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March 2, 2013

Backers, opponents debate liquor privatization

HARRISBURG — Advocates say that if the state privatizes the liquor system, shoppers will enjoy greater selection and easier access to beer, wine and hard liquor. That access could translate into increased tax revenue to help offset the lost profits that now pour into the state coffers from Pennsylvania’s government-run liquor monopoly.

But even before Republicans fully unveil the latest legislative proposal to dismantle the liquor monopoly, critics are warning that the math just may not add up in a way that bodes well for shoppers or taxpayers.

Proponents for dismantling the monopoly say that the upfront license sale will generate $1 billion. Gov. Tom Corbett has proposed using that money for a special grant program for schools.

But once the liquor system is privatized, the state must replace the millions of dollars of profit that is generated by the LCB each year. Last year, the LCB transferred $80 million to the state.

Rep. Kurt Masser, R-Northumberland County, is a member of the House Liquor Control committee, which will first consider any privatization legislation. He said that in addition to the revenue from annual license fees, advocates believe that by significantly increasing the number of places where beer, wine and liquor is sold, sales will increase, which will translate into more sales tax.

“Liquor is not a core government function,” Masser said. “If the plan is revenue-neutral, and there are reasons to believe privatizing may be better than revenue-neutral, then I think it is something we should explore.”

A financial analysis commissioned by the Corbett administration indicated that the state would generate $138 million a year through annual license renewals.

The initial cost of the “enhanced beer distributor” license is too much for most existing beer distributors, said Mark Longietti, D-Mercer County.

Rep. Bryan Barbin, D-Johns­town, agreed, saying that the enhanced beer distributor license “technically” provides an opportunity for existing business owners, but it is an opportunity few can afford.

Even if the operators of a small family-owned beer distributor made the leap, they wouldn’t be able to compete with the grocery stores and big box stores and they’d likely have the added cost of a loan needed to acquire the upgraded license, Barbin said.

Longietti said he also has had conversations with grocery store proprietors who questioned whether the cost of a license would be worthwhile.

In most cases, businesses will likely pony up the money to get the license, but they will pass along the cost to consumers, said Roland Zullo, a research scientist at the Institute for Research on Labor, Employment and the Economy at the University of Michigan, who studied the Pennsylvania liquor privatization plan.

Zullo said there are three questionable assumptions built into the strategy for closing the $80 million profit gap without it translating into higher prices for customers:

• The state is not changing the rate of tax collected on liquor – 18 percent from the Johnstown Flood tax and 6 percent from sales tax.

• The state is proposing license fees that are higher than most other neighboring states.

• The state is suggesting that retailers will be willing to sell beer, wine and liquor with a smaller gross margin than the industry norm. The gross margin is the difference between what the retailer pays its supplier and what the retailer charges customers.

 “Prices are going to have to shoot up,” Zullo said. “There is no way around it. I’d bet the farm on it.”

Zullo said that as far as being a revenue-generator for the government, the liquor monopoly is hard to beat.

“They are getting rid of a very lucrative business. Most states would be envious of the model you have,” Zullo said. “It is hard for me to see the wisdom of selling a system that has served the state well.”

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