Liquor Privatization in New Hampshire

The Fiscal Impacts of Expanded Spirits Retailing in ew Hampshire

January 2012 Prepared by:

Table of Contents Executive Summary.................................................................................................................. 3 I.

Introduction ...................................................................................................................... 5

II.

Alcoholic Beverage Control Systems............................................................................... 7

III. Why Reduce Control Over Alcoholic Beverage Sales? ................................................... 9 IV. Alcoholic Beverage Sales Benchmarks.......................................................................... 11 V.

Fiscal Benchmarks......................................................................................................... 17

VI.

Privatization in Other States.......................................................................................... 22

VII. Impacts on Sales at State-Operated Stores.................................................................... 25 VIII. Fiscal Impacts ............................................................................................................... 32 IX.

Conclusions ................................................................................................................... 40

Appendix A ............................................................................................................................ 42 End Notes................................................................................................................................ 43

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Executive Summary This study seeks to inform the debate over proposals to expand sales of spirits (liquor) in New Hampshire to private retail outlets such as grocery and convenience stores. The study discusses how alcoholic beverage sales are controlled in New Hampshire and other states and analyzes 38 years of alcoholic beverage sales data to compare New Hampshire’s sales with trends in other states. The fiscal performance of New Hampshire’s alcoholic beverage control system is benchmarked against states that directly control the sale of spirits and wine, as well as those states where the sale of spirits and wine is licensed to private retailers. The report examines the experiences of other states with privatization of spirits and wine sales and highlights the key factors that will affect the fiscal impact of any proposal to allow private sales of spirits in New Hampshire. A detailed analysis of differences in the customer base of sales of wine at stateoperated and private retail outlets is presented, and the implications that these differences have for sales and state revenues under proposals to expand private sales of spirits are highlighted.

A detailed fiscal impact model of spirits sales is presented that allows policymakers to input any number of assumptions about spirits privatization in New Hampshire to estimate likely fiscal impacts. The model allows users to understand key levers that will determine fiscal impacts of any proposal as well as to understand the sensitivity of fiscal impact estimates to key variables and model assumptions.

Finally, this report discusses options for any proposal to expand private sales of spirits in New Hampshire to achieve revenue neutrality from the perspective of the state’s general fund and calculates the expected values needed for spirits sales and tax rates (and their associated price impacts) that would be needed to achieve revenue neutrality.

Key findings include:

•

On a per capita basis, more spirits are purchased in New Hampshire than are purchased in any other state, including “license” states that allow spirits to be sold at private retail outlets such as grocery, convenience, ‘big box” retailers and liquor stores.

•

Spirits, the alcoholic beverage with which NH state government is most involved in distribution and sales, has higher per capita sales relative to other states than does either wine or beer, suggesting sales increases via expanded distribution through private retail outlets would be minimal.

•

Unlike other states that have privatized sales of spirits, there is no empirical evidence

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that access to spirits is constrained or restricted in NH because of state control.

•

New Hampshire’s alcoholic beverage control system transfers more revenue to the state’s general fund on a per capita basis than does any state in the nation. In addition, a higher percentage of those revenues are generated from profit margins compared to sales and excise taxes than in any other state that controls the distribution and sale of spirits and wine.

•

Fewer states have privatized spirits sales than have privatized wine sales. Compared to increases in wine sales after privatization, sales of spirits did not increase by anticipated levels. Prices of spirits also rose by more (1.5-2% more annually) than would have occurred without privatization.

•

Sales of spirits at private retail outlets in New Hampshire would come primarily at the expense of sales at state-operated retail spirits and wine outlets. Depending on prices charged, some small overall increases in spirits sales associated with more retail outlets and added convenience may occur. However, some of these additional spirits sales will come at the expense of wine and beer sales.

•

Under HB 1251, the state of New Hampshire would earn about 33 percent less on each bottle of spirits sold to a private retailer as it makes on a retail sale to consumers at its state-operated outlets.

•

Under a scenario where private retailers purchase spirits from the NH Liquor Commission for resale and receive a discount of either 10 percent (for retailers with combined spirits and wine sales of over $350,000) or 15 percent (for retailers with sales volumes under $350,000) the fiscal impact of expanding retail sales is expected to be an annual net loss to the state’s general fund of between $13.4 and $16.8 million.

•

To achieve revenue neutrality under the provisions of HB 1251, expanded retail sales would have to produce overall spirits sales increases in the state of between 22 and 28 percent in New Hampshire - the State that already has the highest volume of per capita sales of spirits of any state in the nation. Other options for revenue neutrality, including the imposition of excise or sales taxes, will be unpopular with the public and politically unfeasible. Depending on whether taxes were applied to private spirits sales only or sales at both state-operated and private retail outlets, an excise or ‘gallonage” tax would have to be between $2.42 and $6.10 to achieve revenue neutrality. An ad valorem sales tax applied to all spirits sales at state-operated and private retail outlets would have to be between 5 and 6 percent to achieve revenue neutrality.

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I. Introduction New Hampshire is one of 18 states that directly control one or more aspects of the distribution and sale of alcoholic beverages. In New Hampshire, transfers (profits, licenses, and fees) from the liquor and wine operations provide the fourth largest source of the State of New Hampshire’s general fund revenue. New Hampshire’s liquor and wine operations transfer more revenue to the state’s general fund on a per capita basis than does any other state in the nation.

Policy changes that affect such a significant contributor to the revenue structure of New Hampshire state government warrant thoughtful examination and analysis.

Changes to New Hampshire’s spirits (liquor) sales and distribution system have been proposed in recent years and proposals to allow for the expansion of spirits sales at private retail outlets have again been proposed for the 2012 legislative session. Spirits sales in New Hampshire is a $300 million dollar business in which many private sector retailers would like to participate.

A number of states (including New Hampshire in 1978) have reduced their control over the distribution and sale of wine at the retail level, but thus far states have been less willing to lessen their roles in for spirits sales. In part, this reflects concerns that the proliferation of spirits sales could have broader, negative impacts on neighborhoods, communities and states. Many believe that the risks of alcohol abuse are greater with spirits than they are with other types of alcoholic beverages. This is an important issue but outside of the scope of this report In some states, reducing state control over the retail sale of alcoholic beverages is motivated by belief that the state is realizing a low return (in the form of state revenue from liquor and wine sales) on the public funds invested in operating retail liquor and wine stores. These states may feel that the net fiscal impact of having the private sector control spirits and wine sales would be greater than if the state continued to control distribution and or sales of alcoholic beverages.

In the current economic climate, nearly all states face challenges to maintaining or expanding revenues necessary to meet state obligations and that has resulted in some states looking at their retail wine and spirits operations as an opportunity to provide immediate, large, near-term gains by increasing private sector participation in spirits and wine sales. In New Hampshire, supporters of efforts to reduce the state’s direct involvement in the sale of alcoholic beverages may be motivated by a number of factors including:

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•

A desire to increase the sales of private sector retailers.

•

A belief that access to spirits is constrained by the current system of retail sales.

•

A belief that spirits sales in NH could increase significantly with expansion of spirits retailing.

A concern about the involvement of state government in the sale of any good or service for private consumption.

A concern that the state revenue generated by spirits sales in New Hampshire is either too high or too low and reducing state control would provide a more optimal level.

