The alcohol industry lobby and Hong Kong’s zero wine and beer tax policy

The transformation of the alcohol tax regime

In Hong Kong, alcohol duties have been applied on both imports and goods manufactured locally on an ad valorem basis but not levied on exports or re-exports. Throughout the 1990s, the duty rates on alcoholic beverages, except wines, remained unchanged: liquor with an alcoholic strength of more than 30 percent was taxed 100 percent while wine and beer were taxed at a rate of 60 percent and 30 percent, respectively. The alcohol taxation policies have, however, undergone dramatic transformations in the 2000s. In 2001, the Hong Kong government increased the duty rate on liquor with an alcoholic content of 30 percent and below (except wines) from 30 percent to 40 percent [22]. Subsequently, the government raised the duty on wine from 60 percent to 80 percent in 2002 (see Figure 1).

One of the main reasons for such a tax increase was the rise in Hong Kong’s budget shortfall, with a consolidated deficit of HK$ 65.6 billion (US$ 1 = HK$ 7.80) for 2001–02 as a result of the continuing slump in the property market and the local economy [22]. In view of the economic downturn, the excise tax represented a more politically viable way of raising revenue for the government than other taxes such as those on capital gains and income. In his 2001 budget presentation, then-Financial Secretary Donald Tsang (who was appointed Chief Secretary in 2001–2005 and subsequently assumed the office of Chief Executive in 2005–2012) acknowledged that he felt pressured because “Hong Kong must overcome the difficulties spawned by the economic downturn” [23]. As part of effective measures to restore the fiscal balance, he believed that an increase in the duty on beer would be inevitable. He stated that the tax increase would generate additional revenue of HK$ 90 million each year [23]. In the following year, faced with a growing budget shortfall, Financial Secretary Anthony Leung, Tsang’s successor, proposed to increase the duty rate on wine from 60 percent to 80 percent, which he claimed would produce an additional HK$ 70 million in revenue [22].

The increase in alcohol taxation was met with immediate opposition from the alcohol industry. From the alcohol industry’s perspective, the tax represented a direct menace to their continued prosperity. The Hong Kong Beer Industry Coalition (HKBIC), which then comprised seven international brewers and importers, strongly opposed the tax increase on beer. In May 2001, the HKBIC claimed that “such an increase would adversely affect the livelihood of several hundred thousand people working in the beer, retail and catering industries [24]”. More importantly, in order to gain wider public support, they highlighted that the tax increase might significantly push up retail prices, which would eventually penalize the majority of ordinary beer drinkers [25]. The HKBIC’s attempt to rally the general public against the tax increase was well reflected in their public statement: “The HKBIC does not believe that it is fair to impose a duty rate increase, which affects a broad spectrum of ordinary consumers, while the duty rates on luxury products remain unchanged [24].”

Likewise, the local wine industry fiercely opposed the duty increase and urged the government to reconsider its proposal. The Hong Kong Wine Industry Coalition (HKWIC), then comprising eleven wine manufacturers, employed a rather similar rhetoric to appeal to the middle class, as they could be construed as a potential supporter against government tax-rise legislation. In its letter submitted to the Legislative Council in April 2002, the HKWIC argued that “wine is a staple consumer good enjoyed by a wide range of the population” and therefore such an increase “affects a large cross-section of the population, not a small group of high-income earners [26].” They warned that the government would not receive the planned additional HK$ 70 million in revenue from the alcohol tax increase. Rather, they estimated that the tax increase would result in a loss of government revenue because there would be general signs of trading-down activities to cheaper priced alcohol [27]. Linking the wine duty with Hong Kong’s competitiveness vis-à-vis other economies in the region, the SoHo Association Limited representing the catering industry noted that raising the wine duty ran counter to encouraging investment in Hong Kong [28]. In a separate move, the Australian and New Zealand Consulate-Generals in Hong Kong, the two major suppliers of wine to Hong Kong, sent protest letters to the government. They argued that “consumers will react to the tax increase by switching to lower taxed and untaxed beverages and to illicit sources of smuggled wine, defeating the aim of substantially raising revenue [29].”

