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Privatizing the LCB

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pa-wine-and-spirits-store-logo.jpgAlthough it generates tons of cash, the dirty little secret about the Pennsylvania Liquor Control system is that it does not produce much in the way of profits.

Out of $1.5 billion in sales, the LCB ended with a net income of $52.5 million last year, according to a consultant's report released this week. The 285-page report, commissioned by Gov. Corbett, examines -- sometimes in excruciating detail -- the pros and cons of dismantling the system.

Not surprisingly, the report by The PFM Group comes out in favor of privatization, which syncs exactly with Corbett's view.

But, the report makes a legitimate case that the loss of the profits currently generated by the state-owned-and- operated system could be made up by charging annual license fees to the private wholesalers and retailers who would open up operations in Pennsylvania.

It also projects that the state could have a one-time windfall of between $1 billion and $1.6 billion by limiting the number of licenses granted and auctioning them off to the highest bidders.

What would a privatized Pennsylvania look like? A lot like Delaware and New Jersey, with a mix of wine and liquor super stores, plus smaller retail shops and specialty purveyors.

There would also be more stores.  The LCB runs 613 state stores, which PFM says is among the lowest per capita number in the states it studied.  A private system is likely to have 1,500 stores -- or possibly more, depending on how aggressively the state markets licenses.

Would the wine and liquor these private stores sell be cheaper than today? If you read between the lines, the answer is: not much.  Though private stores would have the freedom to vary markups and bargain price items, prices will be high because of the level of state taxes on booze.

The state currently imposes the six percent sales tax on each bottle, plus the notorious  

18 percent "emergency tax" enacted in 1936 after a devastating flood in Johnstown. These two taxes generate $377 million a year for the state. The state will not want to give this revenue up.

If the system is privatized, it would make sense if the state switched from these per-bottle taxes to a tax levied on gallons sold, according to PFM. (Such a gallonage tax would be easier to monitor and collect once the state no longer has complete control over sales and distribution.)

PFM estimates that the state would have to levy a $8.31 a gallon tax on liquor and a $5.84 gallonage tax on wine to maintain the $377 million it currently collects. These rates would be much higher than neighboring states, such as Delaware (where the tax on wine is 97 cents and liquor $5.46 on the gallon) and New Jersey (where tax is on wine is 88 cents and liquor $5.50 on a gallon.)

The state won't want to lose the profits generated by the LCB either, but those numbers have declined in recent years, according to PFM, due to two factors: a slowing in the growth in wine and liquor sales, combined with higher expenses incurred by the LCB.

According to the consultants, over the last 10 years revenue has grown an average of 3.5 percent a year, while costs have gone up an average of 5.5 percent. PFM estimates this trend will continue going forward.

As the report puts it: "It goes without saying that if the PLCB were a private sector firm, there would be concerns about its ability to remain as a viable business with expense growth outstripping revenue growth over a 10-year period."

One reason expenses are up is that the LCB is spending money trying to modernize its stores and operations. It has worked hard to shake its image as a Soviet-style shopping experience, offering a limited selection sold by clueless clerks. Even in small towns, you can find great stores, with a wide selection of wine and knowledgeable clerks. (In Williamsport, to use one example)

To counter the move to privatization, the LCB has introduced a package of bills in the legislature to allow it to do more flexible pricing (as opposed the now uniform 47 percent mark up); to expand Sunday hours, to allow state stores to sell lottery tickets, etc.

In other words, a government entity born in the post-Prohibition era to keep a tight control over liquor sales, now wants to operate more like a big, private business to increase sales and profits.

In noting these efforts,the PFM report dryly notes: "PLCB's desire to function more like a private sector organization raises the fundamental question: Why not simply privatize the system?"

Good question.

-- Tom Ferrick

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