US taxes could put Scotch on the rocks: Healthcare reforms in America may be bad news for drinks companies over here. John Shepherd reports

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The Independent Online
AMID THE recent raft of annual industry statistics issued by Macdonald Martin Distilleries lies a warning of yet another taxing challenge looming for the Scotch whisky producers - the Clinton administration's pledge to reform US health care.

The industry, which has suffered from penal rates of excise duty in the UK for many years, now has to face the imposition in the US of a 'sin tax' to fund the social and medical costs arising from alcohol. In addition, there may be a greater fiscal penalty to help ease the US budget deficit.

The need to fight against duty increases in America is of paramount importance for three UK drinks companies - Grand Metropolitan, Guinness and Allied-Lyons, which are respectively numbers one, two and four in the world order.

Export figures show that the US bought 38.4 million litres, or pounds 250m worth, of Scotch alone in 1992. That amount, however, was down by 6 per cent on the previous year. France, which recently increased duty rates on spirits, is another important market, having imported 28.7 million litres in 1992, up 12 per cent on 1991.

Scotch whisky, in common with other spirits, is not taxed as heavily in America as it is in its country of production. Each nip of whisky sold in a Scottish pub tips about 23p into the Treasury's coffers. The shot served in American bars - more than twice as large - puts only the equivalent of 7p into the federal government's hands.

About dollars 10.5bn was levied from sales of spirits in the US in 1992, much the same as was raised in 1991 when federal tax was last increased on spirits.

That statistic throws up two conflicting lines of argument: one which says that taxation of spirits is now testing the law of diminishing returns, and another which says sales are beginning to recover from the recession and can easily shoulder higher duty.

Drinks companies are concerned about the latter argument, and have been bracing themselves for a fight since before President Bill Clinton was elected. Their plan of action against the threat of higher taxation has been co-ordinated under the umbrella of the Distilled Spirits Council for the US (Discus), the equivalent of the Scotch Whisky Association at home.

A taste of the build-up to the current level of lobbying was recently provided in Impact International, the international drinks magazine, with Fred Meister, president of Discus, saying: 'It's been our standard operating assumption that whatever administration was elected, beverage alcohol taxes would be on the table.'

Elizabeth Board, also of Discus, believes that the lobbying of senators and representatives, before and after the election, has been effective. Discus is far from being complacent, however. It says: 'We are now trying to take the message beyond Washington.'

So are American brewers, who have launched an advertising campaign in newspapers warning President Clinton of the impact higher taxes could have on the 1.37 million people directly and indirectly employed in the drinks industry.

Raymond McGrath, a former New York congressman and the recently appointed president of the Beer Institute, is on record as saying: 'We (already) gave at the office, at the church and at home. We are totally opposed to any new taxes.'

The brewers and spirits companies argue that, while federal taxes seem low at 23 per cent, levies by individual states have already made the total tax burden unbearable. Tax taken by some states on spirits is double the amount taken by the federal taxman.

For the giant British distillers, the most serious implication of higher US taxes is that they would come at a time when business in other large markets, such as Spain and Germany, is just starting to be hampered by recession. Despite falling consumption of spirits over the past decade, the US still absorbs huge quantities of whisky produced in Scotland.

While Discus aims to take the message beyond Washington, IDV, the drinks arm of Grand Met, wants the British government to open up another front.

A spokesman said: 'Our contacts continue to reinforce our view that increases in excise tax are seriously being considered by Congress. This could have some impact on our exports of Scotch whisky. Any government lobbying from this side would help make the US government aware of our concerns.'

Given that more that pounds 2bn of Scotch was exported worldwide last year, the issue of taxation by foreign governments is one that Whitehall can ill afford to ignore. The Government's case, however, is seriously weakened by its own rates of excise duty and VAT, which are way out of line with the rest of Europe, let alone the US.

Grand Met's spokesman was equally dismissive of any justification put forward on health grounds for adding to the tax on spirits. 'We refute the idea that the moderate drinker should be punished unduly. There are no bad drink categories, but bad drinkers in all drink categories.'

Another prime concern for the British contingent is the protection of drinks brands. They are worried that more drinkers would switch to own-label products or cut-price brands such as Passport and Scorseby's if prices were pushed higher by tax increases.

Guinness, Grand Met and Allied- Lyons all have extensive brand stables, which include Johnnie Walker, J&B Rare, and Ballantine's whiskies. Grand Met has the most powerful portfolio, owning 11 of the world's top 100 brands. In total, British companies produce nearly one in three of the world's best-selling spirits.

However, the pressure on brands was clearly shown in recent statistics compiled by Impact International. Shipments of the top 100 brands in the world last year dropped by 1.2 per cent to 270.2 million cases of nine litres. Shipments of all but six British spirits brands in the top 100 were either stagnant or lost ground in 1992.

United Distillers, owned by Guinness, is to close three Scottish malt whisky distilleries at the end of this month as part of a rationalisation and investment programme designed to reduce costs.

The importance of the American branded spirits market for the three companies was emphasised last year when they hastily boosted shipments ahead of President Clinton's threat of a trade war with Europe.

Judging from the scale of the budget problems facing President Clinton, the question now is not whether he will raise excise rates on alcoholic drinks but by how much.

Drinks alone, though, will not provide anywhere near the estimated dollars 150bn-dollars 200bn needed to fund the radical healthcare reforms. While the threat to Guinness, Allied-Lyons and Grand Met is real, its effects may well turn out to be less harsh that the lobbyists would have us believe. After all, it was once said: 'The budget is a mythical bean bag. Congress votes mythical beans into it, and then tries to reach in and pull real beans out.'

(Photograph and chart omitted)