Tax

International Drinks Groups Warn PA Governor About Liquor Mark-ups

shutterstock_654240889.jpg

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.

When the tax man comes for your kombucha

shutterstock_572015131.jpg

Kombucha—a slightly fermented beverage usually made of tea, yeast and healthy bacteria—has become the new rage. As more consumers seek out the drink, more producers have sprouted up across the country to start making it. Because kombucha ferments, it contains small amounts of alcohol—but far below any level that could intoxicate an adult. Regardless, the feds have started trying to apply antiquated federal alcohol taxes to kombucha, meaning that if it reaches a certain threshold of alcohol content it could be taxed like regular booze. R Street’s Jarrett Dieterle writes for Washington Examiner about why this doesn’t make any sense at all:

[U]nder antiquated federal tax provisions, kombucha can occasionally become subject to alcohol excise taxes despite the fact that the product, by nature, only has trace amounts of alcohol. In light of this, both to promote commercial freedom and as part of a greater push to modernize outdated alcohol laws, fixing this accident of history should be a priority for federal lawmakers.

Under the federal tax code, all “fermented beverages” that contain 0.5% of alcohol or more by volume are technically considered “beer” and therefore subject to alcohol excise taxes. Federal excise taxes on beer follow a relatively complicated formula, but they can range anywhere from $3.50 a barrel up to $18 a barrel, depending on the size of the brewery.

When kombucha is made, it is usually below the 0.5% threshold for alcohol. However, if it’s not properly refrigerated after leaving the factory for distribution, it continues to ferment, thereby raising the alcohol level above the intended amount…

n recent years, the Alcohol and Tobacco Tax and Trade Bureau has taken to sending warning letters to kombucha makers, informing them that their products tested slightly over the limit and threatening fines of more than $10,000.

This is for little reason, since the 0.5% level has absolutely nothing to do with intoxication but rather originally traces its heritage to the early 1900s, when pro-Prohibitionists used it as a means to control the spread of alcohol to new states…

Read the whole piece here.

Pennsylvania May Finally Scrap Flexible Pricing Authority for Spirits

shutterstock_563368003.jpg

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.

Congressional bill would eliminate excise tax on Kombucha

shutterstock_574253602 (1).jpg

Kombucha traditionally has small amounts of alcohol in it, which can make it a tricky case for federal excise taxes on alcohol if it rises above 0.5% alcohol by volume. A U.S. Senator recently introduced legislation to help protect the drink from these taxes, according to Bend Bulletin:

A measure in Congress would help kombucha manufacturers by eliminating excise taxes on their products that contain more than 0.5% alcohol.

The bill, introduced by U.S. Sen. Ron Wyden, D-Oregon, raises the limit on alcohol by volume for kombucha to 1.25% and makes the product exempt from excise taxes imposed on alcoholic beverages like beer…

Kombucha is a fermented product, created when sugar and yeast are combined. When kombucha is not kept cold, it continues to ferment, raising the alcohol level above 0.5% and making it subject to the excise tax, said Amelia Winslow, director of project management at Kombucha Brewers International, a nonprofit trade association.

“Commercial kombucha producers work hard to control their processes to achieve compliance,” Winslow said. “However, if there are gaps in the cold chain during distribution, authentic kombucha, which is a living food, can go slightly above this 0.5%.”

It doesn’t make sense to tax kombucha for exceeding that threshold, Winslow said…

Read more here.

R Street's Jarrett Dieterle Interviewed About Nebraska Alcohol Taxes

shutterstock_571032364.jpg

Nebraska’s legislature is considering increasing taxes on beer, wine, and spirits in an effort to raise more revenue and provide property tax relief. The Heartland Institute interviewed R Street’s Jarrett Dieterle about the proposal:

Local craft breweries that produce small volumes of beer are growing in popularity nationally and in Nebraska, says Jarrett Dieterle, director of commercial freedom policy at the R Street Institute.

“The craft beverage industry is booming cross the country,” said Dieterle. “In 2017, craft breweries created the second-most manufacturing jobs of any industry in America.

“Nebraska is no exception,” Dieterle said. “Nebraska has 3.5 breweries per 100,000 people, which puts it in the top 15 states for breweries per capita. Overall, breweries had a $465 million economic impact in the state.”

The craft beer industry will shrink if Nebraska moves forward with this tax hike, says Dieterle.

“Research has demonstrated that increasing taxes on products like beer can lead to a decrease in brewpubs and breweries in a state,” said Dieterle…

Governments shouldn’t focus on a specific product category to increase revenue, says Dieterle.

