The Liberty Papers

Sometimes it can be hard for people to grasp how government distortion of the free market actually impacts them, and why it’s such a corrosive and destructive force.

The whole issue is so big, and so pervasive, that people can’t relate to it, or focus on it, or see how it hurts them personally… at least until it does something like say, get them thrown in jail, or shuts down their business, or costs them their job; at which point the local news stories and the facebook posts and the buzzfeed and upworthy click bait flood out with sympathy for the individual story… but the larger issue is never addressed.

In this short post, consisting of nothing but some bare facts, Gizmodo illustrates the direct personal impact of the nanny state, rent seeking, regulatory capture, state sponsored monopolies, and regressive tax policies… all in one piece about whiskey:

GIZMODO: How Much a Bottle of Whiskey Costs in Every State

Alcoholic beverage sales in the United States are a nearly perfect example of government induced market distortion.

In many states (18 as of this writing), all liquor sales and pricing are exclusively controlled by the state. Some states (and many cities and towns) explicitly set the minimum price for which a bottle or a drink can be sold. In ALL states, there is relatively restrictive licensing to sell liquor (often extremely restrictive, and almost always politically controlled).

Additionally, most states require liquor retailers purchase their liquor either from the state directly, or from a strictly limited number of state licensed distributors. This is accessible these days, with the ability to order alcohol to your door with this Denver liquor delivery for instance.

This can extend to ridiculous extremes, such as Florida, where a recent reinterpretation of the law requires brew pubs to sell their product to a state licensed distributor, who then sell it back to them (both required to sell at a minimum price, and both paying taxes on the “sales” between each other, and THEN retail taxes on top) just so they can serve their own customers.

The states offer many rationales for these restrictive regulatory regimes, including reducing drinking, limited access to minors, reducing fraud and tax cheating…

…All of which have not only been ineffective, they have in fact generally had an impact opposite of their stated intent.

The REAL purpose behind this restrictive control, is of course the real purpose of most restrictive licensing and pricing schemes…

Power, Control, and Money

Retail, restaurant, and bar liquor licenses, in restrictive licensing areas; can sell for huge amounts of money, or can be subject to years of delays (or both); generally at the whim of politicians and bureaucrats .

These business owners, are mostly willing to play along with this scheme, because it limits their competition, and it increase the value of their business (which they can later sell for a very high price).

In fact, in some areas, local liquor license holders are allowed input (or even a veto) on whether a new business can obtain a liquor license, or whether (or to whom) a liquor license can be transferred.

Even if a license holder is opposed to restrictive licensing, they may have had to pay hundreds of thousands of dollars… even millions in some cities… to obtain their license (or to purchase a business that already had one, which is often the only way to get a license); so often they actively work against reform, because they don’t want to see the value of their investment plummet.

Liquor distribution can be even more lucrative, particularly with state granted near monopolies, and often state regulated minimum pricing; guaranteeing distributors little or no competition and huge profits.Some states go so far as to only license a handful of distributors for the entire state, or even license them exclusively within certain counties, municipalities or regions; giving them effective monopolies on all liquor sales in their areas.

Of course, as with anything of great value, the politicians and bureaucrats who control licensing, can get great benefit from granting them, allowing them to be transferred, reducing the costs associated with obtaining them; or more destructively, for NOT granting a license to a potential competitor.

A few minutes talking with anyone in the hospitality trade, or anyone with an interest in government corruption, and you’ll hear endless stories of shakedowns, bribes, organized crime influence, naked influence peddling…

Liquor licensing is possibly the single most corrupt area of government in this country… and that’s really saying something.

And then there’s the taxes… oh the taxes…

Even if we ignore the inherently corrupt and corrupting issue of restrictive licensing, the states (and for that matter federal government), derive considerable revenues from liquor sales.

In some states, there is both an excise tax on all alcohol sales, PLUS a “spirit tax” (charged per gallon of “spirituous liquor”), AND a separate (and much higher) sales tax on alcohol or spirits (beer, wine, and “spirituous liquors” are often taxed very differently).

In Washington state (the highest alcohol tax state, which has only recently decided to allow, in a very limited and restricted way, sales of liquor through some private retailers), the combined excise and spirit tax is $35.22 a gallon, PLUS a 20.5% sales tax on liquor (the national average is $5.33 per gallon, and most states do have a separate sales tax for spirits)

… But wait, there’s more…

Washington, like many other states, also charges all liquor retailers and distributors an additional fee; which in their case, is 17% of gross revenues from alcohol sales.

Obviously, businesses are going to pass that fee onto consumers; so, in effect, Washington is adding a 37.5% sales tax, on top of the spirit tax, to every sale.

