Alcohol Reform and Revenue

Here’s a key point for the alcohol policy reform debate from Nathan Lutchansky at the PLCB Users Group blog.

Tom Corbett has said that he wants to raise $2 billion from privatizing the state stores, but as you can see in the chart above, the state stores do not contribute $2 billion to the General Fund.

All of the taxes here are still going to be collected. The legislature only has to replace about $125 million more in revenue per year. That can be accomplished fairly easily by trading the Johnstown Flood Tax for a gallonage tax that includes poured alcohol.

Here’s Nathan with a good illustration of the market distortions that result from not taxing poured alcohol at the point of sale:

Pennsylvania has one of the lowest beer tax rates in the nation (behind only Missouri and Wisconsin), but the excise tax burden on wine and spirits is enormous. Per drink, we pay more than three times the state tax of New Jersey or Delaware, and almost eight times the state tax of Maryland.

If you broaden the tax base, you can lower the tax rate. Removing the cap on liquor licenses would also be a good way to broaden the tax base, since you’d have more bars collecting revenue.

Needless to say, public health concerns should weigh heavily on considerations of how much lower the tax rate can go.

What To Do About Liquor Licensing for Bars and Restaurants

Hoisted from the comments:

On licenses, you still need a way to deal with people who own licenses; to just eliminate them/erase that value is an unreasonable. My proposal is that the license owner receive a waiver of the annual fee for a period of time equal to their license value, and that the waiver account be a transferable asset so it can be sold just as the license could have.

That sounds fair to me, but are we compensating license-holders for the amount they originally purchased the license for, or for its current market value?

I’m not out to penalize incumbent bars and restaurants who had to go through the existing painful process and pay way too much money for a liquor license. But I also want to see some more competition as well as an increase in the rate of new restaurant openings.

I just think that since the restaurant business is so risky and has such a high failure rate, it’s messed up to charge people who want to open new restaurants an extortionate price to sell a high-markup menu item that would make it less risky for them to go into business. It seems clear to me that you would see more restaurants and bars open if not for the high price of liquor licenses.

Alcohol Policy Reform Round-Up

A few recent items:

24 Wal-Marts are getting wine kiosks. This is getting a little closer to not-insane policy. The wine is now inside of the grocery stores. It just needs to move out of the machines onto the store shelves.

It’s stupid that there’s a class of “economic development” liquor license that’s different from a regular liquore license. It’s even dumber that local governments are in the business of ruling on whether to grant these liquor licenses. If restaurants want to sell booze, why not let all of them do it! Uncap the number of licenses and switch to a flat rate fee. $2000-5000 seems fair. If the point of the cap is to reduce alcohol consumption, the right tool to use is an excise tax on booze.

John Micek updates us on the state of play on alcohol policy reform in Harrisburg. There’s no bill yet, so there’s not much to talk about.

Lew Bryson makes an important point about the PLCB’s “compromise” plan (my bold):

Call me crazy, but I have a strong feeling that it would be much easier to simply do away with The State Store System than to tweak hell out of The Almighty Liquor Code to allow “a world-class business operation.” But if you don’t believe me, here’s the PLCB’s ‘secret plan’ to fix things so we’ll never ever see privatization rear its ugly head again. Please note the bond issue, which would borrow against the next 20 years of PLCB “profits” to blow a chunk of bucks into the state’s budget now…effectively guaranteeing that no legislator would bring up privatization for 20 years, because then they’d have to pay off the bond: brilliant!

Here’s a bonus Bryson post on “choice paralysis” and the economics of craft beer

Lisa Boscola has introduced a pro-craft beer bill to let businesses fill customers’ to-go mugs during Musikfest:

Boscola is introducing a bill that seeks to resolve the issue so bars can stock up on their beer supply and legally sell to ‘festers.

Steve DeFrank, Boscola’s chief of staff, said the senator would prefer state agencies figure out a solution, but that hasn’t happened yet. So she introduced the bill.

He said it only seems fair that licensed tavern owners inside Musikfest’s boundaries be allowed to play by the same rules as Musikfest and sell to-go cups and mugs of beer.

“We really view this as a competition issue,” DeFrank said.

The intent behind Boscola’s bill is to allow any business with a liquor license within Musikfest’s designated festival grounds to refill mugs and sell to-go drinks of any kind of alcohol that Musikfest sells. The legislation applies only to Musikfest and would not affect other festivals or cities in the state.

