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.