Tuesday, January 27, 2009

Reason #13: Who Needs 'Em?

Thank you, Michael Hudson.

Who is Michael Hudson, of Pottstown, PA, and why am I indebted to him? He's a Philadelphia Inquirer reader I've never met, but he wrote the following letter to the Inky's editor that posted today, and goaded me into reviving this sadly moribund blog:
Gov. Rendell's decision to push the state's budget shortfall both down and up the food chain at the same time - i.e., on to local taxpayers and the federal government - reflects the cowardice and poor judgment that are the hallmarks of his administration. Someone is going to hurt the economy by raising taxes, just not good old Ed. The right answer for the state is to cut costs (employees) and sell assets (state liquor system) to balance the budget.

Well, hello Michael! You're my new best friend. Because you've put your finger on the dirty secret the PLCB and the State have been hiding right out in the open for decades.

Reason #13:

We don't need the State Store System to make a lot of money off booze

Let's take a look at just how much that works.

The first screech about privatizing the State Store System is always about how much money -- excuse me, how much revenue it brings to the state. We won't be able to replace that revenue flow, the argument goes, without more taxes, and contrary to popular notion, the Legislature doesn't really like raising taxes: it gets them voted out of office. Interrupts their revenue flow, you know?

Let's take a look at that flow. Here's (actually, they've updated it; that now points to the next year, but it still has these numbers; look under 52 weeks ended June 26, 07) the latest state Auditor General audit of the PLCB and their State Store System operations. There's some interesting stuff here for future posts, but for now, riffle back to page 12 (jump to page 18 in the PDF controls), and feast your eyes on some numbers:

  • Right up near the top, the total taxes collected: $336,980,000. That is a buttload of bucks, incoming to the state's operating funds. Yummy revenue stream...
  • Jump down a bit, to the total operating expenses: $335,427,000. That, too, is a buttload of bucks, outgoing from the state's operating funds (and please note: it appears that's just the operating costs for The State Store System, not the PLCB's lawyers and administrative staff and enforcement agents and board and CEO.)
  • "Operating profit from state stores": $106,352,000. Not bad, but not as big a nut as the taxes, is it?
Pretty much every number south of that on the page wouldn't change if we shut down the SSS tomorrow, except the "Interest income," and the state can invest any money it has for interest, it doesn't need the PLCB to do it (not to mention that the PLCB gets an annual loan from the state's general fund of about $80 million for operating expenses).

There would still be income from license fees and fines, we'd still have to pay for licensing and inspections costs and enforcement costs (the PLCB shoots about $20 million to the PA State Police for that -- out of the total income, that's considered a transfer, not an expense). So the important numbers:
  • $336,980,000 coming in from tax collection.
  • $335,427,000 in operating expenses.
  • $106,352,000 in "operating profit."
Now...I'm not an accountant, I'm a very slapdash "businessman." But it sure as hell looks to me like this is a no-brainer...for shutting down the State Store System tomorrow. If we could turn a key right now that transferred control of every State Store over to private businesses tomorrow -- completely aside from the one-time windfall that those businesses would line up to pay for that privilege, and what we would get for selling off over $185 million in inventory, and the machinery, land, and other assets -- we would still get about $336 million in taxes without any cost -- or liability or risk -- to the State. Because the onus and cost of collecting those taxes would all be on the private businesses, as it already is in states where they run things normally.

That's $336 million free and clear. We don't have to pay anyone to collect it and send it to Harrisburg. We just pass a law that says they have to, put enforcement and inspection clauses in it and hand it over to Department of Revenue to handle with their existing sales tax collection mechanism (with an added widget for collecting the damnable Johnstown Flood Emergency Tax), and whoosh, you got revenue flow.

We have this big state-owned retail store system for collecting taxes from sales we don't need to be making, and all it's netting us is $106 million? A system that is unresponsive to the citizens of the state, a monopoly system that most people who buy booze in the state despise?

The PLCB should be abolished because it costs us money. The operating costs are so high that it's probably one of the major reasons we have so few State Stores: if they opened a reasonable number of stores, the state would be bankrupt. Yet somehow, liquor stores in other states manage to run at a profit, and deliver a constant flow of taxes to the states. If we went all private and sold more licenses, my God, how the money would roll in. Just think of the money we'd make from people no longer crossing state lines to buy booze in states with rational booze retail and real selection! Think of the boon to Pennsylvania's restaurants! Think of the jobs created!

