Excise taxation trends in Americas and beyond

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Americas: Excise taxation trends — 2018

In recent years, excise taxes seem to have been on a collision course between the need to raise revenue and the desire of governments at all levels (federal, state and local) to control the behavior of consumers.

Last year, we looked at excise tax trends across the globe and certain underlying similarities among all excise taxation regimes. This year, we highlight the changing mentality of governments as they impose excise taxation in the supply chain.

What are the key trends we are seeing in excise tax policy?

  • Excise taxes are addressing health and environmental issues, with a secondary focus on revenue collection.

    Over the past few years, the imposition of excise taxes has increasingly become a means for government authorities to control and influence the behavior of consumers and producers — with a secondary goal of raising revenue. More directly, as the Organisation for Economic Co-operation and Development (OECD) noted in 2016: “a number of excise duties have been adjusted with a view to discouraging certain behaviors considered harmful, especially for health reasons.”1 While health reasons are often cited for the imposition or increase of an excise tax, the environment is just as much a concern in excise tax imposition.

    The US Congressional Budget Office, in discussing increasing excise taxes on tobacco, noted that “the first broad step in assessing the budgetary impact of a policy to promote health is determining the ultimate impact on consumer behavior.”2 The questions that arise is whether or not excise tax has become the “invisible hand” of the government for consumer behavior and whether the resulting impact is effective in its stated and underlying objectives.

    Perhaps the most recent phenomenon in excise taxation across the globe is the imposition of taxes on sugary beverages. The driving force behind most jurisdictions that have passed laws in this area is to reduce the consumption of “unhealthy” beverages through a deterrent of high costs. Taxes are imposed on the manufacturers or distributors of the product and ultimately passed to the end consumer.

    While a number of countries across the globe have implemented or are considering so-called “soda taxes,” the experience in the US has been quite interesting, highlighting certain potential downsides for governments in adopting these measures. Cook County (the home of Chicago, Illinois) deployed a sugary beverage tax in 2016 in order to reduce consumption of “unhealthy beverages” and increase revenue for the county. On 11 October 2017, less than one year after going into effect, the Cook County Board of Commissioners repealed the tax, effective 1 December 2017. Some of the reasons for repeal included the increased tax burden on low-income families, an uneven application of the law (sweetened coffees made by hand were excluded, for example) and people turning to neighboring counties to purchase sugary beverages. As a consequence, they also were purchasing their groceries in those places — thus reducing the intake from other taxes for Cook County.

    This highlights one of the possible unintended impacts of soda taxes: the reduction of overall revenue to the jurisdiction under a soda tax. The recent taxation in Seattle led to consumers leaving the city limits to purchase groceries in areas where the sugary-beverage excise tax does not apply, therefore reducing purchases made in Seattle and impacting the sales-tax revenue for the city. Another potential consequence of the tax was highlighted in a 2012 Cornell University study, which suggested that proliferating sugary-beverage taxes could lead to increased alcohol consumption, thereby swapping one health concern for another.

    However, other jurisdictions have reported more favorable outcomes. For example, in Mexico, in the two years following its soda tax introduction in 2014, the consumption of sugary drinks dropped by almost 8% on average and consumers turned to healthier alternatives (e.g., water and milk). Similarly positive results have been reported in Hungary, which introduced a sugar tax in 2011. Other countries have similar plans to tax sugar products; examples include Ireland, the Philippines, South Africa and the United Kingdom (UK). The UK tax is due to enter into force in April 2018 with two rates of tax: one for soft drinks with more than 5 grams of sugar per 100 milliliters and a higher rate for drinks with more than 8 grams per 100 milliliters. In anticipation of the tax, many producers of affected drinks have already decided to switch to alternative, untaxed ingredients or to change their formulas to avoid the tax. While the long-term future of soda taxes is uncertain, the trend toward government taxation for behavior modification is likely to continue.

  • Excise taxes still aimed at revenue collection are offset to keep pace with innovation.

    Across the globe, motor vehicles are becoming more fuel-efficient. As a result, traditional fuel-duty regimes are under fire as ineffective in a world where vehicles go farther using less fuel — creating a shortage of funding for roads and other public infrastructure. Alternative-fuel vehicles (such as electric cars), while more environmentally friendly than traditional petroleum vehicles, do cause additional harm to infrastructure. For example, they still travel on publically funded roads and may require public investment in infrastructure (e.g., for charging points). They still contribute to traffic congestion and road deaths. However, they may have a reduced or zero fuel-tax liability.

    The most innovative discussion on excise taxation in this area has been the introduction of a vehicle mileage tax (VMT), whereby the tax would be directly applied to the individual consumer who is using the fuel to propel the vehicle along public roads. The concept is to create a more direct tie to those who are using the highway system with the way the funds are collected and spent.

