International Drinks Groups Warn PA Governor About Liquor Mark-ups


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.

Pennsylvania May Finally Scrap Flexible Pricing Authority for Spirits


As covered before on these pages, Pennsylvania grants broad power to its liquor regulatory agency—the PLCB—to set the price mark-ups for distilled spirits sold in its state-run retail stores. R Street’s Jarrett Dieterle has previously pointed out that liquor mark-ups in control states function analogously to taxes, especially when the money they generate flows to the state’s general fund. This week in The American Spectator, R Street’s Kevin Kosar discusses an effort afoot in the Pennsylvania legislature to at least limit the unilateral power of the PLCB to set mark-up levels:

Keystone State legislators may abolish Pennsylvania’s stealth drinks tax. The House Liquor Control Committee is examining HB 1512, which would end the Pennsylvania Liquor Control Board’s “flexible pricing” power.

Rep. Jesse Topper, the measure’s primary sponsor, argues that flexible pricing power is not a power one should give to a monopoly. “[T]he PLCB is neither constrained by market discipline nor antitrust laws,” he wrote.

Topper’s bill would repeal the flexible pricing provision “in order to reinstitute some kind of consumer protection.” If enacted, the PLCB would revert to using a longstanding pricing system that set spirit prices by a formula

[F]lexible pricing is effectively a stealth tax and may therefore raise constitutional questions. Instead of elected officials setting income- or sales-tax rates to cover the cost of government, the pricing mechanism has enabled the state Legislature to outsource revenue-raising authority to an executive agency…”

Read Kevin’s whole piece here.

Pennsylvania Further Restricting Spirit Sales


While we have discussed that Pennsylvania may be rolling back some of its drinks laws, not all reports point in this direction. Jdsupra explains that some Pennsylvania distilleries may be restricted on their spirits sales:

"Limited distilleries and distilleries licensed in Pennsylvania are now restricted to selling up to 50,000 gallons of distilled spirits annually to Pa.L.C.B. licensees and permit holders. This does not restrict the amount of distilled spirits that a limited distillery or distillery may sell to consumers or the Pa.L.C.B., just the amount that may be sold to Pa.L.C.B. licensees through self-distribution.  This restriction will be combined for all limited distilleries or distilleries with common ownership, either directly or through a wholly-owned subsidiary.  Thus, if a person owns two limited distilleries, the two would be permitted to have combined sales of 50,000 gallons to Pa.L.C.B. licensees.  Upon reaching that 50,000-gallon limitation, all sales to Pa.L.C.B. licensees must be purchased by the respective licensee through the Pa.L.C.B., assuming such products are offered for sale by the limited distillery or distillery through the Pa.L.C.B..."

Check out the entire article here.

Pennsylvania might improve its dreadful drinks laws—a little


Pennsylvania's legislature is set to consider a bill that would roll back the state's recently-implemented flexible-pricing scheme for alcohol. R Street's Jarrett Dieterle has written before about how booze markups in control states function analogously to a stealth tax, and now R Street's Kevin Kosar weighs in on Pennsylvania's specific situation in an op-ed for the American Spectator:

If Rep. Jesse Topper has his way, Pennsylvania’s legislature will roll back its infamous stealth tax on drinks. Topper, a Republican representing the south-central Bedford, Franklin, and Mercer counties, has introduced H.R. 2263, which would repeal the “flexible pricing” authority given to the Pennsylvania Liquor Control Board in 2016.

Why is this good news? Well, the cheerfully named provision had the dreadful effect of enabling the state liquor officials to raise prices as they saw fit. The PLCB has a monopoly on the sale of spirits and a near monopoly on wine sales, so it can set prices without fear of price competition. And with the state legislature demanding the PCLB give it big chunks of revenue each year to fund government employees’ pensions and the like, the problem is obvious: flexible pricing is a stealth tax. Bureaucrats raise revenues for general government spending by elevating mark-ups paid by drinks consumers, sans legislative enactment. It is literally taxation without representation...

