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Plan to modernize Pennsylvania liquor stores could include higher prices

wine storeBy Andrew Staub | PA Independent

When Gov. Tom Wolf vetoed legislation last week that would have broken the state’s monopoly over wine and liquor sales and allowed the private sector to take over, he reasoned it was “abundantly clear that this plan would result in higher prices for consumers.”

Predictably, that irked free-market advocates who contend competition among private businesses would naturally temper prices. Adding to the frustration, Wolf’s plan to modernize state-owned wine and spirits shops instead of privatizing them “literally calls for higher prices on consumers,” said Nate Benefield, vice president of policy analysis for The Commonwealth Foundation, a free-market think tank.

That particular component of modernization is called variable pricing, and it would allow the Pennsylvania Liquor Control Board to abandon its proportional 30-percent markup on its goods. State stores conceivably could lower the markup, but David Ozgo, chief economist with the Distilled Spirits Council of the United States, thinks they’d do the opposite.

“Variable pricing is a guarantee for prices to go up. That’s how it’s designed,” Ozgo said.

Ozgo outlined a scenario in which a supplier that wants to promote its beverage would offer a dollar off a bottle. Under current rules, that discount would be passed along to consumers, but variable pricing would allow the PLCB to raise its markup to absorb the savings instead.

That strategy aims to increase the state’s profitability by as much as $50 million to $70 million a year. It’s not unlike what the private sector’s mission would be, but unlike a state-run monopoly, those businesses would have to account for competition before jacking up prices, Ozgo said.

“That is probably the most anti-consumer suggestion one could possibly make,” he said.

It’s not clear to Ozgo that privatization would increase prices, either. Even with privatization legislation adding a 15 percent fee on wholesalers, there could still be room for retailers to charge the same price or less than what the PLCB does, he said.

Yet the notion that privatization means higher prices for consumers took hold in late June as Republican lawmakers advanced a privatization bill to Wolf’s desk, where it was vetoed within days.

State Sen. Chuck McIlhinney, R-Bucks, appeared on the June 28 episode of CBS 21’s Face the State and said prices would likely rise as the state tries to maintain or build upon its revenues and private retailers try to make money, too. He repeated that sentiment in subsequent comments taped by Roxbury News.

“I think most likely it has to have an impact that it will increase prices,” he said. “Like I said, there’s a cost to the privatization.”

There could be a consumer cost to modernization, too, but state Sen. Jim Brewster, an Allegheny County Democrat pushing a modernization proposal, said he doesn’t think the PLCB would be foolish enough to drive away customers through price gouging.

Improving convenience — such as allowing more stores to open on Sundays and for the direct shipment of wine — could prompt the state to sell more booze and bring in more revenue, ultimately keeping prices competitive, Brewster said.

“I would like to think the state would be more price friendly than independent people,” he said.

A memo seeking support for Brewster’s bill notes the potential for price increases, but the legislation would increase licensee discounts and special liquor order markups to help alleviate that.

Brewster and Wolf cited Washington state as an example of privatization affecting prices. Voters there approved privatization in a 2011 ballot initiative.

“In the most recent case of another state that pursued the outright privatization of liquor sales, consumers saw higher prices and less selection,” Wolf said.

That’s not a good comparison, Ozgo said.

Washington’s ballot initiative stacked new fees on top of existing alcohol taxes to make up for lost state revenue, adding a 10 percent fee on liquor distributors’ gross revenue and a 17 percent fee on retailers’ gross revenue.  That left Washington with the highest liquor taxes in the nation, with levies sometimes approaching 100 percent of the sale price of some products, according to the Tax Foundation, a non-partisan, nonprofit research organization in Washington, D.C.

“The private sector can bring lots of efficiencies to any system, but it’s pretty hard to make up for 27 percent in new fees, all told,” Ozgo said.

For now, privatization efforts could be moot as long as Wolf is in office. His veto, McIlhinney said in a statement, “makes it extremely difficult to envision a scenario in which further consideration of privatization proposals would be fruitful.”

McIlhinney chairs the Senate Law and Justice Committee, which hears liquor-related issues, and said it would turn its focus toward improving the existing system.

That means modernization. Brewster sees his proposal as a vehicle for compromise during a budget impasse that has stretched on for more than a week. It could improve convenience, bring in more revenue for the state and preserve more than 4,000 jobs jeopardized by privatization, he said.

It also means customers could pay more at state stores, thanks to variable pricing.

In Washington, higher prices have sent consumers into Idaho and Oregon to buy booze. Pennsylvania already deals with its own border bleed problem, thanks to the lack of sales tax in Delaware and Maryland’s lower liquor levies.

The Commonwealth Foundation has estimated lost sales of $180 million because of shoppers buying booze elsewhere, and a 2011 PLCB survey of consumers in and around Philadelphia found a majority didn’t think Pennsylvania had competitive pricing compared to out-of-state retailers.

While tax rates are a factor, it suggests private retailers might not necessarily charge more.

“However, the best evidence for me of lower prices in border states is the thousands of Pennsylvanians that flock to border state package stores each week,” Ozgo said. “I suspect that they know something and are voting with their feet.”

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