Cost-effectiveness of volumetric alcohol taxation in Australia

In 2008, Australians aged 15 years and over consumed, on average, the equivalent of 9.95 L of pure ethanol per person.1 To reduce the lifetime risk from alcohol-related harm, National Health and Medical Research Council (NHMRC) guidelines recommend consuming no more than two standard drinks per day for both sexes, and, to reduce the risk on a single occasion of drinking, consuming no more than four standard drinks for both sexes.2 In 2007, 60.8% of the population drank at levels considered to pose low risk of harm in the short and long term, while 10.3% and 20.4% drank at levels considered risky in the short and long term, respectively.3 The social cost of alcohol consumption in the 2004–05 financial year was estimated at $15.3 billion, second to the cost of tobacco and almost double the cost of illicit drugs ($8.2 billion).4 Alcohol-related harm accounted for 3.2% of the total burden of disease and injury in Australia in 2003, equating to 3430 deaths and 85 435 disability-adjusted life-years (DALYs).5

A strategy to reduce alcohol-related harm is to reduce the average consumption of alcohol across the population.6 Evidence suggests that increasing the price of alcohol (usually via taxation) reduces consumption: a meta-analysis of 112 studies, comprising 1003 estimates of price-elasticity (see glossary, Box 1), found a significant negative relationship between alcohol price increases and consumption.7

In Australia, the United States and United Kingdom, excise taxes vary according to beverage type.8-10 In Australia, beer is taxed according to alcohol content above a 1.15% tax-free threshold, spirits are taxed at a higher rate, and wine is taxed as a percentage of the wholesale price. In contrast, a volumetric tax would apply the same rate of tax per litre of alcohol across all beverages.11 Increased taxes are generally passed on to consumers in the form of higher alcohol prices. This loss of consumer benefit (Box 1) may be partially offset by the redistribution of the additional taxation revenue as welfare and other government spending. However, the amount of tax collected and redistributed is likely to be substantially less than the loss in consumer benefit, a difference termed “deadweight loss” of taxation.

Our study aimed to estimate the public health benefits and costs of implementing a volumetric alcohol tax in Australia. We assessed three scenarios for a volumetric tax rate:

• A rate that maintains the current deadweight loss of taxation;

• A rate that maintains existing taxation revenue; and

• A rate equal to the existing rate applied to spirits.

A volumetric tax rate with no change in current deadweight loss results is predicted to result in a 2.77% reduction in annual consumption of pure alcohol and an estimated annual increase in taxation revenue of $492 million (Box 3). In this scenario, the price of spirits and RTD beverages decreased and the price of beer and wine increased. The increased consumption of spirits was more than offset by reduced consumption of beer and wine. A tax revenue-neutral scenario also increased the price of beer and wine and decreased the price of spirits and RTD beverages, but resulted in only a marginal decrease (0.05%) in overall alcohol consumption. A volumetric tax set equal to the current spirits tax rate provided a substantially greater reduction (23.85%) in consumption of alcohol and an increase in taxation revenue of $3094 million.

In the current spirits-excise scenario, although the price of spirits was unchanged, their consumption decreased. This result derived from the increase in the price of beer: the negative relationship between the price of beer and consumption of spirits, measured by the cross-price elasticity, means that spirit consumption falls as people’s budget for alcohol is reduced by higher prices paid for beer.

The cost of changing the taxation system for alcohol is estimated at $18 million, or an annualised equivalent of $0.58 million. There is evidence that all three scenarios of volumetric taxation would reduce health costs and increase health gains compared with current policy. The net health gain associated with a deadweight loss-neutral tax change is estimated at 21 000 DALYs averted, and the net cost as – $110 million per annum (Box 4). The tax revenue-neutral scenario provides a much smaller health gain of 380 DALYs and net cost of – $1.4 million. A volumetric tax rate equal to that of the current spirits excise provides the greatest health gain of 170 000 DALYs and net cost of – $870 million.

