September 2, 2008

Liquor Buyers Are Prey for High Taxes, Special Interests

By Jenny Paul

Pennsylvania liquor consumers are getting a break compared with shoppers in Ohio and West Virginia, but the prices they pay still are inflated by taxes, fees and the state's mark-up.

A 750-milliliter bottle of Jack Daniel's Old No. 7 Black Label whiskey retails for $20.99 at state liquor stores. With the 7 percent Allegheny County sales tax, consumers pay $22.46 -- nearly $10 more than the bottle's wholesale price of $12.73.

"Wow, that's crazy," said Rick Austin, 38, of North Huntingdon after he looked at the price breakdown. "I live in Westmoreland County, but still that's nuts."

For years, the Pennsylvania Liquor Control Board, in an effort to stave off privatization, increasingly has taken a consumer-friendly approach to customer relations, store hours and selection, most recently embarking on a proposal to sell liquor and wine out of vending machines in grocery stores.

But power to change the tax structure lies with legislators, not the board. Although legislation is pending in the General Assembly to change the state's monopoly system and heavy tax structure, it's unlikely any laws will pass, said G. Terry Madonna, a Franklin & Marshall political science professor.

"You have a confluence of elements that makes it difficult to change anything," Madonna said. He cited advocacy groups that want to limit alcohol consumption, unions that want to protect liquor resellers' salaries and a Liquor Control Board reluctant to reform itself.

"I think it's just a question of inertia, the powerful forces that want to keep (policies) in place and the inability of the forces that want to change to be able to get enough traction to do anything about it," he said.

Major mark-ups

The high cost of liquor stems from the state's pricing system, which dictates mandatory fees and taxes. Under rules, most bottles of liquor and wine in Pennsylvania undergo an automatic 30 percent mark-up from the wholesale price.

Then, the Liquor Control Board adds a charge -- typically $1 to $1.50, depending on the size of the bottle. The 18 percent Johnstown flood tax -- enacted in 1936 -- is factored in next, and the price of each bottle is rounded up to the nearest nine, meaning a price of $16.95 becomes $16.99. A sales tax of 6 percent is charged in most counties; the tax is 7 percent in Allegheny and Philadelphia counties.

"It's like gasoline, with all those taxes," Austin said.

Western Pennsylvania consumers can get a price break if they trek to a special outlet store in Washington County, where one-liter bottles of liquor are offered at discount prices.

The Liquor Control Board created outlet stores in 2003 to keep consumers in the eastern part of the state from crossing the border to buy alcohol in New Jersey, Delaware and Maryland, where taxes on liquor are lower. In those states, some products, including Grey Goose vodka and Yellow Tail Chardonnay, can be more than $3 cheaper than they are in Pennsylvania, according to data gathered by the Tribune-Review.

Most prices at liquor and wine stores in Ohio and West Virginia are similar to or higher than the cost of the same products in Pennsylvania, according to Trib comparisons. Ohio and West Virginia, like Pennsylvania, have state rules governing liquor pricing, which is why prices in those states are often comparable to prices here.

The board opened outlet stores in the western half of the state to provide the same buying opportunities for residents here and to try to lure Ohio and West Virginia consumers to the stores, Chairman Patrick Stapleton III said.

But evidence that the stores have brought in out-of-state consumers and persuaded Pennsylvanians to shop in-state is anecdotal, Stapleton said.

"The success is that they are some of the highest grossing stores in the system," he said. "The question of whether they stop people from going out of state is unclear."

Outlets draw business

Bar, restaurant and club owners -- not everyday consumers -- are the biggest factor in the stores' high grosses. During fiscal year 2008, licensees spent nearly $42.5 million at outlet stores, about 53.7 percent of the stores' total sales. At the Washington County store, licensees made up nearly two-thirds of sales.

Liquor Control Board spokesman Nicholas Hays said the spike in licensee traffic at these stores has been an "unintended consequence" of the outlet store concept. The board is considering the creation of service centers for liquor license holders that could serve as a hub for licensee activities, including license renewals and server training, while providing the outlet prices that restaurant, bar and club owners travel dozens of miles to snag in a location that's closer to home.

The centers could be approved within two years and would be located near metropolitan areas, Stapleton said. Retail consumers would be allowed to make purchases at the centers but would be encouraged to use regular state stores, he said.

While licensees have jumped on the deals offered by the outlet stores, consumers in eastern Pennsylvania haven't fully bought into the concept. Although transporting alcohol into Pennsylvania is illegal, employees at stores in Maryland, Delaware and New Jersey said they continue to see Pennsylvania residents at their stores. Tom Donelson, a clerk at F&N Wines and Spirits in Wilmington, Del., said he thinks about half of his customers come from Pennsylvania.

"PA's right there, man," Donelson said. "Why go to the liquor store over there when they can go here?"

It could take a complete overhaul of Pennsylvania liquor prices - - not just offering a few lower-priced products -- to persuade more residents to make alcohol purchases in-state.

The state won't be able to match prices of stores in Maryland, Delaware and New Jersey until the Legislature reworks the tax and mark-up structure on wine and liquor, said Jonathan Newman, the former Liquor Control Board chairman. Newman said he created the outlet stores and the Chairman's Selection, a collection of lower- priced wines, as "stop-gap" measures.

"It all comes to one thing: Pennsylvania has to wean itself off of the Johnstown flood tax," Newman said. "They've got to look at their mark-up, and they've got to realize that high taxes aren't always the answer because there are a big number of consumers who travel over the border."

Newman said "beleaguered" licensees deserve to have better prices available to them, but he urged the board to promote the lower- priced outlet products.

"I think it's great that they're trying to make better pricing a reality for restaurants, but they should not forget about the consumer," he said.

Pending legislation

The Legislature is considering these bills:

H.B. 2018

Proposed by: Rep. Robert Freeman, D-Northampton County

What it says: The bill would direct money from the Johnstown flood tax to local governments, where more than 15 percent of properties are tax-exempt. Now, revenue goes into the state's General Fund.

H.B. 889

Proposed by: Rep. Ron Raymond, R-Delaware County

What it says: The bill would reduce the 18 percent Johnstown flood tax yearly and eliminate the tax in 2011.

S.B. 674

Proposed by: Sen. Sean Logan, D-Monroeville

What it says: The bill would allow beer distributors to sell six- packs in addition to cases. It would increase the maximum number of six-packs consumers can purchase at restaurants and taverns from two to three.

S.B. 1273

Proposed by: Rob Wonderling, R-Montgomery County

What it says: The bill proposes selling about two-thirds of state- run liquor stores to private entities. The remaining stores would be jointly owned by the state and a private equity firm.

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