Memo

The Broken Promise of Flexible Liquor Pricing

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Introduction

For three years, Pennsylvania has experienced the effects of Act 39 or “liquor modernization.” The 2016 law expanded retail availability of beer and wine outside of state stores, but it also granted the Pennsylvania Liquor Control Board (PLCB) greater monopoly pricing power. Where the PLCB previously sold alcohol at a simple 30% markup, Act 39 gave it full pricing discretion. The PLCB could have used its new flexibility to benefit consumers, and it led the public to believe it would do so. Instead, the PLCB has used flexible pricing to benefit only itself.

Higher shelf prices

Shelf prices paid by consumers have risen under Act 39. The average markup today is extremely high, up to 65% above the free-on-board (i.e. direct from the maker) price, according to the Distilled Spirits Council.

Flexible pricing raises major fairness issues

Pricing discretion in the hands of a government monopoly amounts to taxing power, and taxing power properly belongs to the elected legislature alone. Moreover, under the old pricing formula the PLCB was required to treat all suppliers and brands equally. Retail prices today are the result of closed-door deliberations. Producers, particularly foreign ones, are concerned about price discrimination. Foreign producers have warned Governor Wolf that PLCB business practices are likely impermissible under the rules of the World Trade Organization. Closed door pricing deliberations also give consumers no assurance that the PLCB is trying to save them money. High prices in the stores suggest it is not. 

PLCB’s finances continue to deteriorate 

The PLCB does not earn “profit.” The PLCB is a government monopoly, not a business: income is extracted from citizens who have no choice but to pay or forego drinking. That said, the PLCB’s current level of remittances to the state are not sustainable.Over the last four fiscal years, the PLCB has transferred $582 million to the state General Fund but earned only $451 million. 

Three years ago, the PLCB had $540 million of retirement liabilities on its books. Those liabilities have since been re-stated, doubling in the process: as of June 2018, they were reported at $1.2 billion. The PLCB’s negative net position, the gap between total liabilities and total assets, is now more than $1 billion. Given the PLCB’s high fixed costs and unionized workforce, the claim that it was going to improve earnings by cutting costs was never an honest one. 

Restaurants, bars, and private stores remain captive to PLCB bureaucrats

Unlike private wholesalers, the PLCB doesn’t deliver products to retailers: they must make their own arrangements to pick it up. It is also under no competitive pressure to fill orders or pay invoices quickly. In some cases, its arbitrary rules even prevent retailers from properly marketing: wholly responsible advertising can be prohibited as an “inducement to purchase alcohol.”

Policy solutions

Privatization remains the solution to the state’s liquor control problems. A winding down of the PLCB, a sale of its facilities or a rescission of its monopoly privilege would address the issues listed above. In the meantime, four bills introduced are strong incremental steps forward:

  • Repeal of flexible pricing. House Bill 1512 (Rep. Topper) would reinstate the proportional pricing formula to which the PLCB was bound before Act 39. Under this measure, consumers would benefit any time that sellers to the PLCB cut their prices. Sellers to the PLCB, meanwhile, would be assured of equitable treatment. 
  • Convenience permits. House Bill 1644 (Rep. Dowling) would allow any restaurant license holder to purchase a $25,000 annual license to sell beer and wine. Minimum seating rules would be abolished. 
  • Wine freedom. House Bill 1346 (Rep. Masser) allows liquor license holders to purchase wine from private wholesalers. This change allows sellers to circumvent the PLCB’s lack of delivery services and choose wholesalers that better meet their needs.
  • Franchise licensing. Senate Bill 548 (Sen. Yaw) allows wine and liquor stores that are licensed by the PLCB but privately controlled. Licensees would also enjoy delivery services.

All of these proposals would be a welcome step toward a fairer and more flexible liquor system for Pennsylvania consumers and businesses.