'Change In The Liquor Tax Structure ... Could Also Drive Up Costs'

HARRISBURG - A study commissioned by the Corbett administration on selling the state’s wine and spirits stores contains several flaws that cast doubt on its pro-privatization findings, according to a preliminary review by the Keystone Research Center.

The study by Public Finance Management appears to inflate the upfront revenue the state could expect from a sale by overlooking factors that will impact how much retailers are willing to pay for licenses, including annual renewal fees of up to $100 million. It also ignores the experience of other states, such as West Virginia, which received much less from selling liquor licenses than expected.

At the same time, the study relies on unrealistically pessimistic revenue projections to argue that privatization wouldn’t reduce tax and revenue collections from the wine and spirits industry, according to the Keystone review, which was authored by University of Michigan privatization expert Dr. Roland Zullo and KRC economist and executive director Dr. Stephen Herzenberg.

“The PFM report,” Dr. Zullo said, “recommends that Pennsylvania take a gamble with a reliable revenue source in exchange for a highly speculative payday. That’s a big leap of faith given the flaws we found in this study.

“A basic problem with the PFM approach,” Dr. Zullo added, “is that it takes privatization to be a goal, rather than assessing the pros and cons of selling the liquor stores. To get there, PFM makes questionable assumptions that threaten the credibility of its report.”

Dr. Zullo also noted that the PFM study recommends a large increase in the number of liquor stores in Pennsylvania - a move that is likely to exacerbate alcohol-related problems in communities across the state.

Rural consumers could also be harmed if the state follows PFM’s recommendations, Dr. Herzenberg said.

“When West Virginia privatized liquor sales, there were no bids for licenses in some rural areas,” Dr. Herzenberg said. “A change in the liquor tax structure recommended by the PFM study could also drive up costs for small-town consumers.” This change would impose taxes based on the volume of wine and spirits rather than the value. A 1.5-liter bottle that costs $7.50 would pay twice as much tax as a 750-ml bottle that costs $15, whereas today the reverse is true.

The Corbett administration commissioned the study from PFM to evaluate the economic and social impacts of privatizing wine and spirits sales in Pennsylvania. The study was released last week.

Among the specific flaws highlighted in the KRC brief were:

• PFM’s projection of the up-front revenue from selling liquor licenses appears inflated because it fails to factor in (i) real-world evidence from neighboring West Virginia, (ii) that companies won’t pay as much up front when future profits are uncertain, and (iii) that companies won’t pay as much up front when they have to pay annual license fees of up to $100 million.

• PFM concludes that privatization would be “revenue neutral” by relying on unrealistically pessimistic projections for public revenues. PFM relies heavily on 2009-10 wine and spirit stores financial figures as a basis for their financial projections. Actual net income for 2010-11, however, came in 24% higher than PFM predicted. Real world evidence from other states on the revenue impact of privatization, from Iowa as well as West Virginia, is again ignored.

• PFM neglects to factor in cost savings or revenue-enhancing measures that can be implemented by the Pennsylvania Liquor Control Board (PLCB) without privatization.

• PFM makes over-optimistic estimates of both sales and tax revenues under a privatized system.On the sales side, PFM’s estimates do not appear to take adequate account of the fact that Pennsylvania would have the highest wine tax in the nation under privatization. When it comes to sales tax collections, PFM notes that privatization “…could result in a loss of revenues” but ignores this possibility in its estimates.

• The PFM plan may bring lower availability and higher prices for rural consumers. It is a current PLCB policy to have at least one store in each county, and to charge the same price for products as in urban locations. This will likely change under privatization.

• Alcohol-related social problems could increase with privatization. PFM recommends a large increase in the number of retail outlets in the state. As noted in April by a rigorous national Task Force of public health professionals appointed by the Centers for Disease Control and Prevention, this is likely to increase excessive consumption of alcohol and related social problems.

• Privatization could eliminate over 3,000 middle-class jobs.

“The PFM study is not transparent,” Dr. Zullo said of the 285-page report. “Models and data are not disclosed, preventing independent review of the results. Complete public access to PFM’s models and data is needed to comprehensively assess the validity of the results.”

- From The Keystone Research Center, a nonprofit, nonpartisan research organization that promotes a more prosperous and equitable Pennsylvania economy. Learn more: www.keystoneresearch.org.