Despite the alcohol industry’s vigorous lobbying, the Hong Kong government was initially resistant to the industry’s opposition primarily because alcohol tax was seen as a “stable source of government revenue [23]”. On average, the alcohol tax had contributed approximately 0.4 to 0.5 percent of the government’s total revenue annually from early 2000 to 2005. For this reason, the tax rate on alcoholic beverages remained intact until the first half of the 2000s despite the industry’s political pressure and strong resistance.

The corporate movement and new tax reduction strategies

By mid-2004, two factors appeared to have contributed towards a new policy climate that favored a reduction in the alcohol tax. One was the robust economic rebound despite the severe economic fallout caused in part by the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003. The Hong Kong economy exhibited a broad-based upturn in 2004 with a rise in real gross domestic product (GDP) of 8.7 percent amid a strong inflow of capital funds and an upsurge in consumer spending [30]. The other arguably more important factor was the persistent lobbying and political pressure from the alcohol industry. Over the years, the alcohol industry incessantly lobbied the government to lower the alcohol tax rate [31].

In its efforts to lower (and eventually abolish) the tax in question, the alcohol industry sought out industry allies such as the hospitality and trading industries and forged agreements with them to collectively advocate its position. Although forming alliances was not a new industry practice, it became an increasingly important strategy. Among others, the Hong Kong Wine & Spirits Industry Coalition (HKWSIC) was notable for this [32]. The coalition was first formed with the wine industry only and named as the Hong Kong Wine Industry Coalition (HKWIC) in 2002 “to lobby the government on industry related issues such as alcohol duties [33].” Then the alcohol tax increase in 2001–2002 prompted a more typical formation of like-minded industry groups which shared similar vested interests. Fredric Dufour, the managing director of Richemont Hong Kong, a transnational retailer of liquor products, tobacco and other luxury goods, became the first chairman of the HKWSIC [34].

In order to convince policy makers and political leaders, the coalition needed a representative that could provide legislative tax initiatives, help industry lobbyists gain access to lawmakers and senior government officials, demonstrate constituent support for alcohol tax reduction and testify on the industry’s behalf. Tommy Cheung Yu-Yan, who holds the seat of the catering industry functional constituency in the Legislative Council of Hong Kong, acted as a core policy link between the HKWSIC and the government, advocating for reductions in alcohol taxation.

At the Legislative Council meetings in 2002, he repeatedly delivered the message that the high cost of quality wines and spirits in Hong Kong damages Hong Kong’s tourism sector [35]. In order to convince politicians and government officials, the idea of Hong Kong becoming a regional hub in the alcohol trade was advanced. The coalition claimed that a lowered duty on wine would boost tourism and further strengthen Hong Kong’s image as a wine distribution centre [35]. The central idea was that a wine tax cut would encourage more investment from international wine traders, which would in turn result in more employment and economic growth.

Indeed, Hong Kong’s political leaders have long been interested in transforming Hong Kong into a regional wine trading centre [36]. In 2000, then-Financial Secretary Donald Tsang once mentioned that Hong Kong had great potential as a wine hub as the demand for wine in Asia and mainland China was rising [22]. The Hong Kong Trade Development Council estimated that the total market for wine in Asia was expected to grow at between 10 percent and 20 percent per annum to a probable consumption value of US$ 17 billion by 2012, and rising to US$ 27 billion by 2017 [37]. Such rosy estimates began to garner political support for building Hong Kong into a wine trading centre. For senior government officials who regarded rapid economic prosperity as the paramount political priority, this policy option was too attractive to resist. Through meetings with Legislative Council members as well as officials in the Financial Services and Treasury Bureau, the coalition provided a variety of supporting arguments and figures to substantiate their case [38].

Faced with relentless industry lobbying, the Hong Kong Government then began to consider assessing the existing alcohol duty regime. In December 2004, the government launched a Public Consultation on the Duty on Alcoholic Beverages to seek feedback on the appropriate level of alcohol taxation [39]. In its consultation document, the government indicated that while the government maintained its position that “the duty on alcoholic beverages should not be abolished but be retained as a form of tax,” a review of the alcohol taxation policy might be needed primarily because “there are constant calls from the liquor industry and the catering sector for a reduction in the duty on alcoholic beverages [40].” This statement clearly reflects the increasing pressure from the alcohol industry to lower the duty on alcohol.

