Nathan Lutchansky finds some big problems with HB11, Mike Turzai’s state store privatization bill:
By my reading of the fact sheet and the bill, Turzai intends to sell wholesaler licenses to whomever wants them, with no limit on the overall number of licenses. However, there is a catch: licenses will come with a strict list of which brands and products may be wholesaled by the licensee. Brand holders must appoint one wholesaler to exclusively represent their line in Pennsylvania, and then that wholesaler must pay the state a fee for the right to distribute that product line.
The concept doesn’t sound too onerous, until you find out how much the fees will be…
Turzai wants to charge existing distributors a fee equal to 42% of their annual sales revenue for the privilege of continuing to sell the same products they’re already selling.
That’s an insane number. Attempting to suck $420 million in one-time fees out of a $1 billion industry is going to cause a lot of hardship for distributors large and small.
What will be the effect on consumers? It’s likely that product selection will be reduced, as distributors prioritize their available capital to buy licenses for only their most popular and reliably profitable products. It’s unavoidable that prices will increase—those huge licensing fees will need to be paid back to whoever put up the money to pay them.
Like I’ve been saying here on the blog, there’s a tension between the objective of realizing a big windfall for state revenues and the objective of significantly increasing choice and convenience. When I see “strict list of brands and products” that worries me. I’m not sure how important competition between wholesalers is for consumers, but Turzai seems intent to restrict the wholesale market to just a few large firms.
Nathan also lays out the problem with Turzai’s revenue plans:
I laid out four options for Representative Turzai, proposing to shift some of the tax burden off certain market segments to encourage competitive pricing within those segments, but he ended up choosing an option that didn’t appear in my list:
Replace the liquor tax with a gallonage tax that places a 38% greater tax burden on wine and spirits sales. Assert, without explanation, that privatization will result in product pricing competitive with neighboring states where excise tax rates are 90% lower.
It reads like a joke, but it’s not. HB11 specifies an excise tax on wine of $8.25 to $8.75 per gallon, depending on alcohol content, and a special rate of $9/gallon on sparkling wine. To put that into perspective, the national median excise tax rate for wine is $0.67 per gallon. Delaware, our neighbor with the highest rate, taxes wine at $0.97 per gallon. The “replacement rate”, which would maintain the same level of tax revenue from wine that the state currently receives under the 18% liquor tax, is only $5.08 per gallon.
Now I’m a supporter of high taxes on alcohol for public health reasons, but I also recognize that if you raise the rates too high it creates tax avoidance incentives – the “border bleed” phenomenon where people drive across state lines to NJ and Delaware to get the same products for lower prices. We’re hearing a lot of anecdotal accounts of border bleed, and it does sound intuitive, but I haven’t seen any actual numbers regarding how common it is or how much money the state is losing from it.
But let’s assume that there is some non-trivial trade-off here between trying to keep the rates high enough to maintain revenues and losing sales at the margins as people along the border shop in other states.
Nathan has previously shown that adopting comparable gallonage tax rates to neighboring states would result in a drastic drop in revenue:
PA overtaxes wine compared to these other states. But the gallonage taxes on beer are much lower than in neighboring states:
I’m not sure what Pennsylvania’s beer sales volume is, but raising the gallonage tax on beer to somewhere between $2.50 and $2.67 would allow the state to keep wine and liquor prices more competitive with bordering states.
I will write a separate post on the political problems with the bill, which are even more tricky.