Read the rest of Kosar's op-ed here.


Pennsylvania's Booze Reforms Prove Popular


Last year, Pennsylvania implemented modest changes to its alcohol laws, expanding the types of stores that can sell beer and wine. According to PennLive, the changes have proved to be quite popular among residents of the Keystone State:

"Pennsylvania last year entered what was, for the natives, a brave new world of alcohol sales.

Now on the cusp of the biggest alcohol sales weeks of the year, by several barometers it appears that long-stalled plunge into a more convenience-oriented market is working out. So far.

More than 550 businesses have received expanded wine permits since summer 2016, enabling them to sell bottles of wine or six-packs of beer, often in "general store" type atmospheres....

Beer and wine drinkers, meanwhile, still seem to be enjoying the novelty of wandering into a section of their favorite grocer and browsing through the aisles to create their own six-pack or even sidling up to the beer and getting a beer on draft.

'I love the convenience,' said Leslie Davis, a 48-year-old Middlesex Township resident reached at the Giant Foods store in Hampden Township this week.

'Because I'm already at the grocery store, and I don't have to go over to the liquor store to get it [a bottle of wine]. And the prices are basically the same,' Davis said, adding with a wry smile, 'I've checked.'..."

Read the rest here.


Pennsylvania Legislative Committee Considers Modest Liquor Licensing Reform


Like many states, Pennsylvania has strict tied-house laws stemming from the post-Prohibition era. As a result, some Keystone State breweries have had trouble with things like leasing space or property from an entity that possesses a restaurant or retailing license. According to The Legal Intelligencer, a key legislative committee may advance reforms to this law:

"The Pennsylvania House of Representatives’ Liquor Control Committee is set to vote on a measure to lift liquor licensing restrictions that have been in place since the repeal of Prohibition.

On Tuesday, the committee is expected to pass amendments to the Liquor Code in HB 1902, a measure introduced by the committee chairman, Rep. Adam Harris, R-Juniata. If passed by the General Assembly, the bill would end the state’s practice of “interlocking prohibition,” a form of tied-house law that disallows holders of liquor manufacturing licenses from also holding retail bar and restaurant licenses.

Tied-house laws make it illegal for a manufacturer to induce a retailer to sell only one brand of liquor. Lawmakers said the current letter of Pennsylvania law presents modern-day problems. For example, under the law, a landlord with a license to serve alcohol couldn’t lease space to a manufacturer of alcohol..."

Read more here.

Pennsylvania May Be Backing Off Plans to Borrow Against State Liquor Profits


During recent budget debates in Pennsylvania, Gov. Tom Wolf floated the idea of using profits derived from the state's Liquor Control Board as security for a state loan (previously covered here). This novel use of state liquor proceeds raised eyebrows--and sparked a lawsuit--but it appears, for now, that the governor will not pursue the idea after all. reports:

"A Pennsylvania advocacy group withdrew Tuesday its bid for a preliminary injunction to stop the governor from borrowing $1.25 billion against the state Liquor Control Board's future earnings to balance the state budget amid reports he was backing off the proposal...

That's because Wolf on Monday signed into law a budget deal approved by the General Assembly that instead borrows $1.5 billion from the state's tobacco settlement fund to pay for the $31.38 billion spending plan approved in June..."

More here.

R Street's Jarrett Dieterle recently wrote about the PLCB and how its liquor markups function like taxes.


How the PLCB enacts stealth taxes on Pennsylvanians with price markups


R Street's Jarrett Dieterle took to the pages of the Pittsburgh Post-Gazette to argue that the PLCB's liquor mark-up authority constitutes a form of stealth taxation power:

Pennsylvanians are used to buying their pinots and bourbons from state-run Fine Wine and Good Spirits stores, but most are probably unaware that the Keystone State is also using alcohol sales to enact stealth tax increases.

