Lutchansky on Flaws in Turzai’s Alcohol Reform Bill

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.

Eating the Seed Corn

Michael Sokolove has a very good NYT piece on how Tom Corbett’s totally unnecessary budget cuts are going to roll back recent education gains in Levittown:

Fifty-one percent of Bristol Township’s students qualify for free or reduced lunch. When schools were first measured under the No Child Left Behind act, the district scored near the bottom of state rankings. Through smaller class sizes and more intense attention given to lagging students, it is now near the middle. “The knock on our schools was you couldn’t get a good education here,” James Moore, the principal at Truman High, told me one recent afternoon. “Nobody can say that anymore.”

It is that progress, though, that is threatened. In a preliminary budget passed by the school board, as many as 28 of the 125 teachers at Truman High could lose their jobs. Double periods for struggling math and English students — credited for the district’s better test scores — would no longer be possible. Advanced Placement courses might be combined with regular honors classes. Art and music at the elementary level would be cut back.

Senate Republicans Breaking with Corbett on the Surplus?

Scott Detrow reports that Senate Republicans are feeling squeamish about Tom Corbett’s budget cuts since there is now a surplus:

But as the surplus continues to grow, Senate Republicans may not support that plan, according to spokesman Erik Arneson. “It is certainly difficult for many members of our caucus to understand why ..putting [the surplus money] in a reserve fund is a better approach than restoring some of the budget cuts that were proposed,” he said. “At this point, with what we know, without having an independent fiscal office in place to share that publically, we believe that you can very responsibly spend some or all of that unexpected revenue surplus to help reduce the impact of the budget cuts.”

The $500 million could keep the basic education subsidy provided to school districts level, or restore the bulk of proposed cuts to State System and state-related colleges and universities.

Tom Corbett still wants to make the same number of cuts, even though it’s now totally optional.

Tom Corbett Is Cutting Education Because He Wants To

The arguments in today’s Patch column will be familiar to regular readers – basically that Tom Corbett and the majority Republicans have the choice not to cut any education spending, since much weaker claims could be cut from the budget and the tax code:

None of the layoffs at the state and local level would be necessary if Republicans and conservative Democrats in Congress were as serious about the jobs crisis are they are hysterical about the wrongheaded push for austerity.

So Tom Corbett is absolutely correct that your Congressman, your Senators, and the President of the United States bear the ultimate responsibility for Pennsylvania’s budget woes.

But he’s absolutely wrong that he has no choice but to cut education.

Today the AP reported that the state Revenue Department has a $506 million surplus – over six times greater than the $78 million surplus Tom Corbett expected to have left at the end of the fiscal year, 2 months from now.

Mr. Corbett has proposed $1.6 billion in education cuts next year. The difference can easily be made up by closing loopholes, ending corporate handouts in the tax code, and enacting a severance tax on natural gas fracking.

Some powerful legislators are starting to make case that the surplus negates the need for education cuts, but Corbett is still clinging to the Day of Reckoning Fallacy:

“What the governor has said is that the tax-and-spend mentality is what got us in trouble in the first place,” Corbett spokesman Eric Shirk said. “We have to have a healthy dose of prudence. Caution is still warranted.”

We have sinned and now a Biblical punishment must be inflicted. He wants to make these cuts, even though they’re now totally optional

The Day of Reckoning Fallacy

It’s hard to understand why Bernie thinks Doug Reichley’s political cowardice is a “reality check.” Consider the following quote from Reichley:

I was at a candidates’ night last week of school board candidates where four of them promised they will not raise property taxes to abounding applause from, primarily, seniors. So we’re gonna’ have the Armageddon of school district battles in East Penn of people who are opposed to tax increases against people who have kids in school. And that’s as it should be. There’s no more ducking this issue. We overspent the last few years.

First of all, if the state raised income taxes, or replaced the state’s regressive flat income tax with a progressive rate structure, or raised taxes on investment income like capital gains, that would also protect seniors from property taxes. Instead, the Corbett budget cowardly kicks state debt down to local governments and school districts, creating the need for property tax increases. By rejecting state level income tax increases out of hand, Reichley will be directly responsible for the property tax increases he says he opposes.

