Wednesday, September 23, 2009

Liquor Taxes & Santa Claus

From today's Chicago Tribune:

The increases on thousands of products, timed to coincide with the Sept. 1 tax hike, sometimes are double or more the increase in the liquor levy alone. It may take a few weeks or months, but the higher prices now faced by liquor retailers should eventually translate into sharply higher costs for everybody from fussy wine snobs to besotted tipplers. Separately, the nation's largest brewers have also signaled plans to raise beer prices this fall.
Voters are primed to blame politicians for almost anything, so piggybacking price hikes on tax increases is a tried-and-true business technique for deflecting consumer ire over rising costs. "That's pretty consistent with what typically happens," said David Vite, head of the Illinois Retail Merchants Association. "The last time liquor taxes went up, distributors took the opportunity to increase their prices while all the time wailing about the government."
Even factoring in a discount for volume purchases, one area retail chain was paying $20.17 a bottle for fifths of 80-proof Smirnoff vodka, up from $16.11 in August. By itself, the tax hike would have added only 80 cents to the price.


Here's the thing, folks. We hear this same bullshit every time a booze tax increase is proposed: "It's only 80 cents a bottle! You can afford that!" Then when the tax gets passed, everyone is shocked -- shocked! -- to find that the price increase on the shelf is more than 80 cents.

Could we grow up? Here's how it works, and it's no mystery. When a producer/importer sells a new product to a wholesaler -- at, say, $10 a bottle -- the wholesaler will take that product, increase the price (called the "mark-up") by a certain percentage (which, in some states, is set by law; in some states, Pennsylvania for instance, the state is the wholesaler for spirits and wine, and marks up everything 30%) and charge that to the retailer: $13 a bottle. That's how the wholesaler makes money, and covers their costs (warehousing, trucks and delivery, records-keeping, marketing, advertising, taxes, etc.). Now, the retailer will mark up the bottle again, say 20% (note that a bar will achieve something like 100-150% mark-up; they have higher expenses, and, well, they've found that we'll pay it), so now it's on the shelf for about $15.60.

This is how retail works. This is how it's done, how it's been done for centuries: "Buy cheap, sell dear" is the rock-sold basis of business. And when the price increases at the top of the process -- the producer/importer level -- it increases at every step, just as it did when the original price was set. That's how it works.

Governments almost always add booze taxes at the producer/importer level. It's easier to attach them and collect them there...but it's inherently deceitful. Because you're adding a cost at the top of the process, knowing that it's going to increase as it comes down. Add 80 cents to a $10 bottle, and it's not going to be a $16.40 bottle on the shelf; it's going to be a $16.85 bottle on the shelf. 'But it was only an 80 cent tax increase!" the naifs in the press cry. 'Why is the price up $1.25?!' And the blame magically comes off the government.

Guys... it always happens. Producers will sometimes choose to 'eat' the tax increase -- Corona brewer Grupo Modelo famously swallowed the federal tax increase in 1991, and their sales boomed as a result -- but wholesalers and retailers almost never do, and they never "pass through" the increases without adding their mark-up. Why should they? It's just another price increase, and if they don't make money on those price increases, they're not going to be keeping up with the inevitable increases in their costs...and they'll go out of business.

Do producers piggy-back price increases on tax increases? Of course they do. If there's anything people, customers, hate more than price increases, it's prices that seem to go up every other month. It works much better to chunk the price up more once a year, and if the government's forcing your price up, that's the time to put your price increase in, and try to blame them for all of it (why not, they're trying to shaft you). As for the legitimacy of price increases in a faltering economy, as for the morality of it...well, craft beer's up, single malts are up, vodka's still up, bourbon's up. If we're buying more of it, that takes a lot of the power out of the legitimacy argument.

Look, I don't like price increases any more than you do. Contrary to what some people might think, I really do buy most of what I drink. But when I'm paying $6 pound for American cheese for my kid's lunches, and $7 a pound for farm-raised salmon, I don't know that these price increases are that out of line. Supply and demand, after all: the demand for champagne has slumped, and producers are cutting production and prices, for example. The demand for craft beer and whiskey go up, prices are going to go up. Again, that's how it works.

It simply does not work that companies make money by ignoring increases in their costs, or by increasing prices just enough to cover those costs without making a little more themselves. If you want to argue about how much more those prices should go up, well...take it up with St. Thomas Aquinas.

