a narrow-based federal manufacturers sales tax with a broad-based goods and services tax (GST) in 1991 and second, a GST rate reduction in 2006 from 7 percent to 6 percent. The 2006 measures also had some economic objectives. At the same time that the rate of duty on all alcoholic beverages was increased, brewers secured a tiered excise duty rate schedule aimed at reducing the tax burden on the smallest breweries within the sector. Additionally, excise duty on wine, wine coolers and ciders produced in Canada and made entirely of Canadian grown agricultural products was eliminated. 4 3 Alcoholic Beverage Study Committee, "Beer, Wine and Spirits: Beverage Differences and Public Policy in Canada", Brewers Association of Canada, Ottawa, In a public statement, while on a winery tour in 2006, Minister of Finance, Jim Flaherty, referenced the 2006 budget measures as "taking steps to stimulate further growth within the Canadian wine and beer industries." He added that the "Canadian wine and beer industries make a significant contribution to our economy through job creation, tourism and sales of high quality products." 4

5 EXCISE DUTY RATE CHANGES Since 1975, except when excise duty increases were tied to changes in the beverage alcohol price index between 1980 and 1985, most excise duty changes have eroded the tax differential between beer and the other beverage categories. The consequence has been to increase the tax burden on the lowest alcohol content beverage, beer, and away from the higher strength alcohol products. The last two changes were substantial. In January 1991, the Goods and Services tax (GST) was introduced. Excise duty rates were increased at the same time, ostensibly to offset revenue shortfalls as a result of the changed sales tax structure. The increase on beer was more than double the change on wine and 15 times higher than on hard liquor. The next increase occurred in 2006, again in connection with GST and, again, the purpose being to maintain Federal revenues within each beverage category. 5 This time the change was due to a GST rate reduction from 7 percent to 6 percent. Excise Duty Changes on Alcoholic Beverages 1991 and 2006 Beverage Category 1991 (percent change) 2006 (percent change) Beer Wine Qualifying Domestic Wines Imports and Other Domestic 17.0 Duty eliminated Wines Spirits Coolers SINGLE-SERVE COMPETITION In the mid-1980's, competition for the beer drinker intensified with the introduction of the first singleserve wine cooler by Chateau Gai Wines in 1984 and the launch of the first spirit based cooler Seagram's 5 Department of Finance Canada, "Archived - Federal Excise Duty on Wine", News Release

6 Rye, the following year. 6 Shortly after the spirit coolers launched, the Federal Government introduced an excise rate specifically for the single serve cooler category, setting it at the same rate as existed for wines containing less than 7 percent alcohol by volume. Initially coolers were taxed higher than beer on a per package basis at $ per litre compared to beer at $ The relationship reversed in 1991, with the cooler duty falling to $0.03 per litre below the duty on beer. The duty on coolers was set at $0.25 per litre compared to beer at $0.28. A lower excise rate on wine and spirit coolers continued after the 2006 rate changes but effectively was cut further as a result of the duty exemption on wines made with Canadian-only ingredients, an exemption that applies also to wine coolers, all fruit wines and ciders. Following the change, exempt coolers have increased from about 8 percent of the domestic wine cooler market in 2007 to 40 percent in This growth reduced the effective rate of duty on domestic wine coolers and on the duty spread between them and beer. The effective cooler rate is now almost half of the duty on beer, or approximately $0.13 per litre below the beer rate. Comparison of Effective Rates of Duty on Domestic Wine Coolers and Beer Duties per litre Effective Rate (1) of Duty on Domestic Wine Cooler Segment $ Difference from 2006 Effective Rate (1) of Duty on Domestic Beer $ Difference in Duty Domestic Coolers vs Beer (1) Effective rate equals total tax revenues from domestic sales divided by total domestic volumes. 6 The Ottawa Citizen (September 23, 1986 and August 12, Newspaper stories around the introductions quoted representatives from Chateau Gai and Seagram's. Both claimed the products were aimed at beer drinkers and discussed plans for expanded promotion and production. 6