And please, don't lean on the weak reed of "more stores would mean more alcohol abuse!" Prove it, convincingly. There is no definite link between the number, the density of booze stores and the amount of alcohol-related problems. Pennsylvania does not rank particularly low in alcohol problems among the other states; we're about average.

We have private, licensed beer distributors, hobbled though they are by the case law. They work. Selling wine and spirits is so much different?


Rich said...

Lew, you are forgetting something important...look further down on that page and you will see "Gross PROFIT from sales". Note that here they are calling out the taxes and the profit separately, and the state get's both. In this case the profit was 441M...in privatization the state wouldn't be getting that money in addition to the taxes. So, there's a reason for keeping it. Although, I agree with you on most of your other points, I don't think this is a very valid one.

Lew Bryson said...

Not so, Rich. The State doesn't get the gross profit: they have to take their operating expenses out of that. They actually make the 'transfers' (payments of money to the State) out of that 'operating profit.' The State gets that; they actually took more in the year shown, I assume because of money left over from the previous year.

But the big money, the reliable money, comes from the taxes, and it could be coming without any state involvement in retail operations. Claiming that the State Store System brings in that $300+ million in taxes is bullshit. The state gets a bit over $100 million from State Store System profits...and I seriously question if we wouldn't be able to match that in increased tax revenue if we went to private stores. Like I said, stopping the leaks over the border alone should do it. There's a reason liquor stores just over the borders do so well.

Anonymous said...

I must be missing something in the math here, since my subtraction of those numbers comes up with a piddling $1,553,000.

I also see some hypocrisy in the "revenue stream" argument from the boys in Harrisburg. Remember, this is the same state and same administration that not long ago wanted nothing more than to sell off our turnpike to private interests (until they waited too long and the economy scrapped the deal). Wouldn't THAT affect the state's revenue stream, too? Sure, it would bring in big bucks up front, but so would selling off the state stores. (I really love that archaic term!)

Lew Bryson said...

Which two numbers, Sam? Total taxes and Total ops expenses? They skim the taxes off the top, before subtracting the expenses. You're subtracting the taxes, cost of goods, and ops expenses from the gross sales, which were $1.686 billion. Cost of goods is about $907 million, taxes is $336 mill, ops expenses is another $335 million. Leaves about $100 million in net.

Look, folks, $100 million isn't chump change. But we'd reap a great windfall selling licenses and the inventory, and again, we'd make more tax money just because people would buy here. This is way doable. The tough part is the State Store Employees, and we've discussed ways to alleviate that problem. Plus, as I've said before: the SSS is supposed to be making the state money and controlling the sale of alcohol. You can't expect it to be a jobs program as well. The state never should have been in this business, and just because it is, is no good reason to stay in it.

Anonymous said...

"Look, folks, $100 million isn't chump change. But we'd reap a great windfall selling licenses and the inventory, and again, we'd make more tax money just because people would buy here."

Where do you think a company that buys a license that is going to bring such giant sums to the state coffers pays for that license? From its customers which is you and I, which means prices don't fall as much as you predict. If the licenses aren't sold for a larger sum your whole proposal for selling the stores loses most of it economic merit.

And to think that all the taxes that are associated with liquor sales will just magically go away is, to put it very nicely, optimistic. No politician that I know of on either side of the fence has ever seriously proposed doing away with any of those taxes.

And given the current state budget deficit in PA, and the overall state of the economy I think you're picking just about the worst time to wage this battle in your war against the PLCB.

Lew Bryson said...

You've got holes there, Anony.

The state doesn't have to be stupid about selling licenses, get a $1,000 fee and then let some putz turn around and sell it for $500,000. The state can put the licenses up for auction, just like the feds put up airspace.

How many licenses could we sell? New York State has 2,500 liquor stores. We could easily do 1,500. There will be bidding, and people, supermarkets, drug stores will pay top dollar for the licenses; selling booze is part of their business plan in other states, they know how to do it. We could even set aside some licenses for State Store System employees to buy.

Plenty of money coming in: people who have money right now are holding it because there are no good investments. Buying a liquor store license in a state that's just opening up private liquor sales is a good investment.

Then about prices...no, they won't jack the prices up. They'll have to come in lower than the State Stores, or people will just keep going across the border. The successful stores will manage it...like they do in other states.

The liquor taxes going away isn't going to happen...but I don't realistically think it is either. I'd like to see it happen, because it would be more fair, but since when have the New Drys ever been about fair?

