Wednesday, May 7, 2008

Reason #4 -- the 18% Emergency Tax

I remember the first time I visited Johnstown. I was driving in from Pittsburgh, and it had been raining heavily. The sky was still gray and threatening, and local streams and creeks were swollen, brim-full. I mentioned this to a Johnstown resident, and his dead-serious response was, "You might not want to talk about that. We're kind of touchy about that."

Say the name, "Johnstown," and people think "flood." The flood they're thinking of was in 1889, a catastrophe caused by a dam failure, but there were other floods in Johnstown, in 1894, 1907, 1924, and 1977. The biggest flood after the 1889 event, though, was the "St. Patrick's Day Flood" in 1936. Damage was extensive, and the State responded with clean-up and recovery aid. The expenditures were covered by a quickly-imposed Emergency Tax of 10% on all wine and liquor sold in the State Stores.

You may have heard that we're still paying this Emergency Tax. Well, that's not really true; we're no longer paying a 10% Johnstown Flood Emergency Tax. Don't be silly; that was over 70 years ago! No, we're paying an 18% Johnstown Flood Emergency Tax for an "emergency" that ended 71 years ago, because the State raised the tax to 15% in 1963 and then again to 18% in 1968. That's some emergency.

Reason #4:

The Ridiculous 72-Year Old Emergency Tax

You may find this hard to believe, so here's the proof, right off "e-TIDES" (PA's Electronic Tax Information and Data Exchange System). You'll see at the bottom of the page that the cite is "Emergency Liquor Sales Tax Act, Act of June 9, 1936." The emergency has been over for 70 years, and of course, the money hasn't gone to the citizens of Johnstown (or...the contractors hired to help the citizens of Johnstown) for many, many years: it goes to the General Fund. It's just money the State is taking from you every time you buy booze.

The Emergency Tax is an amazing thing, kind of the creamy center of a towering cake of taxes Pennsylvanians pay when they buy booze. First, there's the actual cost of the packaged beverage. The federal excise tax is added at the producer/importer level. Then the fun starts. The State imposes its set mark-up (for "profit", which in the case of so-called "control states" is really an additional tax, since it all goes to the State) of 30%. Now put that luscious Emergency Tax in there, adding 18% of the cost, the federal excise tax, and the 30% mark-up onto your bill. Think that's rapacious? Wait, there's more! That's right, folks, now you get to add the 6% State sales tax (7% in Philadelphia County)!

Let's look at that. Say you get a bottle of 100 proof bottled-in-bond bourbon. Cost from producer: $10. Federal excise tax of just about $2.50 (it's a set amount per gallon of 100 proof liquor; that's why we bought bottled-in-bond):$12.50. The State's mark-up of 30% is $3.75: $16.25. Now add the 18% Johnstown Flood Emergency Tax of $2.93 (note that it's more than the federal tax): $19.18. Top it all off with the 6% sales tax you pay on computers, cars, books, pets, toilet paper (whoops -- turns out PA doesn't tax toilet paper; make that kleenex...which, believe it or not, was what I had there originally, and for some reason, changed it)-- $1.15 -- and you get a grand total of $20.33. That is more than twice the cost of the whiskey.

Please note three things. First, there may be some additional charges in there that I've missed: the PLCB's site does not make it easy to get a total breakdown of charges. If I get better data, I'll add it. Second, this is what's called a "regressive tax." As a flat percentage, it hits poorer people harder by taking a proportionally larger part of their income. (Thanks to Grey Lodge Pub owner Mike Scotese for pointing that out.)

Finally, I hope you noticed that the Emergency Tax taxes the tax: you're paying 18% of both the federal excise tax and the State's "mark-up". Of course, the State sales tax then does that too, taxing the Emergency tax, and effectively taxing the federal tax and the State's mark-up twice. It's sweet, what you can do in business when you write the rules.

Is the Emergency Tax higher than other states' booze taxes? It's actually hard to compare state liquor taxes. Many of them (but not all) are imposed on gallons at a set rate, rather than a percentage, so the tax load is actually lower on high-end booze. Not the case in Pennsylvania, where you're expected to pay 18% on $500 bottles of single malt (and that nifty 30% "mark-up," don't forget that).