• •

Balancing motivations of the proponents of expanded spirits retailing are concerns about the potential impacts on a large and consistent source of state revenue. New Hampshire’s current system of spirits distribution and sales helps the state achieve two fiscal policy goals important to a majority of New Hampshire residents: exporting as much of the state’s tax burden as possible, and avoiding the imposition of a broad-based sales or income tax1. In addition, the negative social and health impacts associated with alcohol abuse produces significant opposition to the expansion of spirits sales from the health and medical communities and social service agencies.

The issues involved in potential changes to New Hampshire’s system of spirits distribution, sales, and regulation, are complex and not amenable to “rules-of-thumb” assessments. An evaluation of proposed policy changes on the basis of simple ideology increases the risk to the state’s fiscal health. Regardless of one’s views of expanded spirits retailing as a matter of public policy, and how important fiscal considerations are in shaping those views, it is simply sound fiscal policy to fully understand the implications that privatization efforts, including expansion of spirits retailing, will have on the state budget.

This report begins with a discussion of state policies on the distribution and sale of alcoholic beverages. It presents some rationale for current and past efforts nationwide to lessen state controls over the distribution and sale of alcoholic beverages. It benchmarks New Hampshire’s spirits sales, as well as the fiscal impacts of NH’s liquor and wine sales, against other states. The report examines the experience of other states with expansion of spirits and wine sales, and uses econometric techniques to better understand the key drivers and variables that will determine the fiscal impacts of expanded spirits retailing in NH. Finally, the report presents a detailed fiscal impact model that allows users to input any number of assumptions about key variables to estimate the impact that proposals to expand retail spirits sales will have on state revenues. The model calculates expected sales volumes and the distribution of sales between state and privately-operated retail outlets and it calculates the values that would be needed if

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policymakers wish to adopt various policies to achieve revenue neutrality for the proposal.

II. Alcoholic Beverage Control Systems All states exercise some degree of control over alcoholic beverage production, distribution, sales and consumption, at one or more stages along the path from production to consumption. States regulate alcohol at three tiers: •

Tier 1 – Supplier: distilleries, wineries and breweries that produce alcoholic beverages for consumption.

•

Tier 2 – Wholesale: brokers or agents who purchase alcohol from producers, store it, transport and sell it to retail outlets.

•

Tier 3 – Retailer: stores, restaurants or clubs that sell alcoholic beverages for off-site or on-site consumption.

At the first tier, all 50 states regulate distilleries, wineries, and breweries where alcohol beverages are produced. As of July 2011, 18 states have been categorized by the National Institutes of Health’s Alcohol Policy Information System (APIS) as “control states.” States designated as control states exercise control over the spirits or wine business at the second (wholesale) or the third (retail) tier, or both. The remaining states are categorized as “license states” because they allow licensed organizations in the private sector to run the day-to-day operations of the alcoholic beverage business. License states do not directly provide for the wholesale or retail sale of alcoholic beverages but all regulate some or all parts of the wholesale distribution and retail systems, as well as consumption among citizens. Table 1 presents a simple taxonomy of control state involvement in distribution and sale of spirits and wine.

Table 1 Alcohol Control States

Wholesale Control Only Iowa Michigan Mississippi West Virginia Wyoming

Retail and Wholesale: Licensed Retail Agents Maine Montana New Hampshire

Retail and Wholesale: Contracted Retail Agents Ohio Oregon Vermont Idaho Utah Washington

State-Run Retail and Wholesale Alabama Pennsylvania North Carolina Virginia

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In practice, control states vary considerably in the degree to which they divide the management of the spirit and wine businesses between the public and private sectors, blurring the distinctions among the limited categories of control presented in Table 1. Among the 18 states considered control states, the vast majority use a hybrid approach to administer alcohol control systems.

The Alcohol Policy Information System (APIS) at the National Institutes of Health makes additional distinctions between state control systems at the wholesale and retail level. The APIS classification is presented in Table 2. Table 2 presents the APIS classification system as a continuum along the degree of state control, with the greatest degree of state control at the top, in the “state-run” category. The bottom row of the table is the “license” system where states exercise the least amount of control over alcoholic beverage sales and distribution.

Table 2 Alcohol Policy Information System (APIS) Classification of State Alcohol Beverage Control Systems State-run System State controls wholesale and retail through state-run and owned system.

Mixed/ ot Overlapping System

Some beverage subtypes are sold through a state-run system and other beverage subtypes are sold through a license system. No beverage is sold through both systems.

Mixed/Overlapping System

Some or all beverage subtypes are sold through both the state- run and license systems.

License System

State licenses private vendors to operate wholesale or retail systems of distribution of a beverage type or subtype (private systems).

In the aggregate, states maintain a greater degree of control over spirit sales than they do over wines sales. Table 3 shows that at the top of the APIS state-control continuum, in the “staterun” and “mixed/not overlapping” categories where the most control is maintained, there are more spirits than wine sales systems. For retail spirits, New Hampshire is classified as a “mixed/not overlapping” system, indicating a higher level of state involvement in sales and distribution for spirits than for retail wine sales, where New Hampshire is included in the “mixed-overlapping” category (because wine in New Hampshire is sold in both state-run and private retail outlets).

States designated as ‘control states” do not necessarily imply stricter regulation. New Hampshire is a “control state” but has fewer restrictions on marketing and availability than does

8

Table 3 umber of State Spirit and Wine Control Systems by Degree of Control (APIS Category) Wine Wine Spirits Spirits Control Retail Wholesale Retail Wholesale

State-run Mixed/Not Overlapping Mixed/Overlapping License

2

4

8

12

1

7

3

4

10

5

3

2

5

2

4

0

Georgia, a “license state”. During the past few decades, a number of states, including New Hampshire, lessened their control over wine sales. Far fewer states have lessened their control over the sale of spirits. Over the past two years, five of the 18 control states have explored, or are currently exploring, some form of privatization of their alcohol control systems. Vigorous policy debates are occurring in Washington State, Pennsylvania, Virginia, and to a lesser degree in North Carolina.

For the comparison and benchmarking analyses in this report PolEcon relied on the APIS taxonomy for classifying individual state spirits and wine sales systems. The classification of individual state spirits and wine control systems was changed over the 38 years of alcoholic beverage sales data analyzed, to reflect changes in their alcohol control policies that occurred during the time period analyzed. Thus the number, composition, and membership of control and license states changed between 1970 and 2008 and those changes are reflected in our groupings for the analyses in this report, making for more accurate comparisons between New Hampshire’s sales, and the sales of other control states as well as license states.

III. Why Reduce Control Over Alcoholic Beverage Sales?

A number of states are considering proposals to lessen control over their alcoholic beverage sales and distribution systems. The motivation for reducing state control varies among states but there are some common issues and themes. Some states (Pennsylvania and Virginia) appear primarily motivated by fiscal issues or concerns over the performance (return on investment) of their alcoholic beverage control systems. In each state there is also a significant amount of debate along ideological lines over the appropriate level of state government involvement in the sale of a widely used, but legal, substance with significant social impacts and externalities.

There are at least six primary reasons why lawmakers in “control” states have considered

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or are currently considering reducing their state’s involvement in the sale of alcoholic beverages.