For a 750ml bottle of whiskey costing $18, that ends up being $6.98 in excise tax (hidden from the consumer), plus $6.75 in sales tax; a total of $11.02 for the whiskey, and $13.73 in tax.

This map, from http://www.Taxfoundation.org , shows the spirit taxes around the country (not including additional sales taxes on spirits):

All of this of course, is on top of the federal taxes on liquor manufacture, distribution, and sales; which for “spirituous liquors” (generally defined as alcohol for human consumption, packaged and sold above “50 proof” or 25% ethanol by volume) are $13.50 per proof gallon (a “proof gallon” is the amount of ethanol in one gallon of 100 proof liquor. If you are distilling and blending 80 proof liquor, the tax will be 80% of that rate per gallon. For an 80 proof 750ml bottle of whiskey, the federal spirit excise is $2.14). All of these numbers just make it seem like a whisky investment would be so much more beneficial in the long run, you can store it for some years until their value increases and then re-sell it for some profit instead.

These federal taxes are first paid directly by the producer to the ATF. Then more taxes are paid from the distributors, and finally, by the retailers.

So actually, that example above? It’s not really a total of $11.02 for the whiskey, and $13.73 in tax… It’s really a total of…

…Well, if we tried to do a real total cost accounting for what the total tax burden, including all liquor taxes, sales taxes, and regulatory compliance costs… It’s probably more like $3 for the whiskey, $6 in federal taxes and other compliance and regulatory costs, and $16 in state taxes, and compliance and regulatory costs.

And then there’s the actual state monopolies…

Some states don’t bother taxing liquor separately, or they tax it at “normal” rates as they would any other product; they just hold a legal monopoly on all liquor sales.

The revenues available to the states through liquor sales are so great in fact, that in a rare example of a state government doing something that makes economic sense, and is even almost libertarian (as libertarian as any state controlled enterprise could be anyway); the state of New Hampshire (which has no income or sales tax) explicitly operates their state controlled liquor stores as a (relatively) efficient business, with good pricing and marketing designed to attract buyers from other states; helping them to keep tax burdens in the state otherwise among the lowest in the nation.

If you’ve ever driven into or out of New Hampshire on I-93 or I-95, those giant Costco sized buildings on both sides of the highway at the first rest stop after the tolls (of course they’re after the tolls… have to capture that revenue), are state liquor stores; specifically designed and located to capture sales and revenue from Massachusetts, Connecticut, Rhode Island, Vermont, Maine, and New York residents, many of whom drive to New Hampshire specifically to buy liquor and avoid the high prices and taxes in their own states (appx. 50% of all liquor sales in NH are to out of state residents, about 50% of which come from the four state liquor stores on 93 and 95).

Just how much difference does this make to the price of whiskey?

Like I said above, it’s all so big, so pervasive, it can be hard to get a handle on. Some of the costs you can see directly, like sales taxes. Some of them are partially hidden, like excise taxes. Some of them are completely hidden, like the costs of reduced competition, and the costs of regulatory compliance (in economics these are called hidden externalities).

How about we simplify, and just show you the money?

One product, compared across all 50 states, and just see how the regulatory and tax environments in each state effect the price…

Gizmodo chose the most common and popular American whiskey, in the most popular sized bottle: A 750ml bottle of Jack Daniels (which by the way sells for about $8 from the distiller to the distributors, which includes the $2.14 in tax paid by the distiller to the ATF).

What do you think the price difference might be?

On one 750ml bottle of Americas best selling whiskey, what do you think the price difference might be from state to state? (this is comparing the lowest advertised or verifiable price within a state, not cherrypicking a high price)

Oh and by the way, this includes the excise tax, but DOES NOT include sales tax (making the differences even higher).

$1… $2… $5… $10?

How about $20…

Well, actually, $19.

In New Mexico, you can get a bottle of Jack for $15.99. In Alaska, that same bottle costs $35…

Ok… well.. that’s Alaska… transportation costs and all that, right?

Jack Daniels is famously distilled in Lynchburg Tennessee, which by the way, is in a dry county, where all alcohol sales are banned (as is the case in appx 220 counties in 32 states, with another 250 or so counties having near bans or extremely tight restrictions). How much does a bottle of Jack cost in Tennessee?

$25…

Yes, Jack Daniels costs $10 more IN THE STATE THE STUFF IS ACTUALLY MADE, than it does 1300 miles away in New Mexico.

Even worse, is West Virginia, which almost shares a border with Tennessee (less than 30 miles of the extreme western edge of Virginia separate them… My wifes family is from there, it’s a very pretty drive, I highly recommend it), where a bottle of jack costs… wait for it… $32.99.

