New Castle News

March 4, 2013

Critics: privatizing liquor Less profitable

John Finnerty
CNHI

CNHI — Advocates say that if the state privatizes the liquor system, shoppers will enjoy greater selection and easier access to beer, wine and hard liquor.

That access could translate into increased tax revenue to help offset the lost profits that now pour into the state coffers from Pennsylvania’s government-run liquor monopoly.

But even before Republicans fully unveil the latest legislative proposal to dismantle the liquor monopoly, critics are warning that the math just may not add up in a way that bodes well for shoppers or taxpayers.

Proponents for dismantling the monopoly say that the upfront license sale will generate $1 billion. Gov. Tom Corbett has proposed using that money for a special grant program for schools.

But once the liquor system is privatized, the state must replace the millions of dollars of profit that has been generated by the state Liquor Control Board each year. Last year, the LCB transferred $80 million to the state.



MORE RETAIL SPOTS

State Rep. Kurt Masse of Northumberland County is a member of the House Liquor Control committee, which will first consider any privation legislation. He said that in addition to the revenue from annual license fees, advocates believe that by significantly increasing the number of places where beer, wine and liquor is sold, sales will increase, which will translate into more sales tax.

“Government is not a core government function,” Masser said. “If the plan is revenue-neutral, and there are reasons to believe privatizing may be better than revenue-neutral, then I think it is something we should explore.”

Masser said he has concerns about the plan, including how it will impact beer distributors. He has a meeting planned with beer distributor owners in his district in the coming days.

A financial analysis commissioned by the Corbett Administration indicated that the state would generate $138 million a year through annual license renewals, ranging from $2,500 a year for the 1,200 stores selling wine and liquor, to up to $35,000 for big-box stores to sell beer and wine. The plan calls for as many as 5,000 beer and wine shops.

Beer distributorships would be required to pay $150,000 up-front, then $10,000 a year for the right to sell wine and liquor in addition to beer. There will be 1,000 of these licenses available.

Overall, the plan calls for a total of 7,200 licensed retail stores selling beer, wine, liquor or all of them. There currently are 600 state stores selling wine and liquor and about 1,200 beer distributors.



LICENSES COSTLY

The initial cost of the “enhanced beer distributor” license is too much for most existing beer distributors, state Rep. Mark Longietti of Mercer County said.

Longietti said, by some estimates, as many as 1,100 of the state’s beer distributorships would decline to pay the additional $150,000.

“In our area, many of them are family-owned and I cannot envision that they would have the resources to make that investment,” Longietti said.

Rep. Bryan Barbin of Cambria County, agreed, saying that the enhanced beer distributor license “technically” provides an opportunity for existing business owners, but it is an opportunity few can afford.

Even if the operators of a small family-owned beer distributor made the leap, they wouldn’t be able to compete with the grocery stores and big box stores and they’d likely have the added cost of a loan needed to acquire the upgraded license, Barbin said.

 Longietti said he had also had conversations with local grocery store proprietors who questioned whether the cost of a license would be worthwhile.

In most cases, businesses likely will pony up the money to get the license, but they will pass along the cost to consumer, according to Roland Zullo, a research scientist at the Institute for Research on Labor, Employment and the Economy at the University of Michigan, who studied the Pennsylvania liquor privatization plan.



CLOSING THE GAP?

Zullo said there are three questionable assumptions built into the strategy for closing the $80 million profit gap without it translating into higher prices for customers:

•The state is not changing the rate of tax collected on liquor — 18 percent from the Johnstown Flood tax and 6 percent from sales tax.

•The state is proposing higher license fees than those in most other neighboring states.

•The state is suggesting that retailers will be willing to sell beer, wine and liquor with a smaller gross margin than the industry norm.

The gross margin is the difference between what the retailer pays its supplier and what the retailer charges customers.

“Prices are going to have to shoot up,” Zullo said. “There is no way around it. I’d bet the farm on it.”

Zullo said that as far as being a revenue generator for the government, the liquor monopoly is hard to beat.

“They are getting rid of a very lucrative business. Most states would be envious of the model you have,” Zullo said. “It is hard for me to see the wisdom of selling a system that has served the state well.”

Washington’s experience with privatization sheds light on what can be expected.

While Pennsylvania is relying on license fees to generate additional revenue in Washington, the state increased taxes on liquor.

Either way, the added cost to the retailers will be passed on to consumers. In Washington, prices went up between 10 and 30 percent.

The impact on price most certainly will be the most dramatic in areas such as Central Pennsylvania, where shoppers have no easy means of crossing the border to buy liquor in neighboring states.

Nathan Benefield, director of policy analysis at The Commonwealth Foundation, a free market think tank, said concerns about privatization driving up costs are overstated. The LCB already marks up the price of liquor by 30 percent, so there would be sufficient cushion for private retailers to absorb the cost of the licensing fees, Benefield said.

Polls show that most liquor customers want the system privatized, and surveys conducted by the LCB found that in the Philadelphia area, 45 percent of people said they traveled to neighboring states to get better prices on beer, wine and liquor, he said.