7 Although spirits coolers do not benefit from the exemption provisions, they have held their 75 percent share of the combined cooler market since at least 2007 and remain taxed at a lower rate than beer. PROPOSAL Canada s brewers recognize that every level of government requires tax revenue to deliver services, to build hospitals, schools and to invest in infrastructure. We believe also that the federal excise duty crowds out private sector job creation and capital investment. As an immediate action, Canada's brewers request that the federal government restore the excise differential between beer and coolers that existed prior to 1991 in the next budget by reducing the current progressive excise rates by 13.5 percent. The following table outlines the excise rates that would be in place today had the federal government sustained the differential between beer and coolers that existed prior to Proposed Rate of Excise Duty on Beer Above 2.5 percent Alcohol by Volume Brewed by Domestic Brewers Annual Production (hl) Current ($/hl) Proposed ($/hl) From 0 to 2, From 2,001 to 5, From 5,001 to 15, From 15,001 to 50, From 50,001 to 75, Greater than 75, In the longer term, Canada's Brewers would welcome an opportunity to consult with government on the economic benefits that would ensue from an excise structure tied to Canadian inputs (i.e., barley) as is now provided to the domestic wine industry. RATIONALE Social Policy Currently, the lowest alcohol containing beverage, beer, with an average alcohol content below 5 percent, is subject to a tax rate six percent higher than competing single serve products sold by distillers and vintners. Globally, through tax and control measures, governments recognize that it is in an individual's and society's best interests to promote the consumption of lower alcohol content beverages over higher for those who choose to drink. 7

8 Through an extensive consultation process involving more than 30 representatives from federal and provincial governments, addictions agencies, interest groups, academia and the alcoholic beverage industries, Canada is on record as supporting policies that encourage such behaviours. As a direct result of efforts to create "a national framework to reduce the harms associated with alcohol, other drugs and substances in Canada" 7, these groups became part of a National Alcohol Strategy Working Group, chaired by Health Canada, the Alberta Alcohol and Drug Abuse Commission, and the Canadian Centre on Substance Abuse. In 2007, the Group published and released Reducing Alcohol-Related Harm: Toward a Culture of Moderation Recommendations for a National Alcohol Strategy. This document advocates incentives to encourage a shift in consumption to lower alcohol content beverages. Canada's brewers, through Beer Canada, participated in this endeavour and agree in principle to the conclusions and recommendations that have emerged from the Strategy. The industry has a 30-year history of commitment to promotions, programs and partnerships aimed at encouraging the responsible consumption of its products. In fact, Canada's brewers are recognized as global leaders in this field. As a result of these initiatives, public awareness, attitudes and behaviours have changed to the extent that virtually every Canadian knows better than to drink and drive, drink in the workplace, drink during pregnancy, and drink irresponsibly at any time. In fact, awareness of problematic drinking behaviours exceeds the literacy rate. Economics In 2006, for the first time in recent history, Finance Canada appeared to take economic health of the sectors into account when it provided brewers with a tiered excise duty schedule and Canadian vintners with a duty exemption on qualifying wines. The two tax measures demonstrate that economic objectives can be achieved through taxation. Since the measures were introduced, the number of small brewing companies (those with volumes below 75,000 hectolitres) licenced across Canada has increased by 67 percent and sales by these breweries have increased by 30 percent, suggesting that the tiered structure is successfully encouraging growth in this segment. The duty exemption on qualifying wines also caused shifts in the sector within a growing market overall. Since the change, domestic wine sales have increased by 19 percent (2013 compared to 2007), with virtually all of the growth coming from wines made with Canadian-only ingredients. The volume of sales of these wines has more than doubled, increasing from 26 million litres to 58 million. 7 International developments provided impetus for these efforts. A World Health Assembly resolution (WHA58.26), passed in 2005, encouraged member states to develop national alcohol strategies to address the health, social and economic costs arising from problematic use of alcohol 8