•

Lawmakers may feel that their state will get a better return (in the form of increased state revenues, reduced expenditures, or both) from a change in their alcoholic beverage sales and distribution systems. This appears to be a key driver in debates over “privatization” of liquor and wine sales in Pennsylvania, North Carolina, and Virginia. This report contains data for benchmarking the impact of NH’s alcoholic beverage control system on state government finances compared to other states.

•

A related motivation is a desire to change control systems in order to produce large, immediate, short-term, gains to help states overcome pressing, nearterm, fiscal strains. In most cases, these states are also looking to maintain or increase the overall level of annual revenue (if even in a different form) from any changes, but obtaining large initial, “up-front” revenue is a primary motivation for change.

•

Lawmakers may be concerned that access to some types of alcoholic beverages is restricted or limited by aspects of their state’s control system.

Although “consumer convenience” or measures of the number and density of retail “outlets” selling alcohol are often used to indicate whether access to alcoholic beverage is restricted, better economic measures of supply constraints (or restricted access) are available. To some degree restricted access is indicated by lower than expected per capita alcoholic beverage sales relative to comparable states. An even better measure, applicable regardless of the level of overall alcohol sales in a state, is favored by economists as being more consistent with economic principles. Because studies have demonstrated that alcoholic beverages are, in part, substitutes for one another, when the availability of one type of beverage (i.e. spirits) is limited or constrained in a state for any reason, the percentage of all alcoholic beverages sold of that type will be lower than the percentage in comparable states. At the same time, the percentage of all alcoholic beverages sold as wine and/or beer would be elevated. As demonstrated later in this report, evidence of constrained access (using this measure) is apparent in nearly all states that lessened control over one or more of their alcohol control systems.

•

Lawmakers in some states may believe that limiting state controls or substituting private for public sales of alcoholic beverages will have a positive and larger impact on their state’s economy. In examining the experience of other states, there is limited evidence of significant increases in spirits sales after privatization efforts. As noted later in this report, few new retail outlets result from privatization and spirits sales typically replace other product lines of private retail outlets, resulting in no employment gains.

•

Lawmakers may believe that it is an inappropriate role for state government to be in the business of alcohol distribution and sales. This belief may or may not be tempered by concerns about the fiscal impacts of changes.

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•

On the other side of the issue, lawmakers may have concerns about the societal impacts and costs that can accompany a lessening control of the distribution and sale of alcohol in a state.

New Hampshire lawmakers evaluating proposals to change the state’s alcohol distribution and sales system will be concerned with one or more of the issues listed above. With the exception of ideological concerns over state involvement in alcohol sales (which is not amenable to data analysis and empirical investigation) and concerns over societal impacts (which are more amenable to empirical investigation but outside the scope of this report) the report sections that follow seek to inform lawmakers on the issues listed above in the context of NH’s alcoholic beverage control system.

The following two sections of this report highlight several economic, fiscal, and performance-based criteria and benchmarks that can be used when evaluating whether to change the degree of control New Hampshire exercises over its wine and spirits sales and distribution system.

IV. Alcoholic Beverage Sales Benchmarks Regardless of the metrics or comparison states used, New Hampshire demonstrates a high level of retail spirits sales. Figure 1 shows how growth in spirits sales in New Hampshire compares to growth in the U.S. and in Massachusetts. Because there are differences in regional patterns of consumption of alcoholic beverages (the Northeast consumes more spirits and wine Figure 1

Growth in Spirits Sales (Volume) Since 1980 120 110

Index 1980=100

NH MA

U.S. Northeast

100 90 80 70 60 50 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

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and less beer than the U.S. average), the chart also shows sales growth for Northeast region.2 The chart shows a longer-term trend decline in sales that had relatively less effect on NH than it did on other states that saw a substantially larger decline between 1980 and 2000. Compared to neighboring states and the Northeast region, NH has seen 30 percent greater growth in spirit sales.

On a per capita basis, more spirits are purchased in New Hampshire than are purchased in any other state, including “license” states that allow spirits to be sold at private retail outlets such as grocery, convenience, ‘big box” retailers and liquor stores (Figure 2). Only the District of Columbia, which receives a high number of visitors annually and is a popular location for meetings, conventions and other gatherings, approaches NH’s volume of per capita spirits sales.

Figure 2

Only D.C. Comes Close to NH’s Volume of Spirits Sales Per Capita (Age 21+) 6.0 5.0 4.0 3.0 2.0

0.0

ew Hampshire D.C. evada Delaware orth Dakota Wis consin Wyoming Alas ka Minnes ota C olorado Rhode Island Florida Montana South Dakota Connecticut ew Jersey Maryland Mass achusetts Louisiana Oregon Maine Missouri Michigan South Carolina Washington Arizona Indiana Illinois California ew Mexico Mississippi Vermont Iowa Idaho ebraska ew York Kansas Georgia Kentucky Pennsylvania Arkansas Texas Virginia Oklahoma Alabama orth Carolina Tenness ee Utah Ohio Wes t Virginia

1.0

Source: Alcohol Policy Information System, Na tional Institutes of Health , PolEcon calcula tions

H Spirits Sales Exceed Regional Averages by More than H Wine Sales Exceed Regional Averages As a lower-tax state in a higher-tax region, with a high level of visits by residents from other states and a reputation for lower prices on most retail goods, New Hampshire can be expected to have relatively higher levels of per capita alcoholic beverage sales compared to nearby states. Somewhat surprising, however, is the fact that spirits, the alcoholic beverage with which NH state government is most involved in distribution and sales, has higher per capita sales relative to other states than does either wine or beer. Table 4, shows how much per capita spirits sales in NH exceed per capita sales in other states. NH sells more than twice (237%) as much spirits per capita as the average of the Northeastern states. By comparison, NH sells 176 percent

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(about three quarters) more wine per capita than other Northeastern states. This suggests that expanded retailing of alcoholic beverages in NH is not a guarantee of a higher level of sales or of a competitive advantage relative to other states.

Table 4 H Per Capita Alcoholic Beverage Sales as a % of Other State Per Capita (Age 21+) Sales H Per Capita Sales as a: Spirits Wine Beer % of US 242.4% 213.0% 141.8% % of Control States 257.9% 216.7% 136.1% % of License States 219.5% 224.2% 136.6% % of Northeast States 236.7% 175.5% 158.5% % of Massachusetts 213.2% 131.5% 159.3% % of Maine 221.3% 194.6% 136.7% % of Vermont 251.0% 131.1% 124.3%

Larger price differences between spirits sold in NH and prices in other states than occur between the price of wine or beer in NH and prices in other states likely account for much of the results in Table 4, but marketing and “branding” of NH’s retail spirits stores also plays a role.

Limited Access to Alcoholic Beverages Often Precedes Privatization Efforts To a significant degree, alcoholic beverages are substitutes for one another. When access to one type of beverage is more limited or constrained by price, availability, or regulation, than is another type of alcoholic beverage, a portion of sales will be shifted (cross substituted) to the more available alcoholic beverage (substitution occurs across alcoholic beverage types).3 Evidence that access to or the “supply” of one type of alcoholic beverage is limited or constrained occurs when the sales of the more regulated or controlled beverage comprises a smaller percentage of total alcohol sales in a state than it does in comparable states. In determining if access to a beverage is constrained, the overall level of alcohol sales in a state is not important, rather, it is the mix of sales among different types of beverages that is relevant. Regardless of the overall level of alcohol consumption in a state, if access to one type of beverage (i.e. spirits) is limited or constrained, it will be evidenced by that beverage (spirits) comprising a smaller percentage of total alcohol sales in the state than would be expected based on the percentage in comparable states.

