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Growing pressure for fiscal reforms in Mexico, paired with global health organizations pushing countries to refine their excise taxes, resulted in a new proposal that would overhaul the way Mexico taxes alcohol. The new system—a modernized Special 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.
on Production and Services (IEPS)—would move away from Mexico’s existing price-based ad valorem alcohol tax and move to a system where alcoholic beverages are taxed ad quantum based on their alcohol content. The proposed ad quantum tax would be the system that most closely follows the global best practices for alcohol taxes we previously outlined.
A proposal to move Mexico toward this IEPS system, supported by a broad coalition of alcoholic beverage producers, was originally introduced in 2020 and reintroduced in 2021, but didn’t move through the legislature. However, under a new tax review that could happen next year, new legislation may be up for debate.
The proposed system would replace Mexico’s three-tiered ad valorem system that included higher rates for products with stronger alcohol contents. In its place, Mexico would levy an ad quantum tax of $1.40 MXN per degree of alcohol per liter of beverage ($140 pesos per liter of pure ethanol).
Current and Proposed Alcohol Tax Designs in Mexico, 2024
The new ad quantum tax system would increase baseline tax revenues. According to the proposal, a revenue-neutral ad quantum tax rate per degree of alcohol per liter that replaces the existing ad valorem tax would be $1.06 MXN, so the proposed $1.40 MXN rate would increase collections.
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.
collections from alcohol have steadily grown over the past decade. Total alcohol collections increased from $38 billion MXN in 2014 to nearly $74 billion MXN in 2023.
Beer is the dominant market leader in alcohol sales. Estimates put market share for beer at more than 93 percent. Despite a roughly 93 percent market share, beer and fresh drinks yielded only about two-thirds of alcohol excise tax revenues. In 2023, beer and fresh drinks (nearly all the collections coming from beer sales) generated near $49 billion MXN, while wine and spirits sales yielded nearly $25 billion MXN.
The proposed changes to the alcohol tax would fundamentally alter how Mexico’s alcohol tax system is designed. The ad quantum tax would not only increase revenue but also bring significant changes to the tax structure and reduce the illicit market. Mexico’s illicit alcohol market under the current tax regime is substantial. As much as 42.5 percent of the distilled alcoholic beverages are sold “informally” (untaxed), with an approximate tax loss of $11.5 billion MXN annually.
Alcohol taxes should be simple, transparent, and neutral. Well-designed alcohol taxes can efficiently provide tax revenue to fund programs to address external harms and anti-addiction programs associated with alcohol consumption, while simultaneously serving as a financial disincentive for overconsumption.
Mexico’s newly proposed ad quantum tax better-fits the global best practices for alcohol taxes than does the current system ad valorem tax for two major reasons.
- An ad quantum tax is a more neutral tax than an ad valorem tax and better-targets the ingredient that creates external harms.
Applying different tax rates to different types of alcohol is non-neutral. This disproportionately encourages consumption of one product over another by artificially increasing prices through the tax code.
Alcohol is alcohol, regardless of the process of extracting the ethanol (e.g., distilling, mashing, or steeping). Alcohol is also alcohol regardless of the initial starting ingredient (e.g., agave, grapes, grain, potatoes, sugar cane, apple, pear, or honey).
Harms from alcohol are disproportionately linked to the quantity of alcohol consumed, not the price of alcohol. A tax that seeks to decrease the harms from alcohol is better targeted on the quantity of alcohol in a beverage than the price of a beverage.
- The ad quantum tax is much simpler to administer and more transparent than the ad valorem
The ad quantum tax would reduce the number of tax remitters by more than 99 percent. Under the current ad valorem system, each contributor to the production chain is responsible for remitting their portion of the tax, with transfers through the production similar to a value-added tax (VAT). This results in every importer, manufacturer, wholesaler, distributer, and retailer bearing responsibility for tax remission. The government struggles to enforce and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return.
each of these remitters, resulting in an estimated 60 percent under-remission.
In the ad quantum system, the tax can be levied on importers and manufacturers, substantially reducing the number of remitters. Many importers and manufacturers are substantially larger organizations, such as Groupo Modelo, the largest producer by volume and maker of Corona and Modelo. These global companies have better internal capacities for complying with tax systems than do small local retailers. Thus, tax collections in a simpler, more transparent ad quantum system would likely increase simply from increased compliance.
In conclusion, an ad quantum tax system would dramatically reduce tax compliance and administration costs, increase tax collections, result in a more neutral alcohol tax, and better-target the ingredient (alcohol) that motivates having a dedicated tax on alcohol in the first place. The proposed change to the alcohol tax in Mexico would result in the best-designed alcohol tax in the world.
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