In 2016, Pennsylvania lawmakers changed the law to allow the state-run Liquor Control Board to set its own prices on alcohol.
Since then, the monopoly board's profits have increased significantly because, without any competition, it has been able to artificially increase the price of alcohol. Critics are calling the markups an illegal tax.
“When a business gives you a markup, it’s not a tax, right? It’s just a service that you can go then to a competitor store if you don’t like their markups,” said Jarret Dieterle, a senior fellow and alcohol policy expert at the R Street Institute, a nonpartisan, public policy think tank based in Washington. “You can’t do that in Pennsylvania, of course. You’re beholden to them.”
Pennsylvania is one of 13 states in the country that controls retail package sales. Across Pennsylvania, the state runs more than 600 retail stores that sell wines, whiskeys and other hard spirits. It’s a big business for the government as the Pennsylvania Liquor Control Board contributed nearly $752.2 million to state and local governments in the 2017-18 fiscal year.
Nearly a quarter of that amount – $185.1 million – was a direct transfer to the state’s general fund. That was in addition to the more than $517 million generated in liquor and sales taxes.
That additional funding came about because the PLCB has the ability to determine how much of a markup it can add to the price of a bottle. The General Assembly granted the board that authority in 2016 as part of a package that allowed other entities, such as grocery stores and restaurants, to sell wine for off-premises consumption.
Before the law was passed, state law required the board to use a set formula to determine prices.
Since 2016, the amount transferred to the general fund beyond the tax revenue has grown dramatically. In Fiscal Year 2015, the PLCB transferred $80 million. A year later, it was $100 million. In Fiscal Year 2017, the year the law took effect, the general fund received $216.7 million.
“We are an operation that is looked to to generate revenue for the commonwealth,” Elizabeth Brassell, a PCLB spokeswoman, said.
While the agency defends the practice of variable pricing, critics say the increased margins represent an illegal tax and question whether the state should even be in the business of selling packaged liquor and wine.
No other business sector features government-run retail outlets, Dieterle said.
Some critics contend Pennsylvania is susceptible to being sued for illegal taxation because of variable pricing.
While it was elected officials who gave the PLCB the ability to set prices, at least one lawmaker seeks a return to the old system.
In May, state Rep. Jesse Topper, R-Bedford, filed House Bill 1512 to bring back proportional pricing, although it does include an exception for “best-selling and limited purchase” products in order to maximize the state’s return.
“Under the proportional pricing formula, the PLCB was required to pass savings onto the consumer anytime suppliers discounted their prices,” Topper wrote in a memo to his fellow lawmakers. “This offered the consumer a level of protection.”
Dieterle called Topper’s bill a step forward, although he’d prefer for the legislature itself to have a direct say in the markup process.
Brassell said since the agency serves as an administrator, it typically refrains from joining debates on bills that affect how it would operate. However, she noted that the PLCB is producing more money for the state.
Variable pricing has also helped reduce the reselling of premium brands, Brassell said. For instance, when margins were fixed, the state’s stores had the lowest prices in the nation on Pappy Van Winkle bourbons, one of the most coveted brands in the industry.
PLCB stores were forced to sell the 23-year edition at the manufacturer’s suggested price of $249.99, while other stores significantly increased the retail price due to consumer demand. That allowed people to buy bottles in Pennsylvania through lotteries and then resell them for thousands of dollars. None of which came back to the state.