The cost-effectiveness plane for a deadweight loss-neutral volumetric tax is shown in Box 5. Each point represents one of the 2000 simulated results calculated to represent uncertainty around inputs to the model. The x axis measures the DALYs averted by the intervention, and the y axis measures the net cost of the intervention (a negative value on the y axis indicates a cost saving). The graph shows that all estimates have a y value less than 0 and an x value greater than 0, indicating that the intervention is cost-saving and associated with a health gain.

Our study aimed to estimate the public health benefits and costs of implementing a volumetric alcohol tax in Australia. However, a number of caveats must be noted. First, we modelled the reduction in average alcohol consumption arising from an equalised volumetric tax. It is possible that consumption would not be reduced evenly across the population, as responses to price changes might vary between subgroups. If the response to price changes was less (or greater) for high-risk drinkers than for low- or moderate-risk drinkers, the estimated health benefits of the predicted fall in consumption might be over- (or under-) estimated. Further, long-term risky drinkers might be more (or less) price-sensitive than short-term risky drinkers. Thus, the nature of health benefits accruing from reduced consumption might vary.

Second, we used estimates of price elasticity for beer, wine and spirits that date from 1994,11 and were unable to obtain an estimate for ready-to-drink (pre-mixed) beverages, so assumed it was equal to that of spirits. In addition, our model assumed that the type of alcoholic beverage consumed does not affect drinking-risk behaviour, but rather that the pure alcohol content is solely responsible. Our failure to account for the alcohol density of beverages and the rate at which people become intoxicated could have resulted in an overestimate of the potential health gains of an equalised volumetric tax.

Furthermore, both the negative and positive health effects of alcohol consumption were modelled, but the positive effects are debated.22 Thus, the health effects reported here might underestimate the full health impact of reduced alcohol consumption.

Finally, our analysis was conducted from a health-sector perspective, and included hospital and medical costs averted from reduced alcohol consumption but not other significant social costs averted, such as crime.

Evidence from the WHO-CHOICE study14 suggests that the most efficient public health response to the burden of alcohol misuse depends on the prevalence of alcohol use. Taxation represented the most cost-effective response in countries such as Australia with moderate or high levels of drinking. Our results indicate that the method of alcohol taxation is important in efficiently reducing the harm caused by alcohol use. An equalised volumetric alcohol tax is a cost-effective policy that would deliver significant health gains compared with existing taxation in Australia, which applies inconsistent rates per litre of pure alcohol.

However, in prioritising interventions, we need to combine technical approaches, such as economic evaluation, with approaches that facilitate due process.23 Other criteria often considered in evaluating health interventions include the capacity of the intervention to reduce inequity, acceptability to stakeholders, feasibility, sustainability, and potential for other consequences. Aspects of these criteria to consider before implementing volumetric taxation are shown in Box 6. These issues might have positive and negative effects on its acceptability. For example, a volumetric tax might be considered equitable in that the more individuals drink, the more they are taxed, but this approach might also be opposed by alcohol lobby groups, especially those in sectors whose sales are predicted to decline.

Systems are already in place to implement and monitor volumetric alcohol taxation and, once implemented, minimal resources would be needed to ensure its sustainability. The recent change in tax rates applied to pre-mixed alcoholic drinks highlights the Australian government’s motivation to adopt evidence-based policy.24,25 However, the vocal opposition from the alcohol industry demonstrates the political hurdles to such reform. In particular, a volumetric taxation system has the potential to create winners and losers within the alcohol industry — although spirits producers would potentially welcome the system, the beer and wine sectors are likely to oppose a relative tax increase on their products.

The potential for different alcoholic beverage types to have different impacts necessitates caution in interpreting our results. Based on current understanding of the health effects of alcohol, we recommend a volumetric tax. However, research that focuses on specific beverage types is required. A tiered approach to alcohol taxation that respects evidence on beverage-specific health effects might prove more beneficial. Furthermore, analyses with a broader scope incorporating the significant social costs of alcohol consumption would enhance the evidence base. Nevertheless, the political hurdles to implementing evidence-based policy in public health remain the largest barrier to be overcome.

5 Cost-effectiveness plane of a deadweight loss-neutral scenario of volumetric taxation

DALY = disability-adjusted life-year. * 2003 Australian dollars.