Consumer demand for alcoholic beverages has been changing from quantity to quality as incomes have grown and, with that, a greater desire for healthy living. One manifestation of that is a demand swing toward lower-alcohol beverages.
In response, brewers in Australia and elsewhere have developed new technologies to produce lower-alcohol beers. Among them are mid-strength beers, defined as having between 3% and 3.5% alcohol by volume; they have attractive flavour profiles not too dissimilar to their full-strength counterparts, and so have rapidly grown in popularity.
However, while low-alcohol beer has been encouraged in Australia by it being subject to a lower rate of excise tax than regular beer, no such incentive applies to packaged mid-strength beer. The latter attracts the same rate of excise tax as full-strength beer, except when served from a tap – and even then, the tax rate is only one-quarter less than that for full-strength beer on tap.
Would more or less alcohol be consumed if the tax rates for mid-strength beer were lowered, for example to those for low-strength beer? The question is important because recent research finds that full-strength beer (along with pre-mixed spirits in a can) ranks the highest in terms of links to antisocial and unlawful behaviours associated with excessive or binge consumption of alcohol.
The answer is not obvious. This is because, while lowering the mid-strength tax rates would encourage some shift away from full-strength beer and possibly from wine and spirits consumption, it would expand mid-strength beer sales and may cause a shift away from consumption of less-flavoursome low-alcohol beer.
That empirical question on consumer behavioural responses to retail price changes, however, can be answered using available estimates of own- and cross-price elasticities of demand for various beverages and pertinent data on Australia’s alcohol consumption patterns. The latter are summarised in Figure 1.
Figure 1: Consumption of full-strength, mid-strength or low-strength beer in Australia (million litres, ML)
Estimating the consumption impacts of reducing mid-strength excise tax
Using those elasticity estimates and data for 2024, I explored a scenario in which Australia’s rates of tax on mid-strength beer are lowered to the same rates as currently applied to low-strength beer while maintaining the current differences in tax rates for draught versus packaged beers.
In doing so, it was assumed that (1) the tax reduction is fully passed on to consumers, and (2) the retail mark-up on the tax-inclusive wholesale prices (whether packaged or draught) is constant, so that any percentage change in the latter will be the same as that at the retail levels, and that off-trade accounts for 81% of the volume of Australian beer sales and the remaining 19% sold by the on-trade is split 3% packaged and 16% draught.
The results suggest that while Australian brewers are contributing to reducing national alcohol consumption by developing and promoting lower-alcohol beverage categories, they could contribute even further if mid-strength beer consumption were to be taxed at a lower rate such as that currently applied to low-strength beer.
The estimated magnitude of the effect of such a policy nudge is not large, at little more than a 1% fall in national alcohol consumption. However, that reform would also alter the shares of alcohol consumed in its different forms.
Specifically, the share of alcohol from beer that is drunk as mid-strength would increase by four percentage points, almost all at the expense of full-strength beer. That would reduce beverage-specific negative externalities because econometric evidence linking ten alcoholic beverage types to drink-driving and hazardous, disturbing or abusive behaviours when intoxicated suggests that full-strength beer is linked much more to negative behaviours than is mid-strength beer.
The above result is but one answer to the research question posed at the outset. Another set of results could be generated by closing the gap in tax rates between packaged and draught beers. That would generate a larger drop in national alcohol consumption the closer the common rate was to the lower draught tax rate.
Implications
These results suggest there would be value in generating new econometric estimates of demand elasticities using more-recent data, and undertaking more-sophisticated empirical modelling of this simple-to-implement policy reform. The latter could include supply responses by brewers, and could estimate changes in consumer welfare and in excise tax revenue collection by the government.
More-complex analysis could explore the consequences of coupling beer tax reform with a reform of wine taxation. For example, switching from the current 29% ad valorem wholesale tax to a per unit of alcohol tax on wine consumption in Australia would raise the price of non-premium wine relative to premium wine and other beverages.
According to existing available estimates, the own-price uncompensated elasticity of demand for non-premium (cask) wine is -3.0 while the cross-price elasticities of demand for bottled wine, beer and spirits with respect to the price of cask wine are generally positive and small.
Those estimates suggest such a switch in the tax on wine would greatly lower national alcohol consumption from cask wine while not raising it much from other beverages. And, like a reduction in the tax rate on mid-strength beer, such a reform to wine taxation would reduce the extent of negative externalities associated with excessive alcohol consumption since, in the case of wine, that is associated most with cask wine and least with fine wine.
Acknowledgements
The author is grateful for financial support from Wine Australia, under Research Project UA1803-3-1, from the University of Adelaide’s School of Agriculture, Food and Wine and its Faculty of Arts, Business, Law and Economics, and from the Brewers Association of Australia. This blog summarises an article that is forthcoming in the Australian Economic Review.
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