    The VMT concept has been popularly imposed across Europe for heavy vehicles and fleets, as well as in some US jurisdictions, but the concept of applying it to the general population is still in its infancy. Oregon led the way with a 2007 study of the concept of a VMT on the population, which was followed by a second study in 2013 and the first volunteer VMT law in 2015. Recently, California released the results of its congressionally authorized study and found an opportunity to implement a VMT to increase funding for the transportation system. Other US states are following suit in directing their revenue departments to validate a VMT implementation in place of, or in addition to, the traditional fuel-tax regime.

    While the benefits of a VMT are likely apparent — the equal application of tax across fuel types and the burden of tax imposed on active users of the highway system — the implementation of such a system is riddled with concerns. The primary barrier is one of privacy, as illustrated in the law initiating the California VMT study. The California Legislature directly advised the California Transportation Commission in Senate Bill 1077, stating “privacy implications must be taken into account, especially with regard to location data. Travel locations or patterns shall not be reported, and legal and technical safeguards shall protect personal information.”

    While the concerns about privacy are valid, the Journal of Public Economics3 noted many benefits of a VMT system implementation. This includes more stable and higher collection of revenue for transportation funding; an increase in social welfare, as traffic might be reduced as people assess the value of their travel; and a more positive consumer response to a VMT in light of negative views toward the historical fuel-tax regime. While the VMT is not fully implemented across an entire taxable population currently, the potential for a vast upheaval in taxes for transportation could be on the horizon.

  • Excise tax rates are increasing but declining in terms of total tax.

    While consumption taxes are increasing in revenue collected, excise taxes are increasing in their rates and incidence, but decreasing in terms of GDP and total tax collections.

    The increase in taxes on general consumption, such as value-added tax (VAT), has been well-documented and is even being seen in regimes that have not historically imposed tax, such as the Gulf Cooperation Council (GCC) states. However, and in light of a governmental shift from revenue collection to behavior modification, excise taxation as a percentage of total revenue and total GDP has been in decline.

    In 1965, excise taxes and duties accounted for 14.2% of total tax revenue across the OECD countries, falling to 7.6% in 2014. Similarly, taxes on specific goods and services had a steady decline as a percentage of GDP from 1965 to 2010, yet have remained relatively steady at 3.3% of GDP since the end of 2010.

    However, this is not the whole picture. Looking across the tax landscape, excise taxes are increasing both in rate and incidence. In 2017, many countries introduced new excise taxes (including the GCC states) or increased the rates of excise taxes on products ranging from electronic cigarettes to gas-guzzling vehicles and other “sin” products in between. Tobacco, in particular, saw a large number of rate increases. Still, the focus of new excise taxes and rate increases is trending more toward behavioral adjustment rather than filling the jurisdictional coffers.

  • What’s on the horizon for excise taxation?

    While revenue collection may not appear to be the primary focus for governments today, the impact of behavioral modification through excise taxation is a powerful tool. Concerns about an increased impact of taxes on low-income consumers are secondary to the benefits that governments see from reducing the consumption of certain products. Further, as the consumption of products subject to excise taxation declines, resulting in fewer tax dollars for the government, a further increase in excise taxation could occur. Consider the example of the United States, where the gasoline excise tax has not been raised in 25 years, coupled with increased fuel efficiency and a crumbling transportation infrastructure. The potential for increased taxes on fuel and funding through alternative excise taxes is a real possibility for 2018.

    This year is also likely to see continued growth in the amount of excise taxes imposed on products relating to health and the environment. Tax rates applied to existing excise duties will also likely increase, as governments continue to push behavioral modification and revenue-collection objectives onto the constituents they tax.


 

EY - Ashley Scheele

Ashley Scheele
Partner of Indirect Tax
Tel: +17137508272

EY - Samuel R Dagley

Samuel R Dagley
Manager of Indirect Tax
Tel: +17137508614

 

1 Consumption Tax Trends 2016: VAT/GST and excise rates, trends and policy issues, OECD, 2016, https://www.keepeek.com/Digital-Asset-Management/oecd/taxation/consumption-tax-trends-2016/taxing-consumption_ctt-2016-3-en#page12.
2 Raising the excise tax on cigarettes: effects on health and the federal budget, US Congressional Budget Office, 2012, https://www.cbo.gov/sites/default/files/cbofiles/attachments/06-13-Smoking_Reduction.pdf.
3 “From gallons to miles: A disaggregate analysis of automobile travel and externality taxes, ”Journal of Public Economics, Volume 152, August 2017, Pages 34–38.