Israeli tipplers will be rejoicing this week with the prospect of prices for beer and hard alcohol dropping as much as 20%, after Finance Minister Moshe Kahlon announced Tuesday he was reversing three years of sharp tax hikes on alcoholic beverages.
In a surprise announcement, Kahlon said the tax on beer would drop 46% and the tax on spirits by 21%, as of midnight last night. The decision took the beverage industry by surprise and sources said it would take a few days for the price cuts to reach bars and store shelves.
“We’re still studying the figures in order to understand how much it [the tax reduction] will lower prices. Even we only heard about the tax cut now,” said Ariel Epstein, CEO of Hacarem Spirits, a leading Israeli importer of wine and spirits. “Every product’s price will fall by a different rate — the price of a bottle of inexpensive vodka will fall about 15%, while for premium vodka the discount will be less.”
Industry executives said beer prices will decline by 15% to 20% and liquor prices will go down by up to 20%, bringing them down to the levels they were in 2012 before the government imposed a series of tax hikes.
Wasim Hinnawi, the owner of the Wine & More chain of liquor stores, said the short notice retailers and importers were getting would saddle them with short-term losses. “We bought a lot of inventory ahead of the holidays at the old, higher price, but market conditions will dictate that I sell at the lower prices from tomorrow, so I’ll be losing money for a while,” Hinnawi said Tuesday.
The price cuts were the second Kahlon has unveiled in the last week, after announcing the value-added tax would be lowered by one percentage point to 17% from October 1 and announcing cuts in corporate tax rates as well. “After cutting VAT and corporate taxes, we can now bring the people of Israel more good news for the holidays,” Kahlon said.
While the move is certain to boost Kahlon’s popularity and strengthen his claim to be being a “social” finance minister, the decision to lower the taxes on alcohol was based on the recommendations of a committee headed by Finance Ministry Director General Shai Babad, with representatives from the Tax Authority.
Taxes on beer were boosted by Finance Minister Yuval Steinitz in 2013 and those on liquor by his successor Yair Lapid a year later. In both cases, the increases were part of a package of tax hikes aimed at helping the government to contain a growing budget deficit, but they were also presented as public health measures.
The tax nearly doubled in 2012 to 4.33 shekels ($1.11) on a liter for beer with 3.8% alcohol content, making Israeli suds the most heavily taxed among countries in the Organization for Economic Cooperation and Development.
As of today, the tax on beer is back down to 2.33 shekels a liter.
In fact, the committee found that higher prices did little to reduce alcohol consumption. Beer consumption proved to be unexpectedly inelastic, to use the economists’ term, and drinking was little changed.
For spirits, such as arak and vodka, the higher tax didn’t bring any extra revenues and was probably detrimental to public health, the government committee concluded. Instead, it created a pirate industry of black-market and homemade alcoholic beverages that could endanger drinkers’ health and that hurt legitimate businesses.
Tax revenues on beer rose, but officials said Tuesday that the loss in revenues from cutting the tax would amount to about 100 million shekels annually, something the government can afford with its overall tax take growing (see story on this page).
The treasury said the lower taxes were unlikely to put much of a dent in tax revenues. “The move is expected to be fiscally neutral due to stepped-up enforcement by the Tax Authority of the counterfeit [alcohol] industry and alcohol smuggling,” it said.
Hinnawi said the tax cuts will almost certainly lead to higher consumption.
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