Given the state budget crisis...I'd think that a big windfall like this would be the perfect time. Tough times, bold ideas. The State could get out of the liquor store business they never should have been in, drop all those jobs off the payroll, and the taxes would just roll on in. The laid-off employees could (I'll say it again) get first dibs on open state jobs, get early retirement if appropriate, or get low/no interest loans to purchase a license and open their own store. And 1500 new liquor stores is going to create a lot of jobs.

Anonymous said...

Not sure about holes, but what I did have was very poor grammar in my first paragraph. Thank goodness you don't grade the comments in that regard...

I know there are many reasons (13 and counting) you want the PLCB to go away but this one has to do with prices and to me it seems like simple math. Forget how much the state may or may not get from the sale of the system, lets just talk about prices for a bottle of wine...with the taxes we have in place, that I believe we both say will stay in place, there is not much room for prices to fall. Our higher tax per bottle makes us less competitive than neighboring states. Just because a grocery chain or a mom and pop shop can perhaps offer a better selection or better service they still have to make a profit and our tax structure all but ensures that the prices we pay will average higher than neighboring states.

Lew Bryson said...

No biggie on the grammar. Writing fast...things happen!

But our taxes aren't that out of line; they're actually about normal (though as I explain elsewhere, PA's taxes are computed differently than most states, so it's hard to do an apples to apples comparison; PA's tax burden is heavier on the pricier items). It's the 30% mark-up the State Store System uses that boosts the prices, and that IS something a private store can beat. And in NJ and Delaware and Maryland, they do.

Anonymous said...

I just paid MORE for a bottle of wine in the state of FL than I do in PA! Try blowing holes in the theory that PA's system is not effective in power buying for it's consumers. Maybe you have had too many drinks when you are purchasing and can no longer read the price clearly.

Lew Bryson said...

I just paid MORE for a bottle of wine in the state of FL than I do in PA! Try blowing holes in the theory that PA's system is not effective in power buying for it's consumers. Maybe you have had too many drinks when you are purchasing and can no longer read the price clearly.

Wow, me a drinks writer and someone accusing me of being drunk, that's never happened before. Personal attacks are pretty funny, aren't they? You'll go far on convincing people of the validity of your points with that.

No one, far as I know, including myself, has ever argued that every price on every bottle in the State Store System is higher than anywhere else. That would be ridiculous. The SSS only started using their awesome (monopoly-granted) purchasing power under Jonathan Newman, which boosted sales and got people thinking the SSS maybe wasn't so bad -- and you see what thanks that got him. In most private-run companies, competence and leadership like his gets you promoted, in the PLCB it gets you passed over by a failed politician. Hmmm...sounds like another Reason to me.

The problem with the SSS's pricing is that it's erratic. They do really well on the big movers -- white zin, merlot, vodka, Chairman's Selections, big bottles of bottom-feeder blended whiskey. stuff like that -- but on most other things, particularly the high-ticket stuff, the SSS isn't that competitive, no matter what they claim.

But it's not just the pricing. Their selection sucks -- they're like Blockbuster, tons of the big hits and next to nothing else (whisky's on the biggest upsurge in 30 years, and the SSS is trimming their selection) -- their customer service is hobbled and erratic -- there are a few good clerks, some very good, but there are a lot who know nothing about spirits or wine and don't really see that as a problem -- their special order system is a joke (though I do like the new Web-based ability to see what stores across the state have particular items in stock), even the signage in the stores is pathetic.

In short, the prices are a problem, but there's a LOT more wrong with the system than just the prices. There's a lot more wrong with the system than just the stores. That's why...the PLCB should be abolished.

Rich said...

Lew, thank's for clearing that up.

I agree that pricing is a weak point, because as you pointed out, it is not consistant. The state does well on some products and poorly on others, and it changes as the stores have sales, get deals, etc. I think private enterprise would be about the same.

Lew Bryson said...

Price is not the issue it used to be, Rich, I'll agree...but it's still an issue. If you do the supermarket gimmick and fill two shopping carts at a State Store and at a place like Total Wine or Joe Canal's, I have no doubts that the TW cart would cost significantly (5+%) less. But the bigger issues would also be reflected: staff assistance and selection. Another issue we haven't done more than mention is the service to bars and restaurants, which is non-existent. That's a BIG plus to the private enterprise side...at least, until the PLCB gets another smart operator like Newman who realizes what a good thing better wholesale service would be for Pennsylvania business. I'm not holding my breath.