Steve DeFrank is correct that this is a business-vs-business competition issue, and that’s why it doesn’t make sense that this bill is limited to Musikfest. It should be vague enough that if there’s a festival where open-container laws aren’t being enforced, area bars can get in on the action. That should apply to South Side Bethlehem too, since it will be taking on parts of Musikfest next year.

The other point to understand about this is that it’s a Northampton County law that created the problems last year. Doesn’t that mean the proper legislative body to fix this is Northampton County Council? Don’t they have the power to strike it from the books? If so, where do Council members and candidates stand on this?

Political Economy of Alcohol Policy Reform

Important point from George Hale:

The state’s fiscal crisis gives Gov. Corbett a chance to do what previous governors failed to do — privatize the inefficient state stores selling wine and spirits.

Prior to the election he exclaimed, “We need to move our state out of the 19th century and refocus state government on its core functions.” This opportunity also brings pressure to get it right the first time because privatization, if implemented, will create rich and powerful interests that will fight changes down the road

Examining the details will be important because once enacted, a new liquor regime will last a long time. New licensees will quickly become a potent lobby protecting the new status quo by trying to lock out additional competitors.

Many issues of long-term importance require careful consideration now. How many licenses? Can they be sold or transferred? How is multiple ownership addressed? Can new licensees enter the system later?

I’ve made this point here before, but it’s worth repeating. If Mike Turzai succeeds in creating a new class of cartel for wine and spirits sales alongside the beer distributor cartel, that makes the political fight to get beer, wine and liquor sold in supermarkets and convenience stores much much much harder. It’s best to go for the simplest plan. This issue pisses off almost every possible statewide interest group except consumers. Ideally all the conflicting pressures would give politicians the freedom to vote their conscience and deliver the best possible deal for consumers.

State Monopolies and Corruption

I know I already linked to Tom Cowell’s Philadelphia Weekly article on PA liquor laws when I purged my Google Reader feed earlier, but I really want to double down on badgering you to read it. I think this kind of flagrant petty corruption is exactly what you’d expect from a monopoly that both sells and regulates alcohol:

Questionable decision-making and poor business thinking are a persistent hangover at the LCB. It’s no secret that some state-run stores manage to lose money despite their local monopoly. But though the LCB has closed some of its worst-performing locations, its governmental status ensures that these moves can be subject to political influence from behind the scenes when a local pol wants to keep an unprofitable store open, even at the wider system’s expense. Concerns have been raised in the past when politically-connected developers secure a state-run wine and liquor store as a tenant, at what appear to be above-market rents. Neighborhood groups in Tioga protested the Broad Street store opening in 2004, when a company connected to the son of a senior aide to Gov. Ed Rendell nabbed a well-paying liquor store as a tenant in its new strip mall development. It’s probable that any back-door deals are the exception rather than the rule, but as long as government dominates the alcohol business, there will inevitably be questions and suspicions about conflicts, patronage and sweetheart deals brokered by those who enjoy a state-enforced monopoly to sell an essential good.

Alcohol Policy Reform Round-Up

A few links on alcohol policy reform, but first a quick comment.

The main thing that is annoying me about the official debate over this topic is the preoccupation with the question of how much money the state will get from selling the state stores.

Corbett and Turzai put this $2 billion number out front, and are now backtracking, admitting that this was pulled from an old study and we don’t actually know the real number. Advocates seem to feel the need to justify changing the state’s alcohol policy on the grounds that it will plug part of the budget hole.

That’s too bad – even if it doesn’t plug the state’s budget gap, we should still do it. It’s still going to be worth doing because the most efficient way to regulate alcohol consumption and the attendant social ills is on the demand side (taxes), not the supply side (making alcohol difficult/annoying to buy).

Now, the problem with trying to shift to demand side regulations is that once you scrap the supply side regulations, the price of alcohol is going to drop. The Commonwealth Foundation notes that the PLCB adds a 30% mark-up, and Pennsylvanians pay up to 50% more for liquor than in other states.

A drop in price is going to lead to increased consumption and associated harms unless you hold prices constant by increasing taxes by the same amount that the price drops.