“Generally, state and local governments fund their operations through a combination of property, income, and sales taxes,” said Dieterle. “Singling out the alcohol industry to bear the brunt of revenue-generation in the state makes little sense,” Dieterle said…

Read the whole article here.

A (Small) Step Forward For Virginia Distilleries

Silverback Distillery CEO Christine Riggleman.

Silverback Distillery CEO Christine Riggleman.

Virginia distillers continue to labor under some of the worst distilling laws in America, but their outlook is set to get (at least slightly) better. Virginia has the the 3rd highest distilled spirits taxes in the country, requires all liquor sales to take place through government-run liquor stores, and restricts the amount of tastings and servings a distillery can provide to on-premise visitors to a mere 3 oz. of spirits.

Even worse, the state’s notorious “NET 30” payment scheme requires distillers who sell their own bottles in their tasting rooms to send 100% of the proceeds of the sale to the Virginia Alcoholic Beverage Control Authority (ABC). Then, only 30-45 days later, ABC sends back the distiller’s portion (which amounts to a mere 46% of the sale price after Virginia’s high mark-ups and taxes are factored in).

Unsurprisingly, this antiquated process creates tremendous cash flow problems for craft distilleries since they are not even able to touch the money they derived from bottles sales until over a month later. To add insult to injury, the state also charges distilleries handling fees even for bottles sold inside the distillery (and thus handled exclusively by the distillery’s own employees).

Despite these burdensome rules, the state legislature has been resistant to even small changes to the law. Finally, this year, a modest step forward was achieved. An effort led by Silverback Distillery CEO and Founder Christine Riggleman resulted in Virginia lawmakers passing legislation that ends the NET 30 payment scheme and eliminates on-site handling fees (although the law doesn’t take effect until 2020). The DrinksReform.org team reached out to Riggleman, whose distillery is located in Afton, Virginia, to get her reaction to the news.

“[The legislation] allows us to have the working capital on-hand to meet demand,” Riggleman said. “With the flow of tourism and customers, you can’t predict always what the demand for the products will be, so you need the funds on-hand to be able to gear up for busier times.” Riggleman specifically cited the need to have adequate cash flow to invest in bottles and labels in preparation for periods of heightened sales, like around the holidays—something that is hard to do when the Virginia ABC holds their sale proceeds for over a month.

While Riggleman was relieved that her efforts resulted in real change, she was quick to note that more work remained to bring Virginia’s laws on distilled spirits in line with how it treats beer and wine. “This is just a band-aid; I still want full parity [with beer and wine],” Riggleman said. “We’re still hemorrhaging every month in Virginia trying keep up with customer demand as well as all the laws.”

In fact, Silverback Distillery recently opened a new production facility in Pennsylvania rather than expanding in its home state of Virginia. Riggleman noted that, in contrast to Virginia, Pennsylvania has no on-premise tasting limits and even allows distilleries to serve beer and wine.

Ultimately, Virginia will need to continue to grapple with the fact that its many Prohibition era laws are continuing to hamstring a promising growth industry. Hopefully Riggleman’s efforts will lead to more Virginia distillers joining the push for reform.

(R Street’s Jarrett Dieterle has previously profiled Christine Riggleman and her family’s experiences dealing with Virginia alcohol laws).

The Benefits of Legalizing Sunday Liquor Sales

shutterstock_383313106.jpg

Numerous states around the country still restrict or prohibit the sale of distilled spirits on Sundays, a Prohibition era relic known as “blue laws.” Last year, Minnesota took steps to legalize Sunday sales, and now a wave of additional states—including West Virginia, Texas, North Carolina, and South Carolina—are considering similar legislation. Doing so is a good idea from both a revenue-raising perspective and as a freedom-enhancing measure. A recent article for the Duluth News Tribune by Lindsey Stroud of the Heartland Institute recaps the economic success stemming from Minnesota’s reform:

July 2019 will mark two years since Minnesota repealed its Prohibition-era ban on selling alcohol on Sundays. In 2017, then-Gov. Mark Dayton, a DFLer, signed legislation "allowing for the sale of alcohol from stores on Sundays between the hours of 11 a.m. and 6 p.m."…

To understand the impact of Sunday sales, it's actually better to look at excise tax collections. An estimated 75 percent to 80 percent of all sales, as measured in volume, occur at off-premise establishments. According to data from the Minnesota Department of Revenue, the state collected an estimated $86.8 million in annual excise taxes during the pre-Sunday sales period. Since Sunday sales began, excise taxes have increased to $90.4 million, a growth rate of 4.2 percent. Typically, alcohol tax revenue grows around 2 percent to 2.5 percent annually. Sunday sales in Minnesota seems to have generated a much higher revenue growth rate.