Amidst signals from the government that alcohol tax reduction was under consideration as a likely option, the alcohol industry had high hopes, leading it to establish task forces, mobilize more public campaigns, and assemble arguments [41]. The coalition urged the government to lower the tax on alcohol by at least half. The campaign had gathered momentum after signs of a government revenue surplus appeared from 2005 onwards. The increase in government revenue was a politically excellent opportunity for the industry to raise the issue of lowering alcohol duties once again. The coalition noted, in January 2006, that “this is about the time to push forward our proposals as the economy is recovering steadily. We hope the government can reduce the duties when the public has more money to spend [42].”

Since late 2006, the industry elected to work closely with local media in an attempt to garner the wide spectrum of public support. For instance, daily newspaper titles such as “80 percent tax on wine too high, says lawmaker” or “hospitality industry says it would pass on saving to long-suffering consumers” were indicative of how the coalition sought to garner and increase the level of public support [43, 44]. The need for a reduction in the alcohol tax was often illustrated in a simple form of fact sheets, press releases and Q & A materials in order to move the public sentiment on alcohol taxes [45]. Using industry data, the media often highlighted the relatively high alcohol prices in Hong Kong compared to neighboring regions such as Mainland China and Macau, so as to shape the public perception that the alcohol tax was an unfair form of taxation [46]. In December 2006, Fat-Long Chan, co-chairman of HKWSIC, asserted in the media that “Hong Kong has the highest alcohol duties in Asia. Many consumers decide to purchase alcohol abroad and the government loses taxes. If alcohol duties are decreased, we will also decrease our alcohol prices [47].”

The coalition’s opposition to alcohol duties was based on the protection of their commercial interests, but arguing that such duties hurt sales was not a viable political strategy. Instead, the industry attempted to build public support for its position by defining the alcohol duties as a threat to employment and the local economy. A local newspaper cited legislator Tommy Cheung’s remarks that the high alcohol tax threatened to harm employment: “[should the existing tax regime continue], the wine business will have to cut its profit margins to be competitive. It may result in unnecessary lay-offs and future [economic] difficulties [43].”

Boris de Vroomen, the new co-chairman of the HKWSIC and managing director of Moet Hennessy Diageo Hong Kong, was keen to gain a broader spectrum of support by allying with a range of actors as well as communicating with the public. In a media interview in December 2006, he stated that:

"We are trying to engage with other parties as well to increase the level of support. Demonstrating that this [alcohol duty reduction will lead to reduction in alcohol prices] is good for the general public in Hong Kong can lead to a majority of Legco [Legislative Council] supporting this, and then I think the financial secretary will be on board as well [44]."

The Liberal Party and the Democratic Alliance for the Betterment and Progress of Hong Kong supported the move [48]. Sixteen consul-generals had sent a joint letter to the financial secretary backing the call for lower alcohol duties [44]. On 6 February 2007, shortly before the Financial Secretary’s 2007–2008 budget speech, the HKWSIC held a media briefing on the need for lowering alcohol taxes. Tommy Cheung was presented as an influential leader to advocate for the coalition’s position. Cheung argued that “we strongly want the government to reduce duties on wine. We have been talking about this for years. Once the city becomes a wine centre, everyone will come to buy [49].”

On the other end of the spectrum, a small number of lawmakers and commentators expressed concerns about the negative effects of alcohol tax reduction. In January 2006, at a Legislative Council meeting, the Democratic legislator Fred Lo Wah-Ming presented his concerns about possible drinking problems among young people should the existing tax regime change [42]. In September 2006, amidst the growing climate of favouring a reduction in taxes on alcohol, Vladmir Poznyak, the WHO coordinator for management of substance abuse, suggested that Hong Kong use taxation on alcoholic beverages as part of an alcohol control policy. He further noted that the beneficial effects of moderate drinking had been over-rated: “we should be cautious about the message that red wine is good for the heart [50].” Writing in a local newspaper in December 2006, Professor Hildemar Santos, a public health physician at the Tsuen Wan Adventists Hospital, stated that growing availability of alcoholic beverages through reduction in retail prices may increase alcohol-related harms. Comparing to the effects of tobacco taxation on smoking, he further asserted that:

"My argument is based on the fact that most countries that increased tobacco taxes saw a bigger decrease in smoking than with any other public health anti-smoking campaign. I believe the converse is true for all potentially addictive substances: lower taxes lead to higher consumption. It is therefore unwise to push for lower taxes on anything that is addictive and abusable [51]."

