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High drink prices: The real culprit is the minimum pricing scheme

On the heels of last year’s session in which policymakers rightly modernized key alcohol laws to increase consumer convenience, now the Competitive Alcoholic Liquor Pricing Task Force is eyeing the state’s artificially high alcohol prices. While we can all raise a glass to more competitive alcohol prices, we need to make sure that policymakers are calling up the right brand of tax reform.

Right now, the task force is considering a cocktail of reform that includes a look at the state excise tax compared to neighboring states as well as a look at Connecticut’s unique minimum bottle pricing scheme. While the distilled spirits industry certainly supports lowering our burdensome excise tax rate, simply lowering the rate will have little impact on shelf prices in this case. The only real path to reducing shelf prices is to get rid of the state’s minimum bottle price scheme — a scheme that no other state in the country has and for good reason. It costs consumers money.

Let’s take a look at the proposals being discussed: reducing the state’s alcohol excise tax or eliminating the minimum bottle price scheme.

In Connecticut, over half the purchase price of a bottle of spirits already goes to taxes of some kind. In fact, Connecticut increased alcohol taxes in 2011, raising the spirits rate to $5.40 per gallon. From a state competitive standpoint, this compares to $4.05 per gallon in Massachusetts and $3.75 per gallon in Rhode Island. New York charges $6.44 per gallon. So with the exception of New York, Connecticut already has the highest state excise tax in the region. The difference is further compounded by the fact that, unlike Connecticut, Massachusetts repealed its liquor sales tax on package sales.

Taken together with the Federal Excise Tax ($13.50 per gallon) and various federal fees which make up even more of the alcohol tax burden, as much as 76 percent of the total tax liability applied to alcohol is completely beyond the reach of state policymakers. Our economic review of the excise tax reduction proposal found that Connecticut would have to eliminate the state excise tax altogether to have any meaningful impact on shelf prices.

Specifically, our review found that rolling back the Connecticut excise tax rate to its pre-2011 figure ($4.50 per gallon) would bring shelf prices down at most 1.9 percent. Reducing the rate to match Rhode Island’s excise tax would bring prices down by only about 2-3.5 percent. Only by eliminating the state excise tax altogether would consumers see any significant price reductions at the shelf (average 5-10 percent reduction). Given today’s tough budget environment, discussions about reducing or eliminating taxes are nothing more than a distraction.

But there is a path to a meaningful reduction in shelf prices that would be a positive policy change for Connecticut consumers — and Connecticut coffers. Connecticut is the only state in the country with a minimum bottle price requirement. This current pricing scheme allows alcohol wholesalers to set the minimum price at which all retailers must sell. This artificial price — which has no calculated relationship to the per bottle wholesale price — disserves the public and only benefits the retailers who seem to prefer state protection from competition. As a result of the minimum pricing requirement, Connecticut consumers are forced to pay far more at the register.

The minimum pricing scheme has three negative economic effects. First, consumers flee across state lines for lower prices. Second, higher prices force more in-state shoppers into “value” brands — the least expensive products available. While value brands offer consumers good value for their dollars, state policy should not dictate consumer beverage choices. For both of these effects, Connecticut loses revenue. Finally, even if the excise tax rate were lowered, minimum pricing would allow wholesalers to keep any savings for themselves. Thus, getting rid of minimum pricing is the only strategy likely to result in lower consumer prices.

Allowing a retailer to sell at the cost-of-acquisition based on a case price rather than an arbitrarily established minimum bottle price could result in significant consumer savings and allow Connecticut retailers to compete more openly in the state and also with out-of-state stores. The pricing requirement serves no legitimate policy purpose but merely imposes higher prices on consumers who either flee to other states or simply don’t buy.

Just as Connecticut modernized its puritanical Sunday alcohol ban earlier this year, now is the time to modernize its outdated pricing practices, too. Competitive pricing — whether you’re a consumer, a small business owner or a budget hawk — is a model worth toasting.