There’s a tear in my beer: How states use liquor markups to hide the bill from taxpayers

WASHINGTON (Oct. 12, 2017) – In states that hold a monopoly on the sale of spirits, liquor prices usually are set by a formula that includes at least one of three different components: taxes, fees and price markups. But as R Street Governance Fellow C. Jarrett Dieterle contends in a new policy brief, governments have started to rely heavily on the revenue derived from these markups, as state lawmakers frequently have included calls for higher markups in their budget proposals.

“Let’s be clear, markups are artificially created price bumps that exceed the level of increase that would be sustained on the open market,” notes Dieterle. “They function very similarly to taxes and the revenue from these increases often accrues directly to a state’s general fund. This practice is not in keeping with sound free-market principles, nor is it particularly honest.”

As Dieterle writes, liquor markups are readily distinguishable from nearly every other form of government imposed fee, since they target a good designed for private consumption. Perhaps worse is that, despite their clear resemblance to taxes, markups frequently do not need to be ratified by state legislatures in the way that other taxes do. This allows lawmakers in liquor-control states effectively to hide the cost from state taxpayers.

“Many states allow their liquor agencies to raise markups without legislative approval or guidance,” notes Dieterle. “At the very least, states with government-operated liquor systems should bring more transparency to the markup process by requiring explicit legislative approval of any increase in markups. Better yet, control states should consider getting out of the liquor business entirely and transitioning to a private, market-based model.”

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