Despite a few other similar calls for the institution of alcohol taxation to play a bigger role as part of public health and alcohol control measures, the message has not been effectively communicated.

Towards a zero tax regime in the absence of public health advocacy

In 2007, Hong Kong saw a remarkable budget surplus of more than US$ 7 billion with a 6.8 percent GDP growth rate. In his budget speech on 28 February 2007 [52], then Financial Secretary Henry Tang announced that taxation on all forms of alcohol except spirits would be lowered by 50 percent with immediate effect, costing the government HK$ 350 million per year. This meant that the duty on beer and other types of liquor containing no more than 30 percent alcohol was reduced to 20 percent from the previous 40 percent, and the wine duty was adjusted to 40 percent from the previous 80 percent. Tang believed that “reducing the duty will help promote the development of our catering industry, tourism and wholesale and retail alcoholic beverage trade, thereby benefiting the community at large [52].” He further stated that he was willing to “consider the innovative idea of abolishing alcohol duty to boost economic activities and promote development of Hong Kong as the regions’ wine exhibition trade and logistics centre [52].”

Whereas halving the duty on wine and beer was welcomed warmly by the industry [53, 54], there were little, if any, concerns raised from public health experts and civil society organizations (CSOs). In recent years, local non-governmental organizations (NGOs) have played an increasingly important role in exerting pressure on relevant government policies and gaining public support. In the field of public health and environment, NGOs have been, in cooperation with academics and others, progressively active in various aspects of the policy-making scene. For instance, independent non-profit organizations such as the Hong Kong Council on Smoking and Health, the Clear the Air, and the Civic Exchange have been active and committed to tobacco control and/or environmental protection as part of their advocacy [55]. They engaged stakeholders and the wider community in campaigns to protect and promote public health in Hong Kong. Their efforts have resulted in several positive outcomes such as the expansion of smoke free places in January 2007 under the revised Smoking (Public Health) Ordinance, raising public awareness of Hong Kong’s poor air quality, and increasing the tobacco duty by 50 percent in 2009 and 41.5 percent in 2011 [56].

In view of the roles that local NGO actors actively played in the making of public health policy, it is surprising that they have apparently been totally absent in the policy debate on alcohol taxation. The lack of civil participation in creating policy dialogues and raising concerns related to alcohol tax reduction lies in stark contrast to the vociferous mobilization and lobbies driven by the industry. Apart from concerns raised by a professor of public health about the impact of alcohol tax reduction on drinking behaviour amongst young people, the social and public health issues surrounding alcohol taxation were given little attention. Sian Griffiths, Director of the School of Public Health of the Chinese University of Hong Kong, warned in a media interview with a local newspaper in March 2007 that a low alcohol tax might translate into a higher availability of alcoholic drinks, which in turn would potentially increase alcohol consumption, particularly among younger drinkers who are more price-sensitive [57].

In reviewing the industry materials, it is apparent that the coalition devoted particular attention to the positive health effects of wine drinking. Massive publicity and aggressive alcohol promotion efforts were based upon the notion that consuming a small amount of alcohol, in particular wine, helps protect against diseases of the heart [58]. Regardless of the scientific validity and the controversy of the health benefits of drinking wine, this notion has substantially created the widespread misconception among the public that wine is less associated with alcoholism and by implication allegedly less harmful than beer or spirits. How the notion of the positive health effects of red wine was widely accepted among the local public can be found if one looks at the consumption patterns of Hong Kong drinkers. In 2007, retained imports of red wine amounted to US$ 102.9 million and that of white wine were US$ 13.7 million, representing a ratio of 7.5 to 1 [59]. The Hong Kong-based wine industry’s document published in March 2007 is also indicative of Hong Kong drinkers’ perception on the beneficial cardiovascular effects of red wine consumption: “Drinking about two glasses of wine a day is beneficial to health and that is a major influence on the boom of the wine market in Hong Kong…Hong Kong drinkers prefer red wine to white wine because of more perceived health benefits associated with drinking red wine [60].”

