Privatizing the 18% Liquor Tax

This article is one of a series on privatizing wine and spirits sales in Pennsylvania. The full list of articles may be found on the Privatization Index Page.

Representative Turzai has run out of time in the spring session to introduce his privatization bill, but Representative Taylor assures us that "privatization has not lost its steam." My contribution to the debate today is a comparative report on Pennsylvania's 18% liquor tax (the "Johnstown Flood Tax") versus the wine and spirits excise taxes of neighboring license states. This isn't as straightforward as it sounds, because most license states tax wine and spirits based on quantity (like PA does with beer) rather than retail price.
Download the report (PDF)
I encourage you to read the whole report, but I'll summarize some of the results here.
  • During the 12-month period from February 2010 to January 2011, the PLCB sold 23,547,201 gallons of wine and 16,422,462 gallons of spirits. Approximately $119,718,000 in liquor tax on wine and $157,727,000 in liquor tax on spirits were collected. This is an average of $5.08 per gallon of wine and $9.60 per gallon of spirits.
  • This is drastically higher than the gallonage excise taxes other states levy. The US median tax rates are $0.67 per gallon of wine and $3.75 per gallon of spirits. Some of our neighbors are even lower: Maryland's rates are $0.40 and $1.50 respectively.
  • Because the liquor tax is based on value rather than quantity, higher priced products are disproportionately affected.  A $43.99 bottle of Stag's Leap Merlot includes $6.71 in PA liquor tax--that's 117 times the tax imposed on that same product in New York.
  • Conversely, PA gives a tax advantage to value-priced spirits. A $13.79 jug of Nikolai Vodka incurs $2.10 in tax here but $2.98 in NY. The effect is to punish suppliers who try to bring in premium-priced products and reward those who bring in low-end products.
Why is this relevant to privatization? In a nutshell: large excise tax rate differences between neighboring tax jurisdictions reduce the competitiveness of retailers on the high-tax side and encourage cross-border shopping. State-wide monopolies don't need to care much about this, but private businesses with one or a handful of stores certainly do.

Put another way: wouldn't you think twice about opening a wine shop in Philadelphia knowing that your competitors across the river enjoy an excise tax burden that was less than a fifth of yours? (Remember that your liquor license probably would cost significantly more than theirs did, too.) If you were intent on serving the Philly market, wouldn't it make a lot more sense just to set up shop in New Jersey? Why pay the state $2 on each $13 magnum you sell when you could pay 35 cents instead?

As Representative Turzai draws up his privatization bill, he basically has four options:
  1. Keep the existing liquor tax, so the state collects 15.25% of the retail value of all wine and spirits sold. Private retailers in border markets will find that they can only compete on price on low-end products. Mid-range and premium products will be sold almost exclusively in stores where the convenience factor is more important than price, such as grocery stores and drug stores. (If you thought your local liquor store was like shopping at CVS, wait until CVS is your local liquor store.)
  2. Replace the liquor tax with gallonage taxes that are sufficiently high to bring in the same revenue--approximately $5.08 per gallon for wine and $9.60 per gallon for spirits. Boutique wine and spirits shops will be able to flourish, as a $1 to $2 tax per 750 ML isn't a deal-killer on $20+ products. Unfortunately, shoppers in the lowest price segment will be forced to pay through the nose. Value spirits in half-gallon sizes will be slapped with a $4.44 per bottle tax--about double the tax levied on these products today--and five-liter boxes of wine will have their tax more than tripled to $6.71 per unit. The stream of Pennsylvanians leaving the state to shop at discount liquor stores will turn into a flood.
  3. Replace the liquor tax with a value-based or gallonage tax sufficiently low that retailers in border markets can compete with out-of-state retailers in all price segments. Argue that the resulting loss of hundreds of millions of dollars in state revenue is an acceptable trade-off for the benefits that privatizing liquor sales would bring.
  4. Same as option 3, but argue that increased alcohol purchasing under a privatized system (by a factor of two or three) will compensate for the reduced tax rates.
The most palatable solution is probably a combination of all of these: levy both a base gallonage tax and a value-based tax assessed at the wholesale level, and argue that reduced cross-border shopping will probably increase overall in-state purchasing by a few percentage points. The necessary rates for such a tax scheme wouldn't be too hard to calculate, but let's just sit tight and see what Representative Turzai has in store.

User comments have been disabled due to extensive problems with comment spam. Our apologies for the inconvenience.

PLCB Users Group
Spirits Product Guide

Search by Name or Code
Browse by Category
Browse by SLO Vendor


Pennsylvania Cocktail and Spirits Blogs