It’s not just the taxes… it’s all of the other effects of the regulatory burden…

The great part of this comparison is that it accounts for more than just the tax rates. It shows you the complete total cost impact of market distortions and differential burdens across the states; not just for alcohol, but for retail business in general.
Tennessee has one of the lowest spirit taxes in the country, at only $4.46 per gallon, but a bottle of Jack costs $32.99. Washington has the highest taxes in the country, at $35.22 per gallon, but a bottle of Jack costs $18.99 (again, both before sales tax).

Show me the numbers

From the Gizmodo piece:

Here’s the complete list, arranged by price:

1. New Mexico: $15.99 (Quarter’s Discount Liquors, Albuquerque)
2. Arizona: $16.99 (Total Wine and More, Phoenix)
3. Florida: $17.99 (Wine and More, Daytona Beach)
4. Texas: $17.99 (Wine and More, Dallas)
5. California: $17.99 (BevMo, Culver City)
6. Washington: $17.99 (BevMo, Bellingham)
7. Oklahoma: $18.53 (Bryan’s Liquor Warehouse, Oklahoma City)
8. Nevada: $19.99 (Lee’s Discount Liquor, Las Vegas)
9. Louisiana: $19.99 (Prytania Liquor Store, New Orleans)
10. Wisconsin: $19.99 (WI Discount Liquor, Milwaukee)
11. Kansas: $19.99 (Lukas Liquor, Overland Park)
12. Missouri: $19.99 (Lukas Liquor, Kansas City)
13. Minnesota: $19.99 (Zipp’s Liquor, Minneapolis)
14. Illinois: $19.99 (Binny’s, Chicago)
15. Maine: $19.99 (Lou’s Beverage Barn, Augusta)
16. Wyoming: $20.99 (Dell Range Liquor Store, Cheyenne)
17. Delaware: $21.99 (Tri-State Liquors, Claymont)
18. Georgia: $21.99 (Midtown Liquor, Atlanta)
19. South Carolina: $22.90 (Burris Liquor Store, Charleston)
20. Colorado: $22.99 (Colorado Liquor Mart, Denver)
21. Pennsylvania: $22.99 (Wine and Spirits Store, Philadelphia)
22. Mississippi: $23.32 (Stanley’s Liquor and Wine, Jackson)
23. Idaho: $23.95 (State Run Liquor Store, 17th and State, Boise)
24. South Dakota: $23.94 (Capital City Wine & Spirits, Pierre)
25. Indiana: $23.99 (Nick’s Liquor Store, Hammond)
26. Maryland: $23.99 (Eastport Liquors, Annapolis)
27. Nebraska: $23.99 (The Still, Lincoln)
28. Alabama: $23.99 (ABC Liquors, statewide)
29. Vermont: $24.00 (Beverage Warehouse, Winooski)
30. Ohio: $24.25 (Campus State Liquor Store, Columbus)
31. Arkansas: $24.52 (Lake Liquors, Maumelle)
32. Virginia: $24.90 (ABC Store, Richmond)
33. Oregon: $24.95 (Northside Liquor Store, Eugene)
34. Tennessee: $24.99 (Frugal MacDoogal Liquor Warehouse, Nashville)
35. Connecticut: $24.99 (BevMax, Stamford)
36. New Jersey: $24.99 (Super Buy Rite, Jersey City)
37. North Dakota: $24.99 (Empire Liquors, Fargo)
38. Utah: $25.49 (State Liquor Store, Salt Lake City)
39. New Hampshire: $25.99 (Liquor and Wine Outlet, New London)
40. Kentucky: $25.99 (Old Town Wine and Spirits, Louisville)
41. Montana: $26.75 (Bottle and Shots West Liquor Store Billings)
42. North Carolina: $26.95 (ABC Store, Raleigh)
43. Rhode Island: $28.00 (City Liquors, Providence)
44. Michigan: $28.62 (Calumet Market and Spirits, Detroit)
45. New York: $28.99 (Warehouse Wine and Spirits, New York)
46. Iowa: $28.99 (Liquor House, Iowa City)
47. Massachusetts: Charles Street Liquors: $28.99
48. Hawaii: $29.99 (The Liquor Collection, Honolulu)
49. West Virginia: $32.99 (Liquor Co, Charleston)
50. Alaska: $35.00 (Percy’s Liquor Store, Juneau)

Disclaimer: This is not a scientific survey, but I tried to call basic, non-fancy liquor stores for the price check. It’s not clear how much of the discrepancy from state to state is caused by cost of living, tax rates, regulations, or just good ole fashioned price gouging.

You can see, the majority of states are clustered around $20-25, only 7 states cheaper than that, and 12 states more expensive, even though the spirit taxes in those states vary widely. Again, this just shows you the overall burden… the effects of what is seen, and what is unseen… in a highly regulated market.