Follow-up on beer tax relief ("the subsidy")

From the Seattle PI "Washington Beer Blog," this bit of support for the federal tax relief Joseph DiStefano was defaming (and misunderstanding) recently:

The estimated cost of the provision is about $44 million per year and less than $500 million over 10 years. A Harvard study of the Economic Impact of H.R. 4278 indicates that the bill would generate more than 2,700 new jobs over the first year to 18 months, followed by an average of 375 new jobs per year over the following 4 years. Each new job would cost less than $4,000 in foregone government revenue in 2010. According to the study, "Economic activity would increase by $10.91 per dollar lost in government revenue, making the bill an efficient use of government funds."

Sounds pretty damned good, doesn't it? And these are going concerns that are showing steady growth in a mature industry. Still some risk, but...that's damned near money in the bank. If the economy does double-dip, as fears are growing, maybe a different story, but it's going to be a different story for a lot of businesses, and why would you want high taxes on business in a recession anyway? Do this thing. And you, reader, tell your senators you'd like to see this happen.

The Dead Hand of Jim Bell...

No, Jim Bell isn't really dead; at least, not so far as I know. But his Frankenstein monster, Red Bell Brewing, continues to haunt Philadelphia brewing. Witness this misreasoned claptrap from the usually eruditer-than-this Joseph DiStefano, titled Beer Will Save America! Funny. DiStefano is bringing up the proposal by Senators John Kerry (D-Mass.), Mike Crapo (R-Idaho), Ron Wyden (D-Ore.), and Susan Collins (R-Maine) to lower the federal tax on craft beer. Kerry says it will create jobs (it will), Jim Koch of Boston Beer points out that craft brewing is one of the few success stories in the recession (it sure as hell is), and the Wall Street Journal says the tax cut will help the craft brewing industry (well, duh).

But DiStefano says "We've been this way before." He opens up the Scary Closet and brings out the shaggy boogiemen of Red Bell and Independence (and not even the right Independence, you big dope; that link goes to the closed brewpub) as being "among the many beermakers backed by the taxpayer-subsidized U.S. Small Business Administration in the late 1990s; both also sold shares to the general public; both are among the many investor- and taxpayer-subsidized brands that flopped."

Well, imagine that: there are businesses that sold stock and went under. That couldn't have anything to do with how the Inquirer sucked up to Jim Bell and printed any damned bullshit he sent them, could it? As far as that goes, "investor-subsidized"? What the hell's that? The shareholders made an investment, they took a risk. If they'd gotten bailed out, that would have been a subsidy. But small brewers don't get bailed out, they just close.

But the main point? This isn't even a subsidy! The Feds raised the beer tax back in 1991, the senators want to roll that back -- like every other part of the 1991 tax increase, like the luxury tax on yachts that somehow got repealed... -- they're not going to SPEND money on this 'stimulus package,' the brewers are going to do that. 

Then he gets silly: "What's the big deal with small-batch beers? Yes, they probably taste better. Yes, they're definitely winning market share from Bud and Miller and Coors over the years. So much that the giants have been closing and consolidating plants and selling out to foreign owners."

Okay, no. Much as this thought leads beer geeks to turn off the lights and fondle themselves in front of the gently glowing screen of a computer locked on ratebeer.com, it's simply not true. The "small-batch beers" just are not selling enough to have caused the "selling out to foreign owners." The big guys have been consolidating to save costs and boost market share, and right now it's the foreigners turn to buy. It's got nothing to do with craft beer, which is still under 5% of the market. You want to point a finger, point it at Corona and Heineken, which have taken three times the share away from the big brewers. So DiStefano is either ignorant, or misleading you. Take your pick.

It's the conclusion that's the kicker, though: "But does that really add up to more and better jobs that merit public subsidies?" Well, yes, it does add up to more jobs. Period. Give craft brewers a tax break, and I guarantee, they will SPEND that money on new hires, on better benefits for the workers they do have, on solid industrial equipment, on advertising and promotions. They won't squirrel it away in a tax break somewhere, or send it overseas. Which, I would think, would be a GREAT way to get an effective stimulus activity out of...wait, that's right, it's NOT a public subsidy! That would be if the government GAVE THEM MONEY. But we're not even talking about giving them money, we're just talking about TAKING LESS AWAY FROM THEM.

