Bottoms up!... and Prices, too: Washington's Liquor Privatization Scheme is a Tax Hike

June 05, 2012

Washington State citizens successfully put an end to their state’s “archaic, state-run liquor monopoly” when an initiative to privatize spirits sales went into effect on June 1, 2012. Initiative 1183, voted into legislation this past fall, sought to end a 78 year tradition left over from the post-prohibition seizure of liquor sales by the state’s government by requiring the government to “auction off its existing state liquor distribution and state liquor store facilities and equipment” and by creating new regulations for the private distribution and retail sale of spirits. Although consumers could benefit from competition introduced by the new system, the financial provisions of the initiative might end up costing consumers more than they bargained for.

Previously, the Washington government collected 100 percent of alcohol sales revenue. This revenue was used to cover all of the associated overhead costs of running the business; all of the remaining profit was put directly into state and local general funds. Because the profits made from providing this service went directly to the government, it is considered a tax: specifically, an “implicit tax.” When calculating the total excise tax rate within a state that controls the sale of alcohol, the markup percentage is included. Washington had a markup of 51.9 percent, an alcohol sales tax of 20.5 percent, and an excise tax of $3.77 per liter, making their total excise tax rate the highest in the country at $26.70 per gallon: more than 3 times the national average of $7.02 per gallon. Under the new legislation, retailers are allowed to set their own markup rate, and the government no longer collects this tax; as such, this loss of revenue can be viewed as a tax cut.

However, the initiative introduces several new fees which not only make up for the lost profit, but are likely to actually increase the state’s total revenue from alcohol sales. Private retailers are burdened with a new liquor retailer license fee of 17 percent of gross revenues, as well as an annual renewal fee of $166. Also, liquor distributors must pay a liquor distribution license fee of 10 percent of gross revenues. Unfortunately for consumers, these new fees will end up costing them more at the check-out than the old system they replaced. According to the Office of financial Management’s estimates:

[…] total State General Fund revenues increase an estimated $216 million to $253 million and total local revenues increase an estimated $186 million to $227 million, after Liquor Control Board one-time and ongoing expenses, over six fiscal years

David Ozgo, the Senior Vice President of the Distilled Spirits Council of the United States, noted in a phone call, “On a lot of products, the total tax burden will approach the equivalent of a 100 percent sales tax.”

New business opportunities and an increased selection on store shelves might result from Initiative 1183, but at the register, the new fees could prove to be a sobering surprise for many citizens of The Evergreen State.

More on Washington here.

More on alcohol taxes here.

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