Distillers pushing for lower taxes but Finance Ministry unlikely to swallow

Recent calls by domestic liquor producers for a 30% reduction of excise tax on spirits will have little chance of parliamentary approval, although industry insiders are intent on lobbying for the decrease. The government introduced an excise tax on certain "luxury" goods, including both domestically produced and imported spirits, in 1993 and has increased the amount on liquor almost once every year since then. Excise taxes are the easiest way for the government to generate money for its cash-strapped coffers. Polish spirits producers, in particular, have loudly protested the progressive tax increases that have eaten away at their profit margins. Their clamoring has increased in reaction to recent press reports about a possible lowering of excise taxes on domestically produced liquor. To back up their new calls for an excise tax reduction on liquor, Polish spirits producers are quick to point out that the anticipated extra revenue from tax on locally produced spirits has fallen short of the government's expectations. Excise tax on spirits manufactured in Poland from January-May 2002, for example, amounted to only zł 1.69 billion ($412 million), 3% less than in the same period in 2001. This amount accounted for about 14.3% of the total zł. 11.9 billion ($2.9 billion) revenue collected from all excise taxes levied on sales of liquor, beer, wine, cars, tobacco products, fuel and electricity during the first five months of the year. Despite the recent discussion about lowering the excise tax, industry players concede that since any cuts would reduce federal budget revenue in the short term, the government would be unlikely to lower it.

"Considering the current budget situation, this solution is unfeasible," said Danuta Machowska, a financial officer at Warszawska Wytwórnia Wódek "Koneser" distillery. No one at the Finance Ministry, which is responsible for reviewing proposals to change excise taxes, was available for comment late last week. Mieczysław Czerniawski, a Democratic Left Alliance (SLD) deputy and the chairman of the Sejm's public finance committee, said that as of last Friday, the committee had not received any draft of changes to the indirect taxes bill, which includes excise regulations. "As far as I know, no calculations have been made, and (an excise tax rate cut) has not been allowed for in the 2003 budget draft," he said. Nevertheless, industry professionals are pressing on with their calls, arguing that the excise tax increases have pushed many consumers to purchase more bootleg bottles on which no taxes are paid. "If one is able to buy half a liter of smuggled spirits for zł. 10, he will not even consider buying half a liter of (legal) vodka for zł. 25," said Machowska, adding that the whole industry was hoping for a considerable reduction of excise tax. She estimated that excise tax amounted to almost 88% of the final price of a bottle of spirits. The illegal production and sales of alcohol account for about 35-40% of the Polish spirits market, according to Bogusław Wojtach, the financial director of Polmos Białystok, a producer of a wide assortment of vodka, including the best-selling brands Absolwent and Żubrówka.

"These 25 million liters (of spirits) produced or imported illegally are equal to the output of … the two biggest Polish manufacturers," he said. Liquor producers have also turned to economic analysis to give credence to their demands for lower excise tax on spirits, arguing that a reduced rate would prevent the government's tax revenue from falling. Robert Gwiazdowski, a tax expert at Warsaw's Adam Smith Institute, said that the increases in excise tax and the corresponding drop in the government's budget revenue this year was a "first-class example of the Laffer curve effect." The Laffer curve, an economic analysis tool named after Ronald Reagan's economic adviser in the 1980s, indicates that if tax rates are raised above a certain level, revenues fall. Gwiazdowski said that the high excise tax on liquor accompanied by a weak tax enforcement authority promoted an increase of criminal activities in gray areas, such as the sale of smuggled liquor. "This could be called 'a supply-side economy' as the demand for smuggled alcohol is actually raised by opportunities created by the actions of the government," he said. Industry professionals agree. "This (fall of revenue) is, unfortunately, in line with our predictions," Wojtach said. "Stepping over a certain line (of the excise tax rate) actually lowers budget income."