Moreover, with full-strength beer sales boosted as well, it's safe to say that Sunday sales has provided an economic gain to Minnesotans and will continue to do so…

Stroud’s entire article is well worth a read (here).

R Street: A Little Less Tariff, a Lot More Booze

shutterstock_452734891.jpg

Politicians from across the ideological spectrum are constantly waxing poetic about the importance of blue-collar manufacturing jobs. In fact, much of the justification for the recent tariff disputes has been a need to protect American manufacturing industries. R Street’s Jarrett Dieterle and Clark Packard argue in National Review that the best path to more manufacturing jobs is to scrap the tariff wars and start deregulating the alcohol industry:

From the earliest moments of his campaign, President Donald Trump has emphasized the importance of domestic manufacturing jobs. He’s negotiated carve-outs to keep factories in America, railed against companies that move jobs overseas, and increased tariffs in an attempt to protect blue-collar workers. Nearly all of the president’s rhetoric, however, has fixated on a handful of sectors traditionally associated with manufacturing, such as the steel industry, automobiles, and construction. This myopic focus has blinded the president to one of the most promising sources of manufacturing jobs in modern America: the alcohol industry.

President Trump is far from the only government official who obsesses over manufacturing jobs, with stories cropping up daily about politicians visiting production plants in Rust Belt states and donning hard hats for well-publicized photo ops…

Lost in all this is the fact that the American drinks industry has some of the best job-growth potential in the country. According to data from the Bureau of Labor Statistics, breweries, wineries, and distilleries created the second-most manufacturing jobs of any industry in 2017. These numbers don’t even include support industries that are tied to drinks, such as barrel manufacturers or bottle producers. With new breweries and distilleries opening every day, the growth seems primed to continue — if policymakers will let it…

Read the whole piece here.

Oregon Governor Proposes Stealth Tax Via Liquor Markup

shutterstock_409912267.jpg

After claiming that she wouldn’t raise taxes on alcohol, Oregon Gov. Kate Brown’s budget proposal includes a call for a 5% increase in the markup for liquor. As reported by Oregon Public Broadcasting:

As she finalized her budget proposal for the next two years, Oregon Gov. Kate Brown made no secret of the fact she’d push for higher tobacco taxes, which she believes should play a larger role in funding health care.

At the same time, Brown said she wouldn’t pursue higher taxes on beer and wine, despite a request by the Oregon Health Authority…

But there was one “sin tax” that Brown didn’t mention — to the media or the industry that would be affected. Brown wants to increase what the state collects from liquor sales.

Tucked toward the back of Brown’s 500-page, $26.3 billion budget proposal released Wednesday is a single mention that the governor hopes to raise the markup on Oregon liquor sales by 5 percent beginning July 2019. The move would bring an extra $21.2 million into the state’s general fund, according to the budget proposal…

Read more here.

Oregon is one of 13 states that controls distilled spirits sales at the retail level—liquor stores are operated by state-appointed liquor agents, but the state sets the prices. As R Street’s Jarrett Dieterle has noted before, control states that increase liquor markups are really instituting a form of stealth tax on their citizens—especially when the money generated from the enhanced markup merely flows to the state’s general fund. (Read Jarrett’s report on control state markups here.)

Why Rebranding Sin Taxes as "Health Taxes" Doesn't Fix Anything

shutterstock_496531687.jpg

There's been a recent wave afoot to rename sin taxes as health taxes. R Street's Kevin Kosar writes for American Spectator about how this doesn't alleviate any of the drawbacks of using sin taxes:

Have you heard the news? So-called “sin taxes” — particularly those on alcoholic beverages — are being rebranded as “health taxes.” It’s true...

Former New York Mayor Michael Bloomberg and other public health advocates think sin taxes should be called and viewed as “health taxes.” Certain activities and products, like gambling and booze, issue “externalities” that are born by the community collectively. They say the overwhelming evidence indicates that higher taxes on alcohol and other vices will reduce excessive consumption and the associated health costs.

For sure, alcohol addiction and severe abuse is damaging. Anyone who has ever known an addict can speak to the awfulness and tragedy of it all. The same goes with compulsive gambling, which is horrifically costly.

So, what’s not to like about a sin or health tax?

Plenty. Dressing up the sin tax as a “health tax” sweeps under the rug some of the problems with this policy tool...

Read the rest of Kevin's column here.