Wednesday, April 16, 2014

Washington State is not equal to PA

For some time we've been told (mostly by UFCW last-ditchers) that Washington State's liquor income is close to Pennsylvania’s liquor income, and that when the Evergreen State privatized their liquor monopoly, they only got a small amount -- $181 million -- for their retail and wholesale systems together.

Well...kind of.

Take a look at this, from the Washington State Department of Revenue. This shows how much liquor tax was collected in 2013. It is more than PA collects, but since their tax rate is 5 times ours, that stands to reason. But the rate of taxation really doesn’t have anything to do with the worth of the system to a purchaser, except to drive it down. Worth is determined by demand and availability; so with about half our population, high taxes which decrease total sales, an already private wine market, and the 8th highest beer taxation (even after it was reduced - see below), Washington’s system was inherently worth less than Pennsylvania’s in total and per unit.

 Pennsylvania is a much bigger market with more outlets even after closing 20% of them over the last 40 years (while Washington increased their number of stores over the same time period) and controls both wine and liquor. As such, it is worth more since the volumes are higher and greater economies of scale are present, along with a high demand and somewhat reasonable taxation on liquor, albeit higher taxation on wine. As a wholesaler, Pennsylvania's monopoly rights are worth more than just the 4 times the indicated value (double the liquor and all the wine). Of course, nobody knows exactly what anything will sell for until it does in an auction situation, and that could change up or down daily. That said, a bigger fish like the Commonwealth is worth more than two smaller fish...and certainly more than one small fish, like Washington.

Some points to consider.
Washington – Population 6.9 million
Pennsylvania – Population 12.8 million

Washington $35.22 per gallon alcohol tax.
Pennsylvania $7.22 per gallon alcohol tax.

Washington Liquor taxes collected (2013) – ~$266 million in liquor taxes (after the 27% increase in fees)
Pennsylvania Liquor taxes collected (2013) – ~$183 million as the liquor share of the Johnstown Flood Tax.

Washington – 40 million units sold (liquor only).
Pennsylvania – 140 million units sold (liquor and wine).

Washington – Reduced beer tax from $23.58 a barrel to $8.08 a barrel (2013) to help in-state brewers.
Pennsylvania – Did nothing to help brewers (probably because our beer tax rate is already one of the lowest, at $2.48 a barrel).

Washington Border Bleed – The total increase for the year was about 10 days worth of PA border bleed.
Pennsylvania Border Bleed – The largest liquor border bleed in the country.

Washington – Legislature respected will of the people to privatize liquor sales.
Pennsylvania – Legislature consistently rejects will of the people to fully privatize (so far).

While we are not Washington, we can do what they did; and with the hindsight they have enabled, do a much better job of it. More jobs, more revenue, more convenience, more selection, less government and freedom of choice can and should be ours.

Privatization IS Modernization. Accept nothing less.


Anonymous said...

If I understand your argument correctly, PA should auction off it's wholesale distribution when it decides to privatize. I agree, to set a low price or limit who can bid would be to shortchange the citizens of the Commonwealth. An auction will allow the market to assess and determine the value of the wholesale operation.

Lew Bryson said...

I don't think PA should auction off the entire wholesaler operation to ONE entity. To do so will be to swap one monopoly for another. Bad idea.

Anonymous said...

If they are smart about it (what is the likelihood of that) they will auction brands and territories.

Albert Brooks said...

I think the reserve should be the minimum price they want. For this plan it should be $770 million for wholesale operations. $100 million for retail would depend on how many licenses they will approve but if it is 2500 for example that makes each one only $40,000 which is far below the cost of a beer distributor license. The nay sayers will come up with it only costs X to buy a license in Y but that isn't the same as being in on an initial offering. If the renewal fees are high then that would be something to compare and complain about.

sam k said...

Very well-considered post, Albert.

May I also suggest that Pennsylvania stop creating wealth by retaining the rights to any state-issued license?

For instance, the state sells someone a liquor license at a rock-bottom rate, and that license then becomes personal property, which in my home county (Centre) is currently worth $250,000, to be sold to the highest bidder.

The state should require that when a licensee is no longer interested in retaining said license, it reverts to the state to be leased out to the next entity. This should have been done with casino licenses too, but it wasn't.

The state should not be creating wealth for a few at the cost of its citizenry.

Albert Brooks said...

If I understand you correctly Sam you want the licenses leased instead of sold so that the state retains control. I haven't given that much thought but it seems like it could be done that way.

Anonymous said...

I believe the state wanted liquor license to be a commodity and have value; otherwise, they would have never permitted them to be transferable. Some are currently non-transferable and they have no value, but the ones that are transferable naturally have value. A business that cannot be transferred has no sale value. For example, if I buy a house but the deed to the land reverted back to the state to be sold, then the house has no real value because the state could sell the deed to someone else then what would I have. As an analogy, then if I purchase a business with a liquor license but that license reverts back to the state. What would I have? I would have to be a part of the queue to buy the license and if I don't get it the business is of no value.

You cannot have it both ways. Businesses want to build equity and the license to sell liquor is part of the equity for a liquor store or restaurant.

Albert Brooks said...

Value is not the same for all. Some people lease cars instead of buying them because the is a value in that decision for them. For a liquor business the value can be in the amount of business.

One does not need to have a physical item to derive a value from controlling that item. The difference is that you can't pass on or inherit the license so it is one generational and not multi-generational.

I'm not saying that is the system I would choose but it is a workable alternative.

sam k said...

I see no reason why a clause couldn't be enacted giving right of first refusal to the subsequent proprietor of a given business. This would keep the license fully transferable, only through the state, not the individual.

The vetting process would obviously have to be completed prior to the transfer of the business itself, but so what? Any current purchaser of a liquor license has to be approved by the state at present before any transfer can occur.

A liquor license need not be made personal property for the enhanced equity of the business to remain constant.