Bottom line? Tax increases on booze cost you more than your legislators promise you they will, because they knowingly lie (or at best, they misrepresent). But even more so, taxes on booze are inherently unfair, as are all excise taxes, because they tax one part of the population based on what they buy. Not how much, not on what they do with it, but what they buy. As I always say: if your proposed government program is an overall good for all the people -- like roads, police, courts -- then let all the people pay for it. If it's only good for some people, let them pay for it. Don't make me pay for it just because I'm having a beer with dinner.

12 comments:

Steven said...

I don't know if this makes me old, anal on trivia, or just a "rank sentimentalist," but I knew what scene that was before I clicked on the start button.

BS indeed. I'm starting an underground railway from Wisconsin -- cigarettes up, booze back.

Russ said...

Steven, you mean there's something we can buy here in Illinois that's actually CHEAPER than in another state? I'm shocked, just shocked...

And Lew, when you mentioned Grupo Modelo absorbing the cost on a tax hike a while back, that touches on another issue: small businesses get hit the hardest because they're least able to take the hit. I have two good friends who recently opened up a brewery here in Chicago and after seeing all the hard work they've put into getting things up and running it pains me to see the state throwing this additional burden on them in the midst of a recession.

Lew Bryson said...

True, Russ, it's much harder for smaller businesses to ride these things out. Smaller reserves, often less fat to cut...they just can't do it. Same thing with price wars: they're disastrous for small businesses.

Jeffrey said...

You hit the nail on the head, Lew. The wholesaler and retailer take their mark ups on their costs, and don't just add 80 cents.

Steven said...

"I have two good friends who recently opened up a brewery here in Chicago..."

And who do you suppose that might be Lew?

Russ, they weren't pouring their fine copper lager at the Great Lakes Brew Fest this past weekend, were they?

A brew fest in Wisconsin, BTW, away from the biggest special excise taxes the city of Chi might add to such fun.

geoffrobinson said...

I don't so much mind the excise tax. The sales tax which taxes the tax is what I mind.

Lew Bryson said...

But Geoff, if there weren't an excise tax, it would just be the sales tax, which everyone pays on everything else equally. Okay, not quite, considering food and some clothing is tax-free in PA (though not toilet paper...), but at least there wouldn't be a special tax on booze. I'd pay the regular sales tax on booze.

Geoff said...

I guess my point was that they have the chutzpah to increase the price with taxes and then tax that price. I don't mind the sales tax per se.

Lew Bryson said...

Gotcha, Geoff. Then what happened in Massachusetts would really piss you off. Booze was only taxed on the supply side -- an excise tax -- and was exempt from sales tax because of that. The Mass Leg needed money -- oh, sorry, not money, they needed 'revenue' -- so they not only jacked up the sales tax 1.25%, they made booze subject to sales tax. That's right: sales tax on the already-imposed excise tax, hello automatic 6.25% increase in booze prices. The only good thing you can say about this is that at least it was an 'honest' increase; no markup on sales tax. Hey, thanks, Massachusetts legislators!

Lew Bryson said...

BTW...some people have the idea that "a tax on a tax" is not legal or somehow unconstitutional. Unfortunately not so. Just look at PA's ziggurat of liquor taxes:
http://noplcb.blogspot.com/2008/05/reason-4-18-emergency-tax.html
Remember: when you make the rules, YOU MAKE THE RULES.

Russ said...

Russ, they weren't pouring their fine copper lager at the Great Lakes Brew Fest this past weekend, were they?

I believe they were, Steven (though sadly I wasn't able to make it up to Racine myself). Metropolitan also just released a Kölsch (Krankshaft) that should be hitting the shelves of Chicagoland's better liquor stores any day now if it hasn't already. I'm admittedly biased, but I also don't B.S. when it comes to beer, and it's one damn fine Kölsch if you're a fan of the style.

Steven said...

"Metropolitan also just released a Kölsch (Krankshaft)

They were pouring that as well, but after judging home-brews all morning my palate was too shot to really enjoy such a subtle beer. I'll get some soon.

In case you missed this earlier this year: http://lewbryson.blogspot.com/2009/02/chicagoland-afternoon-flatlanders-and.html

Scroll down to the 6th & 7th paragraph.