Like many so-called “control” states, the Pennsylvania Liquor Control Board sets the markup prices for the alcohol it sells to the public. The revenue derived from these markups is used to help fund the state government at-large, which means the markups are functionally analogous to taxes. This setup is problematic on many levels, and it’s far past time for Pennsylvania to reform it...

The connection between the PLCB’s markups and general government funding increasingly has become explicit. When the PLCB announced its recent price increases, an agency representative cited the rising costs of public pensions and unemployment benefits as the reason for the hikes. Gov. Tom Wolf even took it a step further by proposing that PLCB profits be used as security for state loans, further underscoring the relationship between the markups and government funding.

Defining what actually counts as a tax is important, since our democratic system of governance long has recognized that only elected representatives should able to enact taxes.

You can read the rest of the op-ed here. The op-ed was based on a larger policy report Dieterle wrote on the issue of control state liquor mark-ups (available here).

How control states use liquor markups as secret taxes

Today, R Street's Jarrett Dieterle released a policy paper on how control states use liquor mark-ups as a form of backdoor taxation. He argues that government-imposed mark-ups are analogous to taxes since they are often used to fund the government at large:

In states that hold a monopoly on the sale of spirits, liquor prices usually are set by a formula that includes at least one of three different components: taxes, fees and price markups. Markups are formally enacted by liquor regulators—usually in the form of a board—who are tasked to oversee alcohol sales in the state. In recent years, governments in these so-called “control states” have relied more and more on the revenue derived from these markups, as state lawmakers frequently have included calls for higher markups in their budget proposals.

These artificially created price bumps exceed the level of increase that would be sustained on the open market and the revenue from these increases often accrues directly to a state’s general fund. In this way, they function very similarly to taxes. Furthermore, liquor markups are readily distinguishable from nearly every other form of government-imposed fee, since they target a good designed for private consumption. Perhaps worse is that, despite their clear resemblance to taxes, markups frequently do not need to be ratified by state legislatures in the way that other taxes do. This allows lawmakers in control states effectively to hide the cost from state taxpayers.

The rest of the paper can be found here.

Reason's Eric Boehm also penned an article specifically about Pennsylvania's liquor mark-up system, which cites Dieterle's paper and suggests that such mark-ups could be illegal since they weren't ratified by the state legislature:

 A new paper published Thursday by Jarrett Dieterle, a fellow at the R Street Institute in Washington, D.C., questions whether state-run liquor operations charging what amounts to secret taxes in the form of price mark-ups on alcohol are illegal.

The PLCB used to apply a 30 percent mark-up on the wholesale price of liquor, but recently switched to a variable markup that fluctuates from product to product. Either way, that added fee is "a tax in everything but name," says Dieterle.

The mark-up system lacks accountability, because taxpayers can't remove PLCB board members at the ballot box. A lawsuit built on Dieterle's premise could undermine the state's ability to continue collecting this unseen tax.

"This setup ultimately allows state officials to hide the bill from taxpayers and to rely on what amounts to backdoor taxes to plug budget gaps, all while avoiding politically contentious policy decisions," Dieterle says.

More here.


Pennsylvania's Governor Calls for Securing a Loan With State Liquor Profits


Control-states have long sought to balance their budgets on the backs of their government-run alcohol systems. And given that state-run liquor regimes usually kick off significant profit--Virginia's has been called "the golden goose of the commonwealth"--it is perhaps unsurprising that politicians often seek to get their hands on it. Pennsylvania Gov. Tom Wolf has now gone a step further, however, by floating the idea of using the profits derived from the state's liquor system to securitize a $1.25 billion loan to help the state balance its budget. As notes:

"[Gov. Wolf] announced Wednesday that he would borrow against profits from the state's liquor system to raise $1.25 billion, money that would pay off the state's prior year deficit and reduce the need for additional temporary borrowing to meet financial obligations.
Officials for the Pennsylvania Liquor Control Board said the organization's finances were on solid footing, with profits and income growing modestly over the last year..."

Read more here. Gov. Wolf's full statement on the issue can be found here.