This would appear to run up against Tom Corbett’s No Tax pledge, even though it wouldn’t result in any noticeable change in prices for consumers. You’d really just be swapping one form of tax for a more efficient one.

So when you read the testimonials at the state Senate hearings where opponents are warning about increased social harms, what they’re really saying is that the drop in price will lead to more consumption. But politicians aren’t powerless to stop that from happening – they have the power to raise taxes on alcohol to reduce consumption.

Links:

 

  • John Micek and Jim Panyard report on the first Senate hearings. It would be better for Senators to be hearing from more economists and fewer ideologues.
  • Lew Bryson reminds us that it’s illegal to sell mixed cases of beer at beer distributors because of a dumb case law.
  • State stores are dropping brands. In a market system, stores would do a much better job of matching local tastes, and thus would avoid the problem of carrying a bunch of stuff people don’t buy.

Alcohol Reform Omnibus?

Omnibus Bill?

Lew Bryson points us to some very encouraging news from CBS Philly:

House Majority Leader Mike Turzai said he does not want to see his bill to privatize liquor sales potentially bogged down by becoming an omnibus liquor reform measure. While he expects to honor Turzai’s desire to deal with privatization in a separate bill, Republican John Pippy, chairman of the Senate committee that vets liquor legislation, said other issues related to updating Pennsylvania liquor laws will be on the table, albeit on a different track. “All those issues are going to be in play anyways,” Pippy said. “As the chairman of the [Senate] Law and Justice Committee I’ve said we are going to look at everything. I think we need to modernize Pennsylvania liquor law.”

As I’ve been saying, the state store system is hardly the only backward alcohol policy in Pennsylvania, and I would argue it’s probably not even the worst in terms of deadweight loss to the economy. But state store privatization – literally just selling store licenses to private buyers without changing any other alcohol commerce rules – is currently the only policy change on the table. If people want to see more comprehensive change, they need to stop using “privatization” as a catch-all phrase for other changes they want to see.

Selling alcohol in supermarkets is not on the table. Letting restaurants pay a fee to sell booze instead of a Cap-and-Trade licensing regime is not on the table. Legalizing Internet wine sales is not on the table. Advocates of these and other changes need to make clear that the work doesn’t end with selling state stores.

It’s understandable from a political perspective that Turzai doesn’t want a big clunky omnibus bill that will only get more enemies as it gets bigger. But is there going to be enough political grist left in this issue for Pippy to actually move a companion bill? Are the Republicans really going to have the stomach to take on various other rent-seekers right after a big fight with the public sector unions?

Wine by the Glass

The El Vee walks us through the Wine by the Glass machines at Wegmans. The fact that you can drink as much as $20 worth of wine in the store is hard to reconcile with the logic behind the Kiosks, which make you take a breathalyzer test before you can buy wine. For starters, no one has demonstrated that the scourge of drunk people attempting to buy wine is a real thing. And if the Kiosks are supposedly needed to shield grocery stores from liabilities, then why are people allowed to drink in the store? It’s not clear exactly what harms the Kiosks are protecting against.

State Stores and Prohibition

Karen Samuels at the Lehigh Valley History blog has a fun post on Prohibition and the state stores in PA and the Lehigh Valley. Here’s an excerpt:

During the years of prohibition, Bethlehem’s South Side became a hive of speakeasies and stills. The illegal activities attracted criminals from New York and New Jersey. The residents were ready to elect a mayor who could rid Bethlehem of corruption. They choose Robert Pfeifle in November of 1929. Within months of taking office, Mayor Pfeifle with the help of his newly appointed police commissioner, Frederick T. Trafford, began to close down the speakeasies in the South Side. In Mayor Pfeifle’s “Second Annual Message” of January 1931, he reported that the Bethlehem police had arrested 214 for violating liquor laws, closed 241 speakeasies, captured and destroyed 2,902 gallons of moonshine, 105 gallons of gin,159 barrels of mash, destroyed 25 stills and held 1,000 gallons of whiskey at police headquarters.

Where did they fit 241 speakeasiest on South Side? Does anyone know where any of them were? My old band used to practice in a basement in Easton under the Subway and the pawn shop in the circle. The basement had a back room with a really old bar that had fallen into disrepair. Wouldn’t it be cool if some developer cleaned up some of these spaces and leased them as commercial space to bars or small restaurants?