Regional differences exist in the patterns of alcoholic beverage purchases. Socio-

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economic and demographic variables also affect patterns of alcohol purchases, so it is important to benchmark against appropriate comparison states when looking for evidence of constrained or limited access. For this study, PolEcon developed a database of alcohol beverage sales, socioeconomic, and demographic variables for all 50 states for the time period from 1970 to 2008.

This allows PolEcon to asses the impact of many variables on alcohol sales in states, as well as to benchmark alcohol beverage sales in a state against any single or combination of states, using multiple criteria for selecting comparison states.

States that have taken steps to reduce control (by enacting some type of expanded private retailing) over one or more alcoholic beverage sales have all shown evidence of limited or constrained access to an alcoholic beverage prior to expanded retailing. Table 5 compares the share of wine sold, as a percentage of all alcoholic beverages sold in a state (in gallons) in the year prior to expanding sales by private retailers, with regional and national and “control” state averages. Table 5 contains data for states that have expanded private sales of wine since 1970.

Table 5 Wine as a Percent of All Alcoholic Beverage Sold (gal.)

The Year Before and One-Year After Allowing Sales at Private Retailers

State NH Montana Alabama West Virginia Iowa

Year “Privatized” 1978 1979 1980 1981 1985

Wine as a % of Sales Year Prior 7.3% 4.5% 3.9% 2.9% 2.8%

% of Regional Avg. 92.4% 75.0% 81.3% 51.8% 50.0%

% Wine Year After Privatization 8.7% 6.1% 5.2% 4.1% 4.7%

% of Region 101.2% 93.8% 98.1% 70.7% 71.2%

Comparison Region Northeast Mountain South S. Atlantic W. N. Central

Table 5 shows that prior to liberalizing wine control, each state did, in fact, have levels of wine sales as a percentage of all alcohol sold that was lower than their regional average. NH’s wine sales as a percentage of all alcohol sold was just slightly below the Northeast region, while Iowa and West Virginia had percentages at half their regional average. In the first full year following the year of expanding sales by private retailers, all states moved closer to their respective regional averages, indicating that alcoholic beverage sales had shifted (through both increased sales and reversing the substitution effects) toward the beverage that had previously demonstrated access constraints.

No states are identical and differences between the populations in each state in a region as

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well as differences in the nature of the retail expansion efforts that occurred in each state likely account for the differences in alcohol consumption patterns following expansion. In addition, caution is urged in extrapolating the results from expanding retail wine sales to expanding spirits retailing, especially in New Hampshire. First expansion of wine retailing in New Hampshire occurred at time when public tastes in alcoholic beverages were shifting. Nationally, wine sales began increasing dramatically during the 1970’s, compared to both spirits and beer (Figure 3).

Second, as discussed below, there is currently no evidence constrained supply or access to spirits in NH as there was in the case of wine in the 1970’s.

Figure 3

Expanding Retail Sales of Wine in NH (and Most Other States) Occurred at a Time When Public Tastes Were Changing and U.S. Wine Sales Began to Increase Dramatically 2 00 1 80

Volume Sales of Alcoholic Beverages in the U.S. (Index 1976=100)

Spirits

Wine

Beer

1 60 1 40 1 20 1 00 80 60 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Nevertheless, the data do suggest that constrained access to specific alcoholic beverages can be seen in alcohol sales data and can be useful in spotting states that may realize the largest increases in volume or shifts in the percentage of different beverages sold in a state.

There is o Evidence of Constrained Access to Spirits in ew Hampshire Fewer states have reduced their control over spirits sales in the past several decades than have reduced their control over wine sales. Iowa and West Virginia each allowed private sales of spirits, separately and in different years than their changes in wine retailing. As with wine, the percentage of alcoholic beverage sales in the form of spirits in both states was well below regional averages (West Virginia’s spirit sales were only 60% of the South Atlantic region’s average and

15

Iowa’s spirits percentage was 69% of the West North Central region’s average) while the percentage of alcohol sold as beer in both states was well above regional averages (suggesting cross substitution of beer for other alcoholic beverages).

The situation for New Hampshire’s spirit sales is just the opposite. The percentage of alcoholic beverages sold as spirits in New Hampshire is well above the regional average and is second only to the District of Columbia (Figure 4). As expected, with such a high percentage of alcohol sold as spirits in the state, the percentage of alcohol sold as beer in NH is six percent lower than the Northeast regional average (but equal to the Massachusetts percentage).

Figure 4

Only D.C. Has a Higher Volume (gals.) of Alcohol Sold in the Form of Spirits Than Does New Hampshire % of Alcohol Sold in the State as Spirits (In gals. o t Dolla r Value) D istrict of Columbia

9.5%

ew Hampshire

8.9%

e vada

7.1%

Massachusets

6.7%

orthe ast Region

6.3%

Maine

6.0%

U,S. Average

5.7%

Vermont

2%

4.7%

3%

4%

5%

6%

7%

8%

9%

10%

Source: Nationa l Institutes of Health, Alcohol Polic y Information System, PolEcon Calculations

One significant implication of these findings is that unlike deregulation in states where spirit sales appeared to be limited or constrained, NH’s already exceptionally high percentage of alcoholic beverages sold as spirits suggests that sales of spirits would not increase significantly.

A large percentage of spirit sales would, however, shift from state-run stores to private stores (a full discussion of this is contained in Section VII of this report). In addition, there would be an increase in convenience for some purchasers of spirits that may result in a very small shifting of alcohol purchases away from wine and beer.

Summary of Spirit Sales Benchmarks: •

NH spirits sales have grown faster than neighboring states, the U.S., or the Northeast region.

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•

NH has the highest per capita sales of spirits of any state in the nation.

•

NH’s per capita sales of spirits is exceptional among all alcoholic beverages (wine, beer, & spirits) sold in NH. Despite being the alcoholic beverage most “controlled” by the state, per capita spirits sales exceed the national, regional, control and license state averages by a larger margin than do NH’s sales of wine and beer.

•

The high percentage of spirits sold in NH as a percentage of all alcoholic beverages suggests that access to spirits is not limited or constrained in the state, despite being the alcoholic beverage most “controlled” by the state, and the fact that consumers have fewer locations than wine or beer to purchase spirits.

•

States that have increased private sales of wine and spirits showed evidence of limits or constraints on the availability of the beverage prior to the allowing spirits sales at private retail outlets.

•

Spirits comprise a larger percentage of all alcoholic beverage sales in NH than in neighboring or comparable states, the Northeast region, or “license” states that allow a greater number of retail outlets for spirits.

•

Although convenience may be enhanced by a greater number of retailers selling spirits in NH, a significant increase in spirits sales is unlikely. A large percentage of sales will shift from state-operated stores to private outlets and a small shift of alcohol sales away from wine and beer toward spirits may also occur.

V. Fiscal Benchmarks Fiscal considerations figure prominently in past and current debates over reducing state controls over alcoholic beverages. In Pennsylvania, Virginia, and North Carolina, some lawmakers believe that alcoholic beverage sales and revenues are currently lower than they would be if spirits and wine were sold at private rather than state-controlled outlets. Lawmakers are typically concerned with the impact that changes in alcohol control policies may have on state government finances, even when the primary motivation for deregulation is other than fiscal.