The Pennsylvania Tourism & Lodging Association has an official position supporting repeal of the Johnstown Flood Emergency Tax. They point out that the tax, along with the State's monopoly pricing and minimal bulk discounts, puts Pennsylvania restaurants and bars at a distinct price disadvantage.

I can't realistically expect that the state will repeal the Johnstown Flood Tax and leave us with no excise tax on liquor and wine at all. What I would like to see is something more in line with other states. Something like this:

The PLCB should be abolished so that the current compound tax situation of an artificially imposed state "mark-up" of 30% -- a de facto tax -- plus the ludicrously outdated "Johnstown Flood Emergency Tax" could be replaced by a tax system more in line with neighboring states.

Collecting those taxes could be a lot easier, too...but we've got plenty of Reasons to address that. For now, let's zero in on admitting that the Johnstown Flood over. The emergency is a state legislature with a drinking tax problem.


Anonymous said...

WOW! I had no idea what the heck the "Emergency Tax" is, and I consider myself to be an enlightened booze dude! Thanks for the clarification and the emphasis on the "tax on a tax" side of this. Keep up the good work, and "Illigitimati non carborundum!"

Rich said...

I assume its a little different for beer since the de facto 30% markup wouldn't exist. So is beer taxed by the barrel for the state like the feds do it?

I also guess we're paying the e-tax on beer and also sales tax, of course.

This all makes me sick.

Lew Bryson said...

Actually...there is no set mark-up that I'm aware of -- just the wholesaler's mark-up and the retailer's mark-up, which is profit, of course (can anyone tell me if PA's wholesaler mark-up is set by law, as it is in some states?), and beer is NOT nailed with the Emergency Tax! In fact, PA has some of the lowest beer excise taxes in the country; I think we're tied for second-lowest. We do still pay the sales tax, but the overall picture ain't bad on beer taxation in the Keystone State. No complaints on that score; count your blessings and shut up, I say.

Lew Bryson said...

Oh, and Rich? If this is making you's working. That's just what I want!

Anonymous said...

There is no set markup for beer in PA, either wholesale or retail, and the margin varies greatly across the state. I would venture that the wholesale markups go anywhere from 20% to 40% depending on the geographic area and the particular product and package involved.

Keep in mind that PA has two kinds of distributors, upper tier (generally IDs) and lower tier (D), and usually the Ds are buying their beer from IDs, adding a layer of markup even within the wholesale system.

Anonymous said...

Lew two things:

(1) How does a 30% markup compare to what you would pay in a normal state where liquor is sold by a private proprietor? What mark-up do they put on liquor/wine?

(2) Is there an accounting of the cost of doing business in the state stores -- what is the efficiency relative to private enterprise? What is the net profit after the cost of doing business (paying the unionized employees; store rental, etc...)? I am assuming that the 30% is in effect the gross profit that is then used to cover those costs? Is this just a break even, or are they generating more profit for the state coffers?

Lew Bryson said...

Sam: thanks for that.

Anony: I have some of that, and I'm working on the rest of it,'s all grist for future posts at this point. Good questions, and we will address them.

Anonymous said...

No sales tax on toilet paper

PLCB has to go. I dislike the patronage, from the top to the local store.

Lew Bryson said... a really interesting article, thanks. I found this quote particularly revealing: The department has no authority to fine a business for misapplying sales tax, Ms. Weyant said. The department can assess penalties only if a business fails to remit any sales tax it collects.

Ain't that just like the State. It's all about Da Bux.

Marty said...

Well Lew, its a good reason to be a homebrewer. But as in Philly, here in the Burg' there is 7% sales tax along with (and I am sure you will love this when going to the Church, Sharp Edge, Haufbrauhouse,ect) a 10% "pour" tax added to each poured booze you purchase in this fine county.It became known as the "stealth tax" from the way the good ol' boys tried to keep it quiet when it was going through.

Having been to other states and a few AHA confrences, seeing how other states get so many more choices is just depressing. And when you try to explain to them what we have to go through to get booze, they give you that puzzled dog look and I think they just feel sorry for you.