On the policy front, the pro-business Liberal Party has been a key force behind the idea that drinking wine is healthy. At the heart of this move stood Party Chairman James Tien Pei-Chun. Shortly after the alcohol tax reduction, he called for further tax cuts on wine. At the Legislative Council meeting held on 28 March 2007, he claimed that one of the reasons why the wine tax should be eliminated was that unlike other alcoholic drinks, wine is beneficial to one’s health. Tien argued that:

"Many medical professionals and doctors are of the view that the consumption of red wine is different from that of whisky or brandy, for the alcoholic content of red wine is relatively low and its effect on our liver and kidney is smaller. Unlike smoking, the consumption of red wine is not hazardous to our health [61]."

In collaboration with business-friendly lawmakers, the alcohol industry employed a variety of instruments including reports, conferences, meetings, opinion pieces and letters to lucidly articulate the rationale for alcohol tax elimination [62]. In its proposal submitted to the Treasury Bureau in January 2008, the coalition claimed that abolishing the wine duty would generate HK$ 4 billion a year in sales and related businesses such as wine storage and fine wine actions [63]. The coalition held a press conference on 2 February 2008, where they urged the government to scrap the wine duty and halve taxes on spirits to 50 percent [64]. Tommy Cheung said that abolishing the alcohol tax would “drive Hong Kong to be a regional wine trading centre and bring economic benefit to Hong Kong [64].” The extensively publicized health benefits of moderate wine consumption had served to underscore their argument.

The corporative initiative appeared to have convinced the government officials and senior policy makers. On 27 February 2008, Hong Kong entered a new era as it implemented a zero alcohol taxation policy. In his budget speech, newly appointed Financial Secretary John Tsang announced that he would scrap all duties on wine and beer. This move has made Hong Kong the only place in the world where wine and beer are completely untaxed [65]. Tsang stated that the aim of the action was to attract more commercial opportunities and investments to Hong Kong in the alcohol trade, costing the government HK$ 560 million annually in lost revenues [66]. Effective 6 June 2008, a new regulation that eased permit controls was implemented under the amended Dutiable Commodities Ordinance [67]. This policy removed the need to obtain licenses and permits to sell liquor with less than 30 percent alcoholic strength and wine, thus creating a more conducive commercial environment.

The HKWSIC commended the decision, claiming that “a bottle of wine will now be cheaper in Hong Kong than anywhere else in Asia. It will make Hong Kong into a sensible hub for exporting, primarily into China [68].” The economic deregulation and liberalization of licensing, alongside the industry’s publicity to cultivate the wine culture, is likely to induce a change towards a wine drinking culture. One US alcohol industry document clearly indicates that its publicity efforts would target the changing drinking practices in Hong Kong. It states that “Hong Kong drinkers are getting more and more receptive to wine drinking practice. The total elimination of the excise tax on wine would probably help nurture wine drinking culture in Hong Kong…. It is an excellent opportunity for US wine traders to expand their exports [69].” As anticipated, wine consumption among the adult population in Hong Kong has dramatically increased in terms of the volume of pure alcohol consumed from 1,588,901 litres in 2004 to 3,164,107 litres in 2008 [14].

Intriguingly, following the reduction (and elimination) of wine and beer duties, alcohol consumption per capita in Hong Kong has slightly increased from 2.54 litres in 2006 to 2.64 litres in 2010 [14]. In particular, a surge in alcohol consumption per capita (3.00 litres) was observed in 2008 when duties on wine and beer were totally abolished. Since the implementation of a zero wine and beer tax policy, there have been calls for the Hong Kong government to lower the duty on distilled spirits by changing the current duty system [70]. The government did not accept the proposal on the grounds that the current system is simpler and fairer and is in line with the ability to pay principle. The government stated that any reform to the current system should avoid any regressive effects and other possible unfair situations between products of different price ranges [71]. Nonetheless, the HKWSIC, which represents the distilled spirits industry in Hong Kong, continues to pursue further tax reform that will effectively lower the duty.