Lawmakers considering expansion of spirits sales in New Hampshire may be similarly interested in the fiscal impacts of any proposed changes. Section IV of this report examined spirit sales benchmarks for NH, this section considers fiscal benchmarks, or how the revenue generated by NH’s current system of alcoholic beverage control compares with “license” states and other ‘control” states. Estimates of how both spirits sales and state revenues in New Hampshire will be

17

affected by expanded spirits retailing are presented in Section VIII of this report.

ew Hampshire Generates the Most et Revenue Per Capita New Hampshire’s alcoholic beverage control system transfers more revenue per capita to the state’s general fund than does any other state-run system in the nation (Figure 5). The data in Figure 5 include net profits from the sale of beverages as well as licensing and any enforcement revenue, and state alcoholic beverage taxes (such as excise or selective sales taxes applied only to alcoholic beverages) administered as part of the state’s alcoholic beverage control system. It does not include general sales tax revenue applied to alcoholic beverages. The U.S. Census Bureau uses the metric “net fiscal impact” of state liquor and wine operations to compare the impact on states from liquor and wine control operations. The metric is essentially net profits from sales and operations, plus license and enforcement revenues, minus liquor, wine and beer taxes administered through the alcoholic beverage control system.

Figure 5

Transfers to General Fund Per Capita from “Control State” Systems (Does not Inclu de Sales Taxes Not Administered Through State Liquor Commission s) ew Hampshire

$84.8

Washington

$49.5

Alabama

$39.8 $38.5

Utah Montana

$31.3

Oregon

$29.6

Mississippi

$29.5

Idaho

$26.2

Vermont

$23.5

Iow a

$21.8

Ohio Wyoming

$21.5 $19.4

Mic higan Virginia

$16.0 $13.2 $10.5

P ennsylvania We st Virginia

$8.3

$0

$ 10

$20

$30

$4 0

$50

$6 0

Source: U.S. Census Bureau, State a nd L ocal Governme nt Finances, 2008, PolEcon

$70

$80

$90

Calculating this metric on a per capita basis (Figure 6) shows not only that NH contributes a greater amount per capita to state revenues than any other state; it does so with the smallest amount of tax collections.

The net fiscal impact of liquor and wine operations is a measure of the non-tax revenue per capita generated by liquor operations. Comparing Figures 5 and 6 highlights that several state

18

Figure 6

Net Impacts on General Fund Per capita (“Profits” from Liquor Operations Minus Revenues From Taxes) ew Hampshire

$72.6

Oregon

$25.6

Utah

$22.4

Idaho

$21.0

Ohio

$19.6

Iowa

$17.0

Alabama

$16.9

Mississippi

$15.7

W yoming

$13.4

Montana

$10.4

Washington

$9.9

W est Virginia Maine

$7.5 $0.0

-$1.1Vermont -$5.4 Virginia -$16.6 Pennsylvania

-$30

-$20

-$10

$0

$10

$ 20

$30

$ 40

$50

Source: U.S. Census Bureau, State and Local Government Finance s, 2008, PolEc on

$60

$70

$80

liquor and wine operations (like Washington State and Alabama) have contributions to state general funds primarily via taxes. In contrast, taxes and fees account for less than 15 percent of the revenue transferred to NH’s general fund by NH’s Liquor Commission.

A final fiscal benchmark measures how important spirits and wine control systems are to each state’s general revenue. Figure 7 shows NH’s spirits and wine control system contributes a larger portion of the state’s general fund revenue than does the spirits and wine control system of Figure 7

Spirits and Wine Profits, License, Fees, and Taxes are a Larger Portion of General Revenues in NH Than They are in Any Other State – and Taxes Account for a Smaller Portion Than Most States 7.0% 6.0% 5.0% 4.0% 3.0% 2.0%

0.0%

ew Hampshire Alabama Washington Montana Utah ew Mexico Miss iss ippi Penns ylvania Virginia Tenness ee Oregon Vermont South Carolina Texas Georgia Florida Ohio Idaho Iowa Kans as orth Carolina Michigan Kentucky United States South Dakota Oklahoma Wes t Virginia Hawaii evada Illinois A rkansas Wyoming ebraska ew Jersey Arizona Maine Louisiana Alas ka Delaware ew York Minnesota Rhode Is land Colorado Wisconsin Indiana Connecticut orth Dakota Mass achusetts Missouri California Maryland

1.0%

Source: U.S. Census Bureau, PolEcon calculations

19

any other state. Moreover, as noted, taxes account for only a small percentage of the overall contribution made by NH’s spirits and wine control system.

Profit Margins and et Fiscal Impacts Profit as a percentage of state alcoholic beverage sales is one metric of the ability of staterun alcoholic beverage systems to earn a return (revenues for the state) on the public funds that operate the system. It is not, however, the only or even necessarily the best measure of the contribution of state-run beverage systems to state finances. States with the highest profit margins tend to be states that sell alcohol at the wholesale but not at the retail level. States such as Michigan, Iowa, Oregon and Utah contract with agents for wholesale and retail distribution of alcoholic beverages, they have fewer expenses and thus tend to have higher net margins. They do not, however, provide the most revenue to their states general fund. Using data and definitions from the U.S. Census Bureau’s annual Census of State and Local Government Finances, Figure 8 highlights the net profit margins of state-operated alcohol sales and distribution systems.4

Figure 8

Net Profit Margin of State Controlled Liquor and Wine Operations Profit Margins of State Run Alcoholic Beverage Systems Oregon* Ohio*

37.0% 32.0%

Iowa*

29.0% 28.0%

Utah ew Hampshire Michigan*

27.0% 19.0% 19.0%

Mississippi Virginia

18.0%

Montana

14.0% 14.0%

Idaho West Virginia* Washington

13.0% 12.0%

Wyoming Pennsylvania Alabama

9.0% 9.0% 6.0%

Vermont -2.0% -5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

3 0.0%

35 .0 %

40.0%

Source: U,S. Census Bureau, “Finances of State and Local Gov ernment, 2008”, NH Liquor Commission Annual Repor ts, PolEcon

State liquor and wine control systems that have shed their retail operations or who contract with private agents for retail distribution have a different cost structure, foregoing a portion of the mark-up revenue from beverage sales to agents and private retailers. They may have higher margins but they do not necessarily return the most revenue to their states.

20

Figure 9 highlights the difference between the net profit margins of state alcoholic beverage control systems and the amount of per capita revenue those systems provide to their state’s general fund. Each red marker on Figure 9 indicates the net profit margin of one state’s alcoholic beverage control system, with higher net profitability indicated by markers further to the right on the “x” or bottom axis of the graph. The elevation of each red marker, or how high each marker is on the “y” or left axis, indicates how much per capita revenue a state alcoholic control system transfers to its state general fund.

Figure 9

There is Little Relationship Between Profit Margins and Per Capita Transfers to State General Fund Per Capita Transfer to General Fund

$90

New Ha mpshire

$80 $70 $60

Washington

$50

Alabama

Utah

$40

Oregon

$30

Michigan

$20 $10 $0 -5.0%

Pennsylvania

0.0%

5.0%

10 .0 %

Iowa

Ohio

Virginia 1 5.0%

20 .0 % 2 5.0%

30 .0 %

35.0% 40 .0 %

et Profit Marg in

Sourc e: U.S. Census Burea u, State and Local F inances, 2008, PolE con calculations

The chart shows that net profit margins and per capita contributions to a state’s general revenues are not strongly related. New Hampshire has a relatively high net profit margin although some control states are higher, yet NH’s wine and spirits operation contributes far more per capita to the state’s general fund than does the spirits and wine sales system of an any other control state.