9 The exemption has had much the same impact within the wine cooler segment. From about an 8 percent share of the domestic market in 2007, Canadian coolers now account for over 40 percent of the wine cooler market. A fair excise rate on beer is important because: 8 One out of every 100 Canadian jobs is supported by the beer economy; The economic impact of the Canadian brewing industry is three and a half times larger than that of the wine and spirit industries combined; The economic benefits span virtually the entire country; Brewing represents a high valued-added sector (in 2009, the value-added share was 79.5 percent as compared to an average of 36.4 percent in the food and beverage manufacturing industry overall); and Brewing generates value added in the supply chain, i.e. through further processing of barley into malt and other adjuncts into syrups, flakes, etc. Government promotion of the Canadian brewing industry through a sensible tax structure has the potential to significantly multiply these economic benefits for the Canadian economy. Canadians' beer consumption is modest by international standards, ranking 25th globally. This compares to a 13th place ranking by the United States, the country closest culturally and geographically and with a similar overall consumption of total alcohol at about 8 litres per person annually. Of note, federal excise duties on beer in the United States are about half the rate imposed in Canada. A significant opportunity to grow the export market may also exist. Canada is one of the top 15 beer exporting countries in the world. In 2013, exports were valued at $193 million or nearly 17 percent of Canadian beer produced. The Conference Board of Canada has commented that "Canada stands to benefit from exporting beer, especially considering the strong growth in beer demand in China and other developing countries.... (W)e found that if Canadian beer exports were to increase by $10 million (that is, by 3.5 percent), the result would be an inflation-adjusted GDP increase of $10.54 million for the Canadian economy... Increasing exports also benefits Canadian employment." 9 Fairness The economic benefits generated by the Canadian brewing industry far outweigh those generated by the wine sector, yet in 2006 government completely eliminated duty on wines made using only Canadian grown ingredients only. 8 Agriculture and Agri-Food Canada, "The Canadian Brewery Industry", Ottawa, Modified The Conference Board of Canada, "From Farm to Glass: The Value of Beer in Canada", November

10 Given the success of this measure in the wine and wine cooler markets, in the longer term, Beer Canada would welcome an opportunity to explore taxation models unique to brewing that recognize both Canadian agricultural content and the value added inherent to the brewing process - such as conversion of barley to malt. Such a study would respond to a 2012 recommendation by the Standing Committee on Agriculture and Agri-Food that the Government of Canada consult with stakeholders "regarding excise tax exemption on Canadian alcoholic beverages in order to promote the development of Canadian alcoholic beverages industry". 10 IMPACT According to volume data by brewery size provided by Canada Revenue Agency, the estimated impact of a 13.5 percent decrease to the current progressive excise duty rates on beer would reduce total beer excise revenues by $85 million. This amount is proportionate to the value of the wine benefit when the difference in the sector size is taken into account (i.e. the value of the wine duty exemption now stands at an estimated $39 million; wine excise collections represent just under half of the beer duty revenues). With increased capacity for reinvestment, there is the potential for offsets from greater contributions to GDP and expanded jobs opportunities. SUMMARY For many years, revenue generation has been the principle objective for changes to the rates of excise duties on beer, spirits and wine (there were some notable economic objectives targeted in 2006). These changes have ignored, and in fact conflicted, with social policy objectives in that the highest rates of increase have been applied to the lowest alcohol containing beverage. Even where single-serve products of similar alcohol contents have been introduced, excise rates currently favour these higher alcohol content products over beer. The emergence of a National Alcohol Strategy embraced by governments, public sector and the alcohol industries provides all parties with an opportunity to participate in efforts aimed at reducing alcohol related harm. Beer Canada s proposed measure to lower the excise rate on beer represents a step toward aligning with the Strategy's objectives. In 2006, the government initiated excise duty changes aimed at stimulating growth and investing in the economic welfare of two important sectors - beer and wine. The proposal to correct a bias introduced in 1991 would build on those initiatives. Those successes are evident from the growth in the small brewer 10 Parliament of Canada, "Toward a Common Goal: 1 Canada's Food Supply Chain - Part I", Report of the Standing Committee on Agriculture and Agri-Food, June Following some initial hearings the Committee decided to focus its research on beverages and two other sectors. Its report, dated June 2013, contained a number of recommendations, among them a call to the Government of Canada to consult with stakeholders "regarding excise tax exemption on Canadian alcoholic beverages in order to promote the development of Canadian alcoholic beverages industry. 10

11 segment, in the extraordinary shift in market within the domestic wine industry and continued growth in the cooler segment. TIMING Beer Canada recommends that the reduction to the excise duty on beer supported in this paper be considered for announcement and implementation in the budget. Without commitment to timing of implementation, Beer Canada also proposes that the government initiate a consultative process on introduction of a beer excise scheme aimed at promoting Canadian content, as was done for the wine sector in The excise duty reduction proposal contained in this paper represents a correction that would enable the Canadian brewing industry to participate actively in growing Canada s economy and adding private sector jobs. 11