Watching last week’s budget speech was a bit like watching one of those seemingly “boring” episodes of The Walking Dead. At first, it appeared like nothing major would come about – but then something happened that completely shocked all of us into simultaneously proclaiming “WTF!”
The budget had a few of those moments, but one of the biggest was the whopping 25% tax increase on alcohol. If you enjoy a good drink or two after a hard week of slaving in the office you know what this tax increase means.
Business owners making a living from the importation of alcohol will feel the full force of the 25% increase. The cost will then be passed on down to distributors and the bars buying the alcohol. Here is where the “real” price increase to the consumer becomes less clear, because distributors and bar owners are free to mark up their alcohol prices as much as they want to (if at all).
We caught up with restauranteur Howard Lo, owner of Standing Sushi Bar, Tanuki Raw, and Liberty Spirits at his newest craft spirit tasting room, The Secret Mermaid, to get his perspective on the latest alcohol tax. We figured since we had previously featured his establishments in our article on “5 Places Where Drinks Are So Cheap, It’s a Problem”, we’d better check back to see if this would affect anything!
What do you really think about the latest alcohol tax increase?
Howard Lo: Well, it was pretty surprising to be honest. No one had any idea that the alcohol tax was going to be raised. What I thought was even more shocking was the fact that the tax increase was made effective immediately.
As a business owner operating on the bar and distributor side of things, an immediate tax increase of 25% doesn’t give you a whole lot of time to react to the price hike.
Having an early warning about the tax increase would have been nice, but now you just have to deal with it and hope you’re in good enough financial shape to live with the increase. An early warning about the impending tax would have given a lot of businesses time to plan for the tax increase.
What was the immediate impact the tax increase had on your businesses?
Howard Lo: On the distributor side of things the immediate impact is larger, as more money is needed up front to restock spirits and beer. To compensate for the additional costs, we have to reduce our marketing budget a bit, but other than that, we’re in pretty good shape.
It’ll be interesting to see what the big alcohol distributors do. Prices are pretty transparent right now, so it would be easy to see if they raise their prices any more than what’s expected. But I doubt they’ll start price gouging just to take advantage of the tax increase.
Small distributors might not be that fortunate. The 25% tax increase might actually push some of them into the red if they’re not doing too well.
On the bar side, there won’t be much of an impact in prices, especially since many bars already have a price point in the $15-$20 range.
A lot of people have this apocalyptic assumption that the tax increase equals a 25% increase on the cost of a bottle of beer. That isn’t true.
The truth is that with the tax increase, prices should only go up by about $.50+ per drink. At the end of the day, a $.50+ increase in the cost of a gin and tonic isn’t going to matter much to a guy who’s already paying $15+ per drink.
What impact do you think the alcohol tax increase will have on small business owners?
I suspect that the alcohol tax hike will definitely slow down the hiring and expansion plans of some business owners. They also might not stock as much alcohol as they did previously because of the price increase.
The sad thing is that businesses that waited until after the budget speech to take out 1,000+ bottles of stock for the month saw their costs increase by thousands of dollars in the span of a few hours.
How do you plan for something like that? You can’t. A hit like that will put a stop any business in its tracks.
What about bars that raise their alcohol prices by $1 or more for drinks?
Yeah, if you go to a bar that has raised its prices by $1.00 or more per drink because of the new alcohol tax, you’re paying too much.
It’s at the bar level that you’ll see the greatest impact on the consumer. Not so much at the distribution level. That’s because it’s the bars that ultimately control the prices they give to consumers.
Sadly, some bars will end up using this tax increase as an opportunity as an opportunity to overcharge customers.
What long-term impact do you expect the tax increase to have on your businesses?
Howard Lo: I don’t see there being too much of a long-term impact on business. This tax is kind of like getting stung by a bee. Sure, the sting is painful, but the pain goes away over time. I think that’s exactly what this tax will be like.
But if I’m an entrepreneur looking to get into the alcohol distribution business, this tax will definitely slow down my plans because of the additional capital I would need to collect.
Standing Sushi Bar and Tanuki Raw are pretty popular for their alcohol promos. Will you be changing them anytime soon because of the costs?
Howard Lo: [laughs] No, no, we don’t intend to change any of our promotions. I’m not sure about other businesses but I can tell you that we’ll be holding onto our current promos despite the tax hike.
Do you think the tax increase will put a lot of people out of business?
Howard Lo: As huge as this tax increase is, I can’t see it putting a lot of people out of business. Many small businesses will struggle through this period, especially those who imported massive amounts of beer and spirits that they’ll now have to pay for at the marked up price.
But I can’t see huge numbers of businesses going out of business except for those who were already close to or operating in the red.
This tax increase is expected to boost revenues by an estimated $255 million annually. What do you hope this tax money will be used for?
Howard Lo: Budget 2014 introduced a lot of social programs aimed at helping out our Pioneer Generation, and lower- and middle-income families with their children’s education. I just hope that every dollar is used effectively in helping those who really need the financial assistance.
MoneySmart Closing Comments
Perhaps the most pressing issue taken from Howard Lo’s eye-opening interview on the impact of the alcohol tax increase is this – why weren’t businesses owners informed about the impending tax hike?
Singapore is known as one of the most pro-business nations on earth, renowned for its stability and efficiency. So it’s very surprising when the government blindsides business owners running alcohol-related businesses with a tax that went into effect as soon as it was mentioned in the Budget 2014 speech.
Some might argue that there are certain “lobbyist” groups that could have complicated the political process here if this tax was announced months before the Budget 2014 speech. However, there’s no denying the fact that small businesses in the import, distribution, and serving of alcohol will have to deal with some hardship over having to deal with a completely unexpected rise in the price of alcohol.
Do you think the government should be more transparent about future taxes? Share your experience on Facebook! And to find even more useful information on everything personal finance, visit MoneySmart today!
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