Several states have lower net margins but return more to their state’s general fund than the highest margin states. States that control wholesale but not retail operations have higher net profit margins (they generally have lower cost structures) but relatively lower per capita transfer to their state’s general fund. This finding is especially relevant when considering proposals that look to substitute state retail sales and margins with increased wholesale operations in a state.

NH’s relatively high net margins on spirits and wine sales but still lower than several states suggest that the state may trade somewhat lower net profit margins for larger volumes and

21

the branding that comes from being identified as the lowest cost retailer of spirits in the region. In turn, this contributes to the state’s ability to have the highest per capita retail sales and largest per capita transfers to general fund of any state in the nation. Finally, some states have relatively low per capita contributions to the general fund from beverage sales, but earn more revenue via sales taxes that are not part of their states alcoholic beverage control systems.5

Summary of Fiscal Benchmarks: •

New Hampshire’s spirits and wine control system contributes more revenue per capita to the state’s general fund than does any other “control” state spirits and wine control system.

•

New Hampshire may forego some sales margin to achieve higher sales volumes and brand the state as the lowest cost provider of alcoholic beverages in the region.

•

High profit margins are not an indication of how much or effectively staterun systems contribute to state revenues.

•

New Hampshire’s liquor and wine distribution and sales system contributes a higher percentage of the revenue it provides to state government in the form of profits on the sale of beverages (rather than from taxes and fees) than does any other state.

VI. Privatization in Other States Reviewing the experience of other states with expanded sales of spirits and wine to private retailers can help New Hampshire gain insight into what it may expect from proposals to expand spirits sales to retailers across the state. At the same time, expansion of spirits retailing in NH is likely to differ from other states for a number of reasons. First, states that have reduced state control of spirits or wine sales through some form of privatization have generally had below average sales of controlled beverages (wine or spirits). In addition, the beverage(s) over which the state exercised the most control comprised a lower percentage of the state’s overall beverage sales prior to expanding private sales. Both suggest that allowing alcoholic beverage sales at private retailers occurred, at least in in part, in response to constrained access to some alcoholic beverages. In New Hampshire, per capita spirit sales are the highest in the nation and as a percentage of all alcohol sold in the state, spirits are higher than all but the District of Columbia.

In states where access to wine was limited or constrained because of state-control could be expected to have their sales increase to levels closer to comparable states after allowing sales at private retail outlets. In the case of wine, that is what occurred in most states. This “regression to

22

the mean�6 cannot occur in NH for spirits because there are limits to volume of sales that NH’s already elevated levels can capture from around the region. Instead, spirits sales will be shifted from state stores to private retailers, with some gain in convenience sales of spirits that will likely come at the expense of wine or beer sales in the state.

Fewer states have expanded retail spirits sales to private retailers than have done so for wine sales. Figure 10 shows growth in per capita spirits sales in these states both before and after spirits sales were allowed at private retail outlets, as well as growth in the Northeast region and the U.S. since 1980.7 The percentage of alcohol sales comprised by spirits in Iowa was just 68% of the percentage of comparable states prior to privatization, suggesting that the state may have had constrained access to spirits prior to allowing private sales and that the state was a good candidate to experience increased sales when retail spirits outlets were expanded. Figure 10, shows that Iowa, which privatized retail spirits sales in 1987 (wine sales were privatized in 1985), experienced a significant bump in per capita spirits sales during the privatization year (perhaps because of initial stocking of private retailers). However, that increase was followed by a nearly 10 year trend of declining sales of spirits before per capita sales increased again in 1996. Sales growth then accelerated through the mid-to-late 2000s. The 10 year interval between privatization and growth in per capita sales suggests that other factors, economic, demographic, competitive with other states, etc. were responsible for sales growth, although it is possible that without privatization, those factors may not have translated into growth in per capita sales.

Figure 10

Changes in Per Capita (Age 21+) Sales of Spirits in States Before and After Privatization 3.0

Iowa Maine Northeast

2.5

Privatized in 2004

2.0

1.5

West Virginia U.S

Privatized in 1987

1.0 Privatized in 1991

0.5

0.0 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Source: National Institutes of Health, Alcohol Policy Information Sytem, PolEcon Calculations

23

Spirits sales as a percentage of all alcoholic beverages sold in West Virginia were just 73 percent of the average of states in the South Atlantic region prior to privatization. The state also experienced a bump in sales in 1991 when it privatized retail spirits sales, but sales have been largely stagnant since that time, showing only modest growth during the 2000s. Maine experienced its largest increase in per capita sales during the two years prior to privatizing its wholesale and retail spirits sales in 2004. Unlike Iowa or West Virginia, Maine showed only limited evidence of constrained market access to spirits prior to privatization, as the percentage of spirits sold in the state was just below (96 percent) the level of the Northeast regional average.

Thus a large increase in sales should not have been anticipated in Maine. In fact, since privatization, spirits sales as a percentage of alcohol sold in Maine have not shown a large increase but they have grown at about the same rate as the average of all Northeastern states but somewhat more slowly than growth in New Hampshire.

Price Impacts There is little publicly available data on spirits prices across states. According to the Iowa Alcoholic Beverages Division, during the first four years after privatization, the per bottle price of spirits rose by an average of 7.4 percent more than they would have under full state control over sales. They noted that during the first year of privatized sales retailers where reluctant to raise prices noticeably in order to avoid negative public reaction to price changes that could be attributed to privatization.8 In Maine, prices per bottle for the top ten selling brands were $1 to $3.50 higher than in New Hampshire according to the 2004 Maine Fiscal Report but it is not clear how much higher those prices are than they would have been under a continued system of staterun stores.

Revenues The Iowa Alcoholic Beverages Division indicates that profits from wine and liquor operations increased by approximately $11 million per year after privatization of both retail wine and liquor sales. They also note that this was the result of reduced costs associated with closing retail stores rather than increased sales revenues.

In Maine, comparisons of before and after privatization revenues depend largely on the treatment of the 10 year, lump sum, lease payments the State of Maine received from the Maine Beverage Company for the rights to provide wholesale beverage operations in the state. The state received a $100 million lease payment in 2004, and a $50 million payment in 2005. If the

24

lump sum lease payments are spread over the 10 year lease period (future value issues aside9), annual revenues from beverage sales and taxes alone are much lower than before privatization occurred. Figure 11 shows how state revenues compare before and after privatization in Maine.

Annuitizing lump sum payments shows that revenues in 2010 have rebounded to near preprivatization levels. Assigning future values to the annuitized treatment of the lump sum payments would result in some modest increases in annual revenue in the most recent fiscal years, over pre-privatization levels, depending on how future values of the lump sum payments are calculated.

