[The Editors' Verdict] Price Controls for the General Election

Abolition of the Beer Price Linkage System After Four Years
Unprecedented Liquor Tax Cuts Amid Record Tax Revenue Shortfall
Artificial Price Controls Aimed at Next Year's General Elections

From January 1 next year, the 'Specific Tax Price Linkage System,' which mandated reflecting the inflation rate in taxes imposed on Makgeolli and beer, will be abolished. This comes four years after the introduction of specific taxes on these alcoholic beverages in 2020. The inflation rate of consumer prices was reflected annually in the taxes on Makgeolli and beer, but the government believes that liquor companies used this as a pretext to significantly raise beer prices. When the Ministry of Economy and Finance announced the tax law revision in July, it explained in reference materials that "since the implementation of the specific tax price linkage system, the tax per bottle of beer (500ml) increased by 3 to 15 won, but beer prices rose by 500 to 1,000 won, greatly increasing the burden on consumers."

The introduction of specific taxes on beer and Makgeolli was prompted by the domestic liquor industry facing difficulties as imported beers, promoted with slogans like "4 cans for 10,000 won," sold like hotcakes. Unlike imported beers, which are taxed based on import prices, domestic beers were taxed using an ad valorem tax method that includes distribution margins, resulting in reduced price competitiveness. Currently, imported beers in convenience stores have risen to "4 cans for 12,000 won." This is due to the sharp rise in barley prices, a key ingredient in beer, caused by the prolonged war initiated by Russia's invasion of Ukraine, the world's largest grain producer. Nevertheless, the government abolished the price linkage system, citing that the liquor tax linked to inflation provided an excuse for domestic beer price increases. Given the expected tax revenue shortfall of 60 trillion won this year, this trend of liquor tax cuts is difficult to understand.

Therefore, this measure implicitly pressures companies to lower prices instead of cutting taxes. Previously, the government introduced a new concept called the standard sales ratio, which is a tax discount rate, for domestically produced distilled liquors taxed under the ad valorem system, lowering the factory shipment prices of distilled liquors such as soju by 10.6%. Accordingly, HiteJinro, which raised soju prices last month, proactively reduced the shipment prices of 'Chamisul' and 'Jinro' by 10.6% starting from the 22nd, and Lotte Chilsung announced that from January 1 next year, it will reduce the shipment prices of soju products like 'Cheoeumcheoreom' and 'Saero' by 4.5% and 2.7%, respectively. In Lotte Chilsung's case, it had been weighing the timing of soju price increases, but after introducing the standard sales ratio and considering the tax reduction effect, it employed a 'clever' method of first raising the ex-factory prices (tax base prices) of Cheoeumcheoreom and Saero by 6.8% and 8.9%, respectively, and then lowering the shipment prices. Lotte Chilsung's cumulative consolidated sales up to the third quarter this year reached 2.3063 trillion won, an increase of 133.6 billion won compared to the same period last year (2.1727 trillion won), but operating profit only increased by 4.3 billion won from 198.4 billion won to 202.7 billion won during this period. This was due to nearly a 100 billion won increase in cost of sales during the same period.

According to a Gallup poll released on the 15th, President Yoon Seok-yeol's approval rating for state administration stands at 31%, with 62% negative evaluations. The primary reason cited for the negative rating is the economy, livelihood, and inflation (18%). This is likely the background for the government actively pursuing tax cuts under the pretext of price stabilization amid an unprecedented tax revenue shortfall ahead of next year's general elections.

The problem lies after the general elections. Artificial price controls inevitably cause adverse effects, raising concerns that prices will surge all at once after the elections. In fact, the market strongly anticipates a cigarette price increase after next year's general elections. The government, struggling with tax revenue shortages, may significantly raise cigarette prices after the elections. Distribution companies, which have restrained price increases at the government's request, are now planning hikes post-election. If prices rise all at once, the burden felt by consumers will inevitably increase further.