International Drinks Groups Warn PA Governor About Liquor Mark-ups

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As noted previously on DrinksReform, Pennsylvania continues to receive (warranted) criticism for the way it prices and marks up the alcoholic spirits it sells in its state-run liquor stores. Like other control states, Pennsylvania’s alcohol regulators—known as the Pennsylvania Liquor Control Board—control all liquor sales in the state. But instead of using a transparent process when it comes to setting the price of spirits, the PLCB implemented what’s known as a “flexible pricing” system in 2016.

The result is that the PLCB has complete control over how high it sets liquor mark ups. R Street’s Kevin Kosar has previously detailed the problems with such a regime:

While profitable for the government, flexible pricing comes with costs for Pennsylvanians. The PLCB’s monopoly pricing power means consumers are stuck paying whatever the state monopoly demands. Additionally, the agency’s monopoly purchasing power leaves drinks-makers with little leverage to bargain over the cost the agency is willing to pay.

The issues with flexible pricing run even deeper, though. Because Pennsylvania explicitly uses the revenue derived from liquor mark ups to fund many parts of the state government, the mark ups are functionally analogous to a tax. But unlike most taxes, which are ratified by representative bodies and legislatures, the mark ups are set behind closed doors by unelected bureaucrats in the PLCB. That’s why R Street’s Jarrett Dieterle has described them as a “stealth tax,” which allows state officials to “hide the bill from taxpayers … all while avoiding politically contentious policy decisions.”

The chorus of entities expressing concern over Pennsylvania’s pricing system is only continuing to grow. Just this week, a cohort of wine and spirits trade associations from across the globe—including Australia, Canada, the EU, and the United Kingdom—sent a letter to Pennsylvania Governor Tom Wolf, expressing “deep concern” with the state’s move toward the flexible pricing system.

Particularly pertinent was the letter’s discussion of how Pennsylvania’s regime violates current international trade agreements. Specifically, the letter points out that past liquor mark up models in other countries that closely mirrored Pennsylvania’s system were successfully challenged in front of the World Trade Organization, including a differential pricing system used by Canadian liquor boards. Because the PLCB is government-operated, it must meet “certain mandatory requisite levels of transparency in its operations” to ensure “it is operating in a nondiscriminatory manner” toward international spirits. Given its lack of transparency, the trade associations conclude that Pennsylvania’s pricing model is “clearly inconsistent under international trade law” and therefore should be reformed.

In addition to these international concerns, Pennsylvania’s flexible pricing regime could also be resting on shaky legal grounds domestically and thus exposing the state to needless litigation risks. In short, the PLCB’s backdoor taxes could run afoul of long-standing U.S. legal precedents requiring all taxing power to reside in democratically elected bodies, rather than with unelected officials.

These past precedents—not to mention our nation’s founding principles of democratic norms and transparent governance—illustrate the importance of overturning flexible pricing in the Keystone State. In fact, legislation that would return Pennsylvania to its prior formula-based system for liquor mark ups is currently pending in the state legislature, providing Gov. Wolf with a ready vehicle for reform.

Instead of waiting for more fallout surrounding its flexible pricing system, Pennsylvania should take the initiative and fix it’s system now.