Figure 11

Annual Revenue from Maine Alcoholic Beverage Operations From Bev erage Sales

Annuitized Lease Payments

Taxes

$45 $40 $35 $30

$12.9

$13.5

$13.9 $17.0

$17.4

$17.4

$16.9

$15.6

$15.6

$15.6

$14.8

Million s

$25 $14.4

$20

$14.4

$15 $24.2

$25.2

$26.1

$15.6 $15.6

$10 $10.0

$15.6

$5 $2.2

$0 2001

2002

2003

2004

$0.0 2005

$4.4

$5.6

$6.2

$6.8

$2.6 2006

2007

2008

2009

2010

Sour ce: State of Maine , “R evenue Trends ”, PolEcon calc ulations

VII. Impacts on Sales at State-Operated Stores For some, the only relevant considerations in a debate over the expansion of retail spirits sales in New Hampshire is whether it will increase access and convenience for consumers, or that it may reduce state government’s role in the sale of a consumer commodity. Others will want a more complete understanding of the likely impacts of expansion. A thorough understanding of the impacts of expansion is not possible using simple “rules-of-thumb” or the orthodoxy of any ideology. Insight into likely impacts is necessary for informed policy but challenging for a number of reasons:

•

Changes in convenience and access may impact the volume of spirits 25

sold, as well as price and volume of wine and beer sold.

•

Sales at different locations and to different types of consumers (i.e. state versus out-of-state) will be affected differently and have substantial impacts on state revenues.

•

Expansion will affect the hospitality industry and may affect the distribution and sale of other alcoholic beverages as increased access (convenience) to spirits results in consumers shifting (cross substituting) some purchases away from beer and wine to spirits.

•

Most spirits sales at private outlets will be drawn from existing stateoperated retail stores and their impact will not reflect new or increased economic activity. Moreover, spirits sales in these outlets will predominately result in the altering of the product mix of stores (toward spirits and away from other products) requiring no additional retail space or employment.

•

Spirits sales will primarily occur in existing retail outlets (“big box,” supermarket, grocery, convenience and other - such as warehouse ‘clubs” etc.) and will generate few new retail establishments.

•

Unlike some states, most of the state revenue received from alcoholic beverages in NH results from sales at state-operated stores at the retail level, rather than taxes and fees, making a goal of revenue neutrality more difficult under expansion of retail spirits sales when a majority of sales at private retailers will come from existing state-run stores.

•

Expansion of retail spirits sales could have broad (statewide or community-wide) or narrow (neighborhoods, individuals) negative social impacts. These are important impacts subject to much research which should be included in any fiscal or economic accounting. However, they are beyond the scope of this report.

This section of the report attempts to overcome some of the challenges listed above to increase policymaker’s understanding of the implications of expanding retail spirits sales, and to help determine whether these impacts detract from or enhance any perceived benefits of expansion, such as greater access and consumer convenience or reductions in state government activities.

PolEcon analyzed 12 years of monthly spirits and wine sales by location in New Hampshire and developed econometric models to determine how sales are affected by number of variables, how sales at different locations are affected, and the impact of sales on other state revenues. With the insights gained from those analyses, PolEcon constructed a model to calculate

26

the fiscal impacts of proposals to expand spirits sales to private retail outlets. The model is presented in Section VIII of this report.

Sales Impacts are Key to Understanding All Impacts From a fiscal perspective, the basic calculus of expanded retail sales is this: how much of the sales of spirits by private retailers will come at the expense of spirits sales at state-operated retail stores, and can sales by private retailers increase enough to earn the state wholesale revenues large enough to offset the loss of retail sales at state-operated stores. When alcoholic beverage sales occur at state-operated retail stores, the state earns both the wholesale and retail mark-ups (approximately 47 percent) on each sale, making sales at state-operated stores much more profitable than the sales at 10 or 15 percent below retail price it would earn on wholesale transactions to private retailers under one proposal (HB 1251).

Recent proposals for expanded retailing would result in only a small increase in licensing and warehousing fees from private retailers. Up-front wholesale revenues to the state resulting from an initial “stocking” of inventory at private retailers is simply a timing issue that provides the state with a one-time boost to wholesale revenues in an “up-front” manner, rather than spread over the first several months of expanded retailing.

Fiscal Impacts of expanded spirits retailing will largely be determined by three factors:

•

How much of the spirits sales of private retailers will be drawn from existing state-run spirits and wine outlet customers.

•

How much sales by private retailers will be “new” or increased sales over and above the volume of sales that occurred prior to expansion.

•

How pricing policies of private retailers will affect the volume of sales (and thus state wholesale revenues), and how these price effects will impact sales at state-operated outlets, as well as how they affect the State of NH’s “brand” as a high-quality, lower-price spirits retailer.

None of these can be definitively forecast but there is data and experience that allow sound estimates to be produced.

Sales at Private Retailers Will Come at the Expense of Sales at State-Operated Stores This is generally acknowledged by all interested parties, including proponents of expansion of spirits retailing. A 2008 NH Grocers Association study assumes the distribution of spirits sales between state-operated outlets and private retailers will approximate the distribution pattern of wine sales. On a volume basis that means private retailers would account for over 50

27

percent of the volume of retail spirits sales (not including “on-premise” sales to hotels, restaurants bars, and other organizations) in New Hampshire. Unless overall spirits sales increase by more than 50 percent after expansion, this would mean that most of the retail spirits sales must come at the expense of state-run store sales. As noted earlier, the experience of other states with allowing private retailers to sell spirits does not indicated that such a large increase in sales, or even a much smaller increase, will occur following the authorization of private sales (see data and discussion of the Iowa, West Virginia, and Maine experiences in Section VI of this report).

Nevertheless, for policymakers to have a sufficient level of confidence in the analyses and fiscal estimates in this report, it is important to develop a solid empirical justification for the belief that with expansion of spirits sales to private retailers, sales will come at the expense of sales at state-operated stores

Evidence that Private Spirits Sales Will Come at the Expense of State-Run Store Sales To better understand the pattern of both spirits and wine sales at state-run stores and at private “off-premise” outlets, econometric techniques (regression analysis) were used to analyze monthly NH spirits and wine sales data going back to 1998 (FY1999). Data for all NH liquor and wine outlets and for “off-premise” wholesale wine sales (made to private retail outlets such as grocery and convenience stores) were analyzed.

There are strong seasonal patterns to spirits and wine sales in NH, meaning that sales increase or decrease in repeating and predictable patterns throughout the year. Unless sales data are adjusted to account for these patterns, accurate sales trends cannot be distinguished from the regular rise and fall in sales that occur throughout the year. To accurately model spirits and wine sales and to determine factors that affect the volume of sales, data must be adjusted for these seasonal patterns. PolEcon used the U.S. Census Bureau’s X12 seasonal adjustment procedure and software to remove the seasonal patterns from monthly sales data. After seasonal adjustment, the changes in sales volume that remain can be attributed to factors other than normal seasonal patterns.

Figure 12 shows that alcoholic beverage sales (wine in Figure 12) in NH can be accurately modeled using just a few key variables. The chart also shows that even with seasonal adjustment of sales data, large and unexpected month-to-month swings can occur. Weather or economic events that temporarily affect travel and visits to NH may account for some of the below expectation sales in some months but most months where sales were significantly lower than

28

expectations were preceded by months with higher than expected sales, suggesting that promotions of other events may have accelerated sales in some months while slowing them in subsequent months. Models for both wine and spirits, and each type of store (highway, border, or “inland”) as well as off premise wine sales were developed to better understand the relationships between variables that effect sales. Insights gained from the modeling process helped guide the sales and revenue impact model presented in the following section of this report.