Am I wrong? Is it really a "public subsidy" when you cut back on an excise tax that shouldn't even be there in the first place? Or is this just one more example of how the brewing industry (and the spirits and wine biz) is treated unfairly because everyone is scared to death of alcohol? I'll tell you what, Mister DiStefano, I would much rather see taxes ratcheted back on a growing, thriving production industry than see government funds given to the banking industry. How about that, fella?

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.

BOHICA: higher booze taxes in Illinois, North Carolina tomorrow

After booze tax increases in New York and Massachusetts, now it's time for moderate-drinking residents of Illinois and North Carolina to celebrate being taxed more than their fellow citizens just because they like having a cocktail before dinner or a beer with the game. Taxes go up tomorrow in both states. I can only assume that New Dry organizations in the states and in the national hives (Marin, PIRE, yeah, I'm talking about you) are dancing with glee as short-sighted state governments pile on the pain by raising taxes during a recession.

I mean...a lot of these states have balanced-budget amendments. But it appears that to almost every legislator and governor, those requirements mean nothing about keeping spending in check; no, they're about a need to raise taxes. Sin taxes. Regressive taxes. I know the cries: "It's only a nickel!" (It never is: either it's a producer tax that ripples and expands, or it's a direct tax that's more by the time it gets to someone drinking good stuff) "Drinking is a luxury!" (So's candy, but there's no special tax on that. (Actually, there is: Illinois taxed that, too; see comments, below) Okay, pets are a luxury, and there's no tax on them!) "Drinking costs billions!" (Really? Check your figures. The whole booze biz also puts billions back into the economy.) "Drinking is a sin!" (Who let him in? I thought we got rid of you back in 1933. Anyway, your mom's a sin, but we don't tax her.)

Here's a cry for you: booze taxes unfairly tax lower-income citizens. Is that the kind of thing you want to do during the worst recession in decades? Way to go, Mr. Progressive.

Meanwhile, Pennsylvania has apparently dodged the bullet again, if Governor Rendell's latest lame joke is any indicator.

"The media's low-paid and high consumers." - Gov. Rendell, joking in a Harrisburg news conference this week about the state budget and the politics that determined that an increase in beer taxes would not find support.

Hey, Mister Kiely: which of your kids do you like best? Huh? Which one?

Interesting piece in Crain's Chicago Business this week on the struggle MillerCoors boss Leo Kiely is facing. There are a number of components, but the key factor, the big Wahooni, is this: how do you grow both Miller Lite and Coors Light, two beers that are obviously in direct competition with each other...and with the best-selling beer in America, Bud Light. How do you put together a business plan that keeps Coors Light chugging along (the brand grew 6% in the last 12 months, very impressive indeed) and also lights a fire of focus under the flailing Miller Lite (down 4% over the same period)?

This is exactly what I was talking about almost two years ago when I called an impending MillerCoors merger a shotgun wedding. This was a merger that simply had to take place; when you're at this level in a highly consolidated business -- as mainstream brewing certainly is -- the only way to survive is to be the biggest sumbitch in the jungle. SABMiller and Molson Coors weren't big enough alone -- amazing, but true -- to take on A-B, let alone the ABIB juggernaut that was starting to look ever more real at that point. They had to merge to have a hope of winning.

And that's the sad thing about what this business has become. It's not enough to do well any more. It's about the guys at the top winning. It's about the shareholders getting a big pay-out (and taking the money and buying more stocks in hope of hitting the jackpot again when some company gets gutted). The best thing I see about the current deep recession is that these damnable masters of the universe are no longer celebrities. I hope it lasts, and we make much of people who create something other than marketing campaigns and buy-out deals.

WhiskyFest Holds the Line

John Hansell just confirmed on his blog (check the comments in the linked post) something we'd talked about at the last Malt Advocate staff meeting: there will be no increase in prices for WhiskyFest 2009 tickets in any of the three cities. We recognize the problems of the economy and you, the people in that economy, and that there are many competing attractions for your whisky dollar. We're doing what we can to bring you the very best whisky festivals in the world at a price you can still afford. Cheers, hope to see you there.