In June, Pennsylvania’s first significant changes to its liquor control laws were met with great fanfare and a legislative promise to begin modernizing Pennsylvania’s post-Prohibition era alcohol distribution laws. Gov.Tom Wolf touted the new law as a way to bring Pennsylvania’s wine and spirits system into the 21st century by creating greater convenience for Pennsylvanians.
Unfortunately, a provision tucked away in the much-heralded law could lead to an increase in the price of wine and spirits for every single Pennsylvanian. The provision, known as flexible pricing, isn’t likely to be very satisfying to anyone who shops for wine or spirits in Pennsylvania.
It gives the Pennsylvania Liquor Control Board (PLCB) the ability to manipulate price, something it has long desired as a way of raising revenues.
Previously, the PLCB was required to price all products by a strict pricing formula, which included:
· The price paid for the particular brand;
· A Logistics, Transportation and Marketing Fee originally set between $1.05-$1.55 for most bottle sizes;
· A fixed 31-percent markup;
· The Johnstown Flood tax of 18 percent; and
· The regular state sales tax of 6 percent.
The strict pricing formula meant any time a wine or spirits supplier lowered its price to the PLCB, the agency was required to pass the savings along to Pennsylvania consumers. This requirement rightly offered a level of price protection to Pennsylvania consumers.
In a state such as Delaware, where many private operators compete for the consumer’s business, retailers are free to mark up a brand as they see fit. But they do so at their own peril. Raise prices too high and consumers have the option of buying from a competing store. Market discipline ensures that retailer prices and profits are reasonable in states outside Pennsylvania.
By eliminating the strict pricing formula, consumers have no such protections in Pennsylvania. Flexible pricing will allow the state to raise prices to any level it wishes on the top 150 wine and 150 spirits brands in the state. The top 150 brands in each category make up over 90 percent of all volumes sold, so the new law effectively covers the entire market.
What does the PLCB plan on doing now with flexible pricing?
Just look at their projections. The agency intends to increase profits by a whopping $65 million annually. That can only come from consumers.
If enriching the PLCB’s margins is not your idea of a “satisfying” development in Pennsylvania alcohol law, you are probably not alone.
Here’s an unfortunate reality about Pennsylvania’s so-called modernization of its liquor business: You’re going to pay a lot more for it. That isn’t modernization, but rather a step backward.
Since 2005, the number of outlets selling spirits has increased by around 50 percent nationwide. Many grocery stores, big box retailers and large chain package stores have entered the market, and competition for the consumer’s dollar has heated up dramatically – outside of Pennsylvania, of course. As one would expect, this competition has driven retailer markups down, not up.
Just not in Pennsylvania.
Allowing the PLCB flexible pricing authority as part of market modernization was a bait-and-switch tactic. If the legislature is serious about market modernization in Pennsylvania – and protecting consumers – it must repeal the flexible pricing provision.
If lawmakers don’t, Pennsylvanians can expect price increases that will surely burn a hole in their wallets.
David Ozgo is chief economist for the Distilled Spirits Council. He is based in Washington, D.C.