Figure 12

State Stores Wine Sales Can be Predicted With Reasonable Accuracy Using a Few Key Variables Monthly Wine (Bottles)

1,000,000

900,000

800,000

700,000

600,000

Seasonally Adjusted Wine Sales Actual 500,000

Model Predicted Wine Sale s 400,000 02

03

04

05

06

07

08

09

10

11

This study grouped state-operated spirits and wine outlets into the following categories depending on their location, “highway”/major inter-state transportation route, ‘border”, and ‘inland”. Except for the highway category, there is room for discretion in fitting stores into these categories. Our assignment of stores to categories is imperfect, but the resulting analyses produced significant results and added insights that would likely only be strengthened with a more definitive assignment of stores, and perhaps the development of additional store categories.10 Even without the detailed analyses presented in this report, NH’s already exceptionally high level of spirits sales and lack of evidence of constrained access to spirits imply that there is limited opportunity to expand the volume of retail spirits sales in the state (although pricing and changes in the mix of spirits sold could increase dollar values above increases in volume).

Nevertheless, our extensive analysis of data suggests that expansion of spirits retailing will almost exclusively draw from sales of NH’s state-run liquor and wine outlet sales. This conclusion is

29

based on:

•

Seasonal patterns in both spirits and wine sales and the differences in seasonal patterns seen between state-operated store wine sales, “off-premise” wine sales, and the seasonal patterns of sales among different categories of state-operated stores.

•

The relationship of state-operated spirits and wine sales to gasoline sales in the state and the different (lack of) relationship seen between gasoline sales and off-premise wine sales.

•

Differences in the mix of products between spirits and wine that are sold at stateoperated stores in different locations (highway, border, and inland).

•

The relationship state-operated store spirits and wine sales in different locations have to NH, regional, and national economic conditions.

A full reporting of these results requires more space that can be afforded in this report.

Highly summarized finding are presented here. Readers are encouraged to contact the author for more details. Key findings that support the conclusion that expanded retail sales of spirits will come from sales at state-operated stores include:

•

Spirits and wine sales have a seasonal element to sales, regardless of where they are sold (more sold before Christmas and New Year’s for instance), but seasonal patterns also occur at state-run liquor and wine outlets during times when travel to NH increases, especially those along highways and those in recreational areas. For off-premise wine, the seasonal patterns are less severe and are less related to travel patterns in the state (Figure 13).

Figure 1 3

State Stores on Highways Show More Dramatic Seasonal Patterns of Wine Sales Suggesting They Attract the Bulk of Non-Resident Wine Sales Monthly Change s in the V olume of W ine Sales (Index)

20 0 18 0 16 0 14 0 12 0 10 0 80 60 40

Highw ay Stores

20

Off-Premise Sales

0 03

04

05

06

07

08

09

10

11

30

•

Highway stores account for a disproportionate share of the wine sales at state-operated stores (a higher percentage than the percentage of all sales of spirits at state-operated stores at highway locations). This occurs because highway stores make a disproportionate percentage of sales to visitors and those less likely to go “off-highway” to buy wine or spirits, while sales at inland and border stores lose wine sales to supermarkets, big-box retailers, and convenience stores. For spirits sales, however, neither inland, border, or highway stores lose sales to private retailers and thus border and inland stores sell a higher percentage of the spirits sold at state-operated stores than their percentage of sales of wine at state-operated stores.

•

Higher levels of gasoline sales in NH are associated with increased wine sales at state-operated stores, indicating a strong relationship between visits to NH and wine sales especially at highway stores and those near recreational areas.

Off-premise wine sales show no relationship to NH gasoline sales suggesting they are not significantly affected by sales to out-of-state residents.

•

State revenues that benefit strongly from out-of-state visitors, such as meals and rooms taxes, tobacco taxes, gasoline taxes, show a positive and statistically significant relationship to wine sales at state-operated stores, but no significant relationship to off-premise wine sales (sales at private retail outlets).

•

Spirits sales at state-operated stores are not significantly related to increased sales of gasoline in NH (although highway stores show a stronger relationship with gasoline sales than do border or inland stores). This seemingly counterintuitive finding warrants explanation because wine sales at state-operated stores (especially highway stores), are positively related to gasoline sales – higher wine sales occur in months with higher gasoline sales.11 First, wine sales at state-operated stores occur disproportionately at highway stores (because inland and border stores lose sales to private retailers) and sales at highway stores increase as traffic counts (and gasoline sales) increase in NH. For spirits sales, however, state inland and border stores do not compete with private (NH) retailers for sales and thus a larger percentage of the customer base for spirits in NH does not depend on seasonal visits and travel patterns. Simply put, spirits sales at state-operated stores in NH are drawn more equally from visitor-dependent and in-state (local) customer sales. With expanded spirits sales, the pattern of sales of spirits will become more similar to wine sales. Spirits sales at state-operated stores will become more dependent on out-of-state customers and seasonal visits and will become more strongly associated with gasoline sales and the vacation, recreation, travel and tourism industry, as well as commuting patterns of potential customers. Under expanded retail sales of spirits, stateoperated liquor and wine outlets will move a giant step toward becoming dependent on patterns and trends in NH’s leisure, recreation and travel industries.

31

•

Off-premise wine sales and wine sales at inland state-operated stores are more responsive to economic conditions in NH, suggesting that they have a more similar customer base, while highway and border store sales are more responsive to regional (New England or Massachusetts) economic conditions.

The Implications of Sales Patterns on Expanded Retail Sales of Spirits The most important implication of the sales patterns highlighted above is that spirits sales will primarily come at the expense of sales at state-operated stores, either in the form of captured sales from NH residents or captured sales to non-residents at populated border towns. That inference also implies that:

•

Sales at state-operated stores will increasingly have to rely on out-of-state residents and marketing for sales.

•

Factors beyond the control of the NH Liquor Commission, such as leisure and recreational trends, the relative attractiveness of NH to visitors, gasoline prices, regional population and growth patterns, will have a greater influence on sales of wine and spirits at NH’s liquor and wine outlets.

•

A larger loss of revenue, as state-operated store sales (where both retail and wholesale margins are captured) are replaced by revenue from wholesale distribution to retailers.

•

It will be more difficult for NH to achieve revenue neutrality from expanding retail spirits sales.

•

With fewer sales at state-operated stores over which the state will have the ability to set retail prices, it will be harder for the NH Liquor Commission to achieve any desired or required level of revenues for state budgeting purposes.

VIII. Fiscal Impacts With insights gained from the analyses in this report, PolEcon developed a spreadsheetbased spirits sales and state revenue model that can be used to assess the fiscal impacts of any proposal to expand retail spirits sales in New Hampshire. The model allows users to change key variables and assumptions about retail spirits sales and different aspects of expansion proposals to estimate how sales at state-operated and private retail outlets and associated revenues will be affected. The model allows users to incorporate any level of increase in spirits sales resulting from the ‘convenience” associated with adding a large number of private retail outlets. The model also calculates sales impacts related to any level of price increase following expansion of sales to

32

private retailers and contains a feedback loop to incorporate price impacts, using user-defined price elasticities, on state revenues from wholesaling, and adjusts final revenue impacts estimates based on expectations of the degree to which state-run stores would “re-capture” spirits sales lost by private retailers via price effects. In addition to calculating revenