According to the World Economic Forum, the global economy experienced a 12% contraction in Q1 of 2020, and the most brutal global equity collapse since the Great Depression. This has been exacerbated by a 60% oil price slump, skyrocketing unemployment and general economic chaos the world over. As policy makers and business leaders scramble to deal with the virus and its implications across all sectors, what is likely to be the impact on the tax stamp industry?
It is always risky trying to look into a ‘crystal ball’ and predict the future but there are already some key indicators that the tax stamp industry should be paying close attention to. From consumption of excisable goods and the trends related to illicit trade, to the pressure on revenue agencies, the only thing we can be relatively certain about is that the impact will be pervasive and challenging.
How will COVID-19 affect the supply and demand of excisable goods, namely tobacco and alcohol?
Current research is highly suggestive that smokers are at least doubly at risk compared to non-smokers in terms of the overall severity of infections as well as mortality.
The fact that this virus is a respiratory disease and smokers are at higher risk is not only logical but now being supported by some rather grim real-time studies. Will this prompt a global reduction in smoking as consumers put their health first as the stark reality literally stares them in the face? Will governments try to promote smoking cessation through tax-based measures? The likely answers here are ‘maybe’ and ‘yes’.
Alcohol is a different animal completely and there are cross currents that make supply and demand predictions rather difficult. On the one hand, restaurants and bars are closed in many parts of the world so all ‘on trade’ sales are down if not non-existent in these countries. In the US alone over 3 million restaurant workers have already joined the ranks of the unemployed.
On the other hand, consumers have been stocking their pantries with alcoholic beverages in preparation for lockdowns. In the US, for example, alcohol sales surged by 55% in the week ending 21 March and internet sales were up by 243%. Although demand is leveling out into the lockdown, it is still up by 22% over the same period last year.
Further complicating this picture is the fact that many producers have ceased production and/or are converting their facilities to produce methanol for hand sanitiser which is in short supply globally. AB InBev (whose leading Mexican brand is unfortunately named Corona) has already cut its annual dividend in half and closed its Mexican brewing operations as a result of government deeming beer production to be non-essential. Most of the big alcohol producers have totally abandoned performance forecasts for the rest of the year as uncertainty of the market is the only certainty.
Historically speaking, the alcoholic beverage business was among the most stable businesses in the world in terms of its resilience to economic factors such as recessions. For now, the only thing that is clear is that the pandemic will create considerable, long-term changes in how alcoholic beverages are purchased, consumed and distributed around the globe.
Impact on tax revenues
On the basis that the world is heading for the mother of all recessions, then tax revenues across the board will be shattered. When people are not working, and businesses are not making profits there is nothing to tax. At the same time, governments are injecting huge amounts of cash – that they don’t have – to lessen the blow on consumers and business alike.
According to global think tank ODI, ‘reduced international travel and trade, falling commodity prices and social distancing measures to suppress transmission will reduce economic activity and government revenues. Access to capital markets to fund deficits may become restricted.’
How will governments react to the deterioration of public finances? The tax measures to address coronavirus are most likely to continue to be highly targeted (to address those consumers and businesses most in need) and time-limited, as governments simply cannot afford to continue to fund such programmes with money they do not have.
One relatively obvious place for governments to look is excise taxes. Excise revenue streams are less likely to face the same level of disruption as, for example, corporate, personal or value added taxes.
Additionally, excise is perhaps the only tax type that is entirely voluntary from the end taxpayer perspective. If a consumer does not want to pay the tax, they simply do not have to consume the product. No other tax works this way.
Given the fact that excisable goods (and particularly tobacco) tend to be more inelastic than other consumer goods, revenue authorities would be wise to consider excise tax and programmes, like tax stamps, to increase revenue.
How will governments react?
Like the public health response to COVID-19, the approach by governments in terms of overall policy when it comes to excise and tax stamps is anything but uniform. Ranging from outright bans on certain goods to business as usual, the pandemic is simply too new to determine if there will be a uniform or coordinated approach to excise amongst governments.
While some countries continue to allow tobacco and alcohol products to be sold, others have clamped down. In South Africa for example, the manufacture and sale of alcoholic beverages has been completely shut down and the sale of cigarettes banned. This represents excise revenue that is lost to government at a time when it is most needed. The more draconian measures have been controversial to say the least, with even some public health advocates saying that the response to coronavirus was never intended to be an experiment in forced abstinence.
In many countries, the government will ultimately foot the bill for those who get sick and require medical treatment. So governments are likely to consider tax policies – like those advocated by the World Health Organisation for tobacco – to strike a balance between tax revenues and actual cost to government when it comes to smoking and drinking. Additionally, given the savings governments can reap from less consumption of goods that adversely impact health, ramping up one’s excise collections could translate into a win-win in the longer term.
In places where excisable goods are banned outright it would be logical to assume that consumers will find a way around the system. After all, supply normally finds a way to meet demand and there already are illicit markets for these products, so illicit producers are likely to ramp up production.
In South Africa, the tobacco industry is already complaining that illicit trade in tobacco is surging as a result of the government ban. As governments look to taxation of excisable goods as a means to fund the fiscus, illicit trade is also likely to increase. And, as excise producers face shrinking revenues, the temptation to under-declare production volumes will be greater than ever.
What comes next?
In these uncertain times, preparing for a future that is totally unpredictable is frustrating to say the least. As we hunker down to ride out this storm, it is only natural for us to think about how we can bounce back. How can this international disaster be dealt with if not turned into a potential advantage for the tax stamp industry? After all, some businesses are actually flourishing (by sheer virtue of the business they are in) so what can this industry do?
As discussed in this article it is hard to make sense of the chaos as the normal market indicators have been completely upended and, added to that, these are totally uncharted waters. The next article in this series will expand on these themes and focus on developing strategies to deal with this unfortunate but very real market uncertainty.
About the author: Michael Eads is a global trade expert and the Managing Director of Sovereign Border Solutions, a boutique consultancy that specialises in strategies and technologies in the field of customs, excise and border management.