The other problem with Reichley’s comments is that he apparently subscribes to the same Day of Reckoning Fallacy that Tom Corbett and Bernie believe. The story goes like this: the state budget is out of balance because “we overspent.” We thought we could afford to increase education spending, but then the recession happened so we’re screwed. We’ve reached a Day of Reckoning where we have to atone for the “sins of the past”. We’ve made our bed and now we have to lie in it.

If that story misrepresents Bernie’s views, I’ll be happy to amend it, but as it stands, it is a very very stupid story.

Pennsylvania did not suffer a tsunami in 2008 that ruined that state’s ability to produce goods and services. There was no earthquake or terrorist attack or famine outbreak. In other words, the economy did not suffer a real shock, it suffered a nominal shock – a temporary flight to safety where households and firms decided they wanted to buy fewer goods and services and horde more cash money and safe assets. The drop in buying and sellling meant lower tax receipts. But now that tax collections are returning to normal, the deficit is shrinking and PA now has a surplus six times larger than projected.

That’s all just to say that there is no Day of Reckoning – as demand for goods and services continues to return to normal, revenue collections will also go back to normal and the state’s deficit will disappear all on its own.

Corbett, Reichley and Bernie appear to think the budget is some kind of morality play where the state is doomed to slow growth forever, but really it’s just a temporary, totally avoidable waste of our productive capacity with needless human consequences. Reichley’s not being brave, he’s not speaking hard truths, and this is certainly not a “reality check”: it’s a fundamental misunderstanding of where the budget deficit came from.

Only 178 of 900 Frackers Paid Corporate Net Income Taxes Last Year

Tom Corbett’s Revenue Department is trying to make it sound like the natural gas drillers contribute much more tax revenue than they actually do:

It has become the billion-dollar question in the Capitol: How much, exactly, do the big natural-gas drilling companies pay in taxes?

The state Department of Revenue on Monday weighed in with its official version: $1.1 billion since 2006. That figure includes an array of taxes, from corporate taxes and sales tax the companies paid on goods to the taxes they withheld from employees.

It also encompasses not only the drillers, but companies that have cropped up because of drilling in the Marcellus Shale – such as those that sell sand used in the high-pressure drilling process of hydraulic fracturing, or fracking.

But of course there are ways to dodge these taxes, and indeed the overwhelming majority of drillers do:

On Monday, critics pounced on the study by Corbett’s Revenue Department, saying that items such as the employer withholding tax can hardly be seen as a true reflection of an industry’s tax contributions

Asked to break down their figures by pure business taxes, the Revenue Department said that in 2010, drilling companies paid $98 million in corporate net income tax. This year, so far, that number has jumped to $199 million.

Still, of 900 drilling companies, only 178 paid corporate net income taxes last year, the department said. This year, that number has dropped to 97.

A severance tax would be harder to dodge than these taxes, which is why the frackers hate it so much.

This can’t be said enough:

Pennsylvania has these companies by the balls.

This natural gas formation is extremely valuable, and it would still be very profitable for them to drill even with a very high severance tax. It’s not like they can get Pennsylvania’s gas by drilling in Ohio. Given what we know about the environmental risks, the ideal policy would be to pass a severance tax high enough that the state can actually begin reducing other regressive taxes like the sales tax.

[Source: Angela Couloumbis]

Tom Corbett’s Lady Problems

Amy Worden says women hate Tom Corbett’s choice to protect tax loopholes instead of children:

In the poll, released Wednesday, 39 percent of voters said they liked the job Corbett was doing, while 37 percent didn’t and 24 percent had no opinion. That contrasts with a February poll that counted disapproval at 11 percent…

Forty-three percent of men polled gave Corbett a thumbs-up – but the same percentage of women gave him a thumbs-down. “He has a gender gap on his job approval and a gender gap on his proposed budget cuts,” Brown said. “Women find the cuts unfair, while men are divided on whether they are fair.”