Let All Businesses Get In On the Magic of the Alcohol Cross-Subsidy

Crocodile Rock in Allentown isn’t anybody’s favorite music venue or anything, but they get pretty decent concerts from time to time. They had Snoop Dogg a few years back, I saw Converge there one time, and they routinely book fairly well-known bands who are big on the indie circuit. Based on ticket sales, it was the 60th most successful nightclub in the world for 2011. They were recently talking about expanding their property to take advantage of the Allentown NIZ’s tax subsidies. The picture you should have is of a decent quality rock club that does good business for this market.

And yet, after losing their liquor license they might end up going out of business. Alcohol sales, it turns out, are the major source of their profits and booze buyers are cross-subsidizing the ticket sales.

I bring this up to remind you that alcohol is a magic elixir that makes all kinds of questionable business models work out. Take a low-margin business like a restaurant or a music venue or a bookstore that can barely make money selling its core product, and then mix in some magic alcohol revenues and VOILA! Subsistence margins grow big and fat.

Obviously this doesn’t work if the core product is crap, but generally speaking, businesses who can cross-subsidize with high mark-up items like alcohol are going to be better off than those who can’t.

And that’s why PA needs to end the fake scarcity of this excellent business model, unwind the tavern license cartel, and allow all businesses to partake.

Comments

  1. Maybe I’m missing something, but I never understood the alcohol licensing system in Pennsylvania.

    To me, the whole idea behind the license is so “they” can track who’s selling alcohol and make sure that establishment is following the rules (not serving minors, not serving someone visibly intoxicated). Instead, these licenses are restricted in numbers and are held by establishments as an asset, sometimes fetching huge sums. They don’t do that with building permits, or driver’s licenses, or any other kind of government-sanctified permission slip.

    If the point of the license is to register you and certify that you know the rules (like a driver’s license) shouldn’t they be theoretically unlimited and cost just enough to pay for enforcement and registration, or is there something else going on here?

    • Jon Geeting says:

      The system was designed by people who were deliberately trying to make alcohol as expensive and inconvenient as possible. Nowadays it’s just rent-seeking incumbents trying to block competition.

  2. John says:

    NYC went the way you’re advocating Pennsylvania go years ago.

    They have realized since that it’s not the pathway to prosperity that Geeting foolishly thinks it is.

    • Jon Geeting says:

      No, actually they didn’t. It’s still very difficult to get a liquor license in many places since it’s controlled at the neighborhood level. PA’s urban neighborhoods would be very lucky to have the kind of deep service economies NYC’s neighborhoods have.

  3. John says:

    Actually you’re right, Bloomberg pulled the initiative to cut back on the number of establishments serving alcohol after a pretty strong reaction to the idea.

    Give it time though. If big gulps are a abomination against mankind and must be banned, how far behind can booze be?

    • Jon Geeting says:

      Well where I part ways with a lot of the liberalization advocates is that I think the public health damages from alcohol are actually really serious, whereas others tend to be flip about it. The trade-off with more convenient access to alcohol should be higher prices from higher excise taxes. Going after booze on the supply side would be just as stupid as going after Big Gulps on the supply side. In both cases, taxing the stuff you want less of is the better policy.

  4. John says:

    Haven’t you learned that higher taxes don’t work? Look at cigarettes. All the higher taxes have done is increase bootleg and Indian reservation sales. The actual incidence of cigarette smoking hasn’t declined.

    • Jon Geeting says:

      Booze is obviously way harder to smuggle than packs of cigarettes. Where tax avoidance is hard, people will pay the taxes or consume less.

    • Jon Geeting says:

      And yes, cigarette smoking has declined.

      • John says:

        The CDC disagrees with you on the prevalence of smoking, but what do they know?

        Jon, here’s where you admit that using the tax code to punish behavior backfires, people will find a way around your bone-crushing taxes, and you hope that’s not the case with booze but you don’t know.

        • Jon Geeting says:

          How much people are able to avoid the taxes depends on how inconvenient it is to dodge them. Pretty banal obvious point.

          • John says:

            Here’s the other 1/2 of the argument that you’re forgetting – go figure, you didn’t think it through:

            And the higher the taxes are, the more inconvenience they’re willing to endure.

            To think for one second that tax policy doesn’t create reactions is to think that people are mindless robots. They aren’t. They figure out every dodge they can including illegal activity.

          • Jon Geeting says:

            Yes, very high taxes can create black markets. The key is to find the right tax rate for your goal. The revenue-maximizing tax rate might not be the same as the tax rate that depresses alcohol consumption the most.

          • John says:

            And the problem is whores like you just can’t stop hiking taxes, you blow right through the ceiling, and create a bigger problem.

            Let me bring up a different point – has the ‘war on drugs’ resulted in lower drug use? Hell no. It’s just made more people criminals.

            My point is taxes are not going to reduce consumption, that’s just bullshit. It is only a factor in when people start brewing their own.

          • Jon Geeting says:

            It’s not bullshit, it all depends on how elastic the supply and demand are. Some people might homebrew. Others will still prefer to drink in bars and will pay the taxes. People aren’t going to stop going to bars if taxes go up 50 cents a drink.

          • John says:

            Jon they aren’t going to stop drinking no matter what the taxes are.

            Let’s be honest – you don’t give a shit about public health, all you care about is how much tax revenue you can pull in. So what you want to do is set the taxes to the max revenue point – the level where if it goes up any more, people bootleg and actual tax revenue collected begins to drop.

            It has nothing to do with people, it’s all about getting your hands on other people’s money.

            Please start being honest, at least with yourself.

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