A flat tax for wine will bring its own hangover

Australia's massively inefficient and heavily rorted wine industry could get the restructuring it badly needs - if the Rudd Government accepts the Henry tax review recommendations and introduces a flat tax across all categories and removes the costly tax exemption enjoyed by smaller wineries.

Alcohol tax is part of Henry's mandate to simplify the tax system and bring it in line with the rest of the world. But what Henry recommends and the Government ultimately ratifies will come down to politics, particularly with a federal election looming.

Right now the number of alcohol taxes in play runs to double figures, many of which are antiquated, and some are at odds with the Government's health and social policies.

If a flat tax is introduced it would simplify the tax system but also change the economics of the entire industry. Cheap wine would increase in price, premium wine would fall, spirits and alcopops would fall and beer sold in pubs and clubs would rise. The screams from the various lobby groups, some of which are incredibly powerful, would be deafening.

Beer, spirits and alcopops are taxed on the basis of their alcohol content, with spirits and alcopops taxed at a higher rate because of the perceived greater risk of abuse.

Wine is the big anomaly. It is taxed on price rather than volume. This means low-value cask wine attracts little taxation while more expensive bottled wine attracts high levels of tax under the Wine Equalisation Tax (WET) system.

A study prepared by one of the leading econometrics groups estimated that a flat tax would result in the price of a $35 bottle of spirits falling to $22.45, an alcopop would fall from $3.30 to $2.42,

a $14 wine cask would jump to $31.07, an $8 bottle of wine would rise to $10, a $13 bottle of wine would rise to $13.87, an $18 bottle of wine would fall slightly and a $30 bottle of wine would fall to $27.53.

In terms of draught beer, the study found that a middy of light beer would rise 36c, a middy of mid-strength beer would rise 29c to $3.49, full-strength would rise 23c and packaged beer would remain virtually unchanged.

Such a move would have profound implications for the wine industry, which remains under serious pressure with systemic global oversupply, a high currency, drought and weather events and the slowdown on global demand.

It would decimate the cask wine market, which represents about half of all wine sold. And it would decimate winegrowers in the Riverina, Griffith and the Riverland.

The Winemakers' Federation of Australia estimates that it could result in the loss of 12,000 jobs and the closure of thousands of wineries. The industry employs about 60,000 people.

Smaller winemakers enjoy an exemption from WET taxation altogether. In many cases, this is an example of Howard government upper-middle-class welfare - where family businesses and investment bankers looking for lifestyle with a taxation hedge attached are given a tax benefit. It all adds to the systemic oversupply and would be the easiest pickings available in wine taxation.

The Government gives back about $300 million a year in WET rebates, some to hobby farmers who already pay a low tax rate and some to inefficient wineries that grow the wrong grapes and produce the wrong wine yet continue to be propped up. There are also some cases were New Zealand winemakers qualify for the WET rebate, again at taxpayers' expense.

The wine lobby is undoubtedly powerful, and while John Howard's cabinet had a heavy South Australian bias and the Liberal/ National parties had their rural constituency to consider, the Rudd Government may be less inclined to protect the wine industry indefinitely.

Regardless, any changes to alcohol tax are politically and practically very challenging. The debate is complex and many in the industry believe it will be too politically damaging to introduce a simple system taxing all alcohol in the same way.

First, there is politics and the practicality of the Government's alcopop tax position. The Government has very publicly stated that alcopops are a special problem due to their sweet taste profile and popularity with young drinkers. It would be a brave government to reduce the price of spirits and alcopops.

And the power of the beer, clubs and pubs lobby groups cannot be underestimated. Beer is the most popular alcoholic beverage in Australia and full-strength mainstream beer in particular tends to be the preference of Labor's core voters.

Howard tried to change beer tax with the introduction of GST but quickly backed down when the Coalition recognised the political pain associated with a campaign that harnessed the power of the beer-drinking public. The beer lobby put together the largest petition in Australian political history in encouraging beer drinkers to have their ''shout''.

If the Rudd Government is smart it will use Henry's recommendations as a base to restructure the wine industry, which includes paying grape growers to rip out vines, and to keep the beer industry happy it would retain taxation bands to encourage the production of lower alcohol products.