Brazil Proposes Major Overhaul of Its Alcohol Tax System

The Brazilian government is poised to make the biggest change to its alcohol taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy in recent history. A policy change that aligns with the principles of modernizing alcohol taxes could result in a simple tax system that increases Brazilian alcohol tax revenue and provides incentives for less alcohol consumption in a neutral manner. Alternative policies being considered are much less efficient and effective and would result in tax policy that is far less neutral.

On July 10, the Brazilian Lower House approved a tax reform bill. This bill would implement specific taxes based on liters per alcohol (LPA), calculated by multiplying a product's alcohol by volume (ABV) percentage by its volume. For example, one liter of spirit with an ABV of 40 percent would yield 400 ml of pure alcohol, and 1 liter of beer with an ABV of 5 percent would yield 50 ml of pure alcohol.

The bill also included ad valorem taxes that would stack on top of the specific taxes. The ad valorem tax rates may vary by product and may increase based on ABV. Currently, the Senate is considering the bill approved by the Lower House and may suggest changes to the text.

Brazil doesn't currently levy an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on alcohol, however, the country applies a federal VAT-like tax (IPI) on manufactured products and also on imported products. The IPI rate varies by product according to a government-determined assessment of the product's value to society. Brazil levies an IPI rate of 3.9 percent for beer and an IPI rate on spirits from 16.25 percent to 19.5 percent. Brazil also levies taxes monthly on each business's gross revenue with a Contribution for the Social Integration Program (PIS) and Contribution for Financing Social Security (COFINS) tax.

Brazilian states levy a VAT tax (ICMS) in addition to the federal IPI. The ICMS varies across states, ranging from 22 percent to 32 percent for beers and from 25 percent to 39 percent for wine and spirits.

Alcohol Tax Design

What would an ideal alcohol tax look like for Brazil? The principles are straightforward. The economic justifications for special taxes applied to alcohol are based on reducing external harms created by consuming alcohol. Excise taxes increase market prices and decrease (legal) consumption, thus decreasing the external harms that accompany alcohol consumption, such as drunk driving, intoxicated violence, and property damage. Alcohol taxes also generate revenue, which can be used to help mitigate the harms of alcohol consumption by funding anti-addiction programs, enforcement of and incentives for sober driving, and education programs.

An ideal alcohol tax designed from scratch would eliminate tax categories and production subsidies. Any product containing alcohol would be taxed based on its quantity of pure alcohol, regardless of the process of extracting the alcohol (e.g., distilling, mashing, or steeping) or the initial starting ingredient (e.g., grapes, grain, potatoes, sugar cane, apples, pears, honey, etc.). Taxing alcoholic beverages by their amount of pure alcohol at the same rate ensures neutrality.

Specific rates based on quantity of pure alcohol are a better tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. than ad valorem rates based on price. Targeting the quantity of pure alcohol with the tax is a more direct way to incentivize changes than targeting product prices. The World Health Organization summarizes this well: "Consumption is reduced best with taxes based on the quantity (known as specific taxes) of an unhealthy product or its unhealthy ingredient (such as pure alcohol) rather than taxes based on the product's value."

If a best-practice specific tax on pure alcohol is infeasible, a second-best approach would be a hybrid tax system. A hybrid tax system should espouse the principles of neutral alcohol taxation and be designed as closely as possible to a specific tax based on LPA, avoiding ad valorem rates that vary based on alcohol type or ABV.

Blurred Lines of Categorical Tax Systems

Alcohol production remains an extremely innovative space in the global economy. While beer is the dominant market product in Brazil, global trends are likely to follow in Brazil and diversify the beer available to Brazilian consumers, along with other kinds of alcohol products.

Craft brewing revolutionized the beer industry in the United States, for example. The number of beers available to consumers exponentially increased. From 1992 to 2022, the number of breweries in operation in the US increased 26 times from 359 to 9,709, according to the Brewer's Association.

The increase in craft brewing not only diversified the flavor profile of the products on the market, but the alcohol content in these products also often diverged substantially from the traditional 4-5 percent in large batch brews. Craft India Pale Ales (IPAs) have a significantly higher alcohol content than the most popular light American lagers. Double IPAs often have 10 percent ABV or more, putting them closer in alcohol content to most wines than beers.

Other products blur categorical lines even further. Malt liquor, a higher-alcohol-content beer brewed with extra malt, by its own name is a clear category stratifier.

Many ready-to-drink cocktails are distilled spirits drinks. After combining the spirit with a mixer (e.g., a caipirinha), the final product available to purchase has an alcohol content closer to a beer than a bottle of liquor.

Hard seltzers' global popularity have exploded in the past five years. Originally designed out of consumer love for vodka sodas and similar carbonated alcoholic drinks, many hard seltzers contain no spirits at all. Hard seltzers are often made from fermented cane sugar, though other times hard seltzers can be brewed from malted barley or made with vodka. While malt-based seltzers are produced with grain, they create a final product that bears little resemblance to their malt-based beer cousin. Hard seltzers often have an alcohol content similar to beer, but the way in which the final product is taxed depends on the ingredients used in a categorical tax system.

Finally, other alcohol products simply don't fit into any existing category. Hard cider is made primarily from apples and pears. Kombucha is a fermented tea; it is naturally alcoholic, but the alcoholic content can be increased through strategic fermentation, resulting in popular products with ABV similar to beer. Numerous other products don't fit well into a three- (or four- or five-) category tax system.

Though tax policy can adapt to blurred categorical lines, that change is often slow, requires legislative attention, and adds substantial complexity to the tax system. A simpler approach is to tax all alcohol by the amount of pure alcohol in the product. The Brazilian government can implement tax reform that improves on their existing system and generates more revenue by applying neutral alcohol taxes that reduce harms associated with alcohol consumption.

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