Everything is more expensive these days at the grocery store. We’ve also seen increases at the liquor store, or wherever you purchase your favourite alcoholic beverages. Well, these products are about to get more expensive yet again.
In 2017, the federal government had the brilliant idea of indexing taxes on alcoholic beverages to align with inflation. It’s called an escalator tax on alcohol. The idea was to make hikes more predictable, but without any parliamentary oversight, or any consideration for changing market conditions. Despite concerns registered by our alcohol industry, Ottawa marched on.
Before the pandemic, inflation was not as significant an issue as it is now. Few noticed that taxes on alcohol increase every year. But the shock will hit us this year, due to our very high inflation rate. So in a few weeks from now, on April 1, that tax will increase by 6.3 per cent, making it the highest increase ever. Canadians will have to pay an additional $125 million in taxes per year, starting April 1, when buying beer, wine and/or spirits. Canada already has the highest alcohol taxes amongst G7 countries. In fact, taxes alone account for around 50 per cent of the price of beer, 65 per cent of the price of wine, and 75 per cent of the price of spirits.
We have seen five consecutive hikes since the escalator clause was implemented in 2017, which allowed Canada to surpass Japan with the highest tax rate on alcohol in the industrialized world. For anti-alcohol advocates, this may be seen as encouraging news. Making alcohol more financially prohibitive will get consumers to drink less. It makes perfect sense from a public health perspective, which is clearly what Ottawa is going after. Fiscal measures impacting alcohol consumption are nothing new, but Canada is now reaching a point where an entire industry can be negatively impacted by our government’s thirst for more tax dollars, no pun intended.
The market size for Canadian breweries will exceed $7.5 billion by the end of this year. Over 17,000 people work in the beer industry alone. We now have more than 1,200 breweries and microbreweries in the country, and many are operated by craft-brewers employing just a handful of employees. The wine industry contributes almost $12 billion to our economy at present. And of course, we have restaurants, pubs, and bars, which all rely on alcohol sales to make a living.
The food service industry is already hurting. According to Restaurant Canada, in 2022, in many provinces, for every restaurant opening, two establishments closed. And that trend is likely to continue into 2023. As a result, the ripple effect of increased prices on the alcoholic beverage industry is clearly measurable. Across Canada, sales of beer are down 3.6% over the last 12 months, according to Beer Canada.
Liquor boards will also be impacted by this. Gross profits for all liquor authorities and government revenue from sales of alcoholic beverages across the country now reach almost $10 billion per year, according to Statistics Canada. These sales are helping provinces fund hospitals, schools, roads, and other infrastructure they need to maintain.
What we learned from similar increases in tobacco tax is this: higher prices may lead to an increase in illicit activities, as consumers seek out cheaper alternatives. For alcohol, this means bootlegging and smuggling. This can have negative consequences on public health and safety, as illicitly produced alcohol may be of lower quality and pose greater risks to consumers. This is not the road we need to take, especially right now.
Some say the escalator tax, which few Canadians know about, is undemocratic. Perhaps, but the escalator tax will eventually make all legal alcohol products in Canada less affordable over time. Parliament should investigate the escalator tax and see whether we should cap it or at least set a ceiling clause of some sort when inflation reaches a certain level. Ottawa has already benefited from inflation, which is why the federal government’s deficit has simply melted down to about $4 billion in the last 8 months. Ottawa doesn’t need more revenue from “sin taxes.” Ottawa should protect our agri-food industry as much as it can, by making it attractive to investors while offering high-quality, decently priced food and beverage products to Canadian taxpayers.
Or else, with higher taxes, many companies will flee Canada, eliminating options and reducing competition, thus pushing prices even higher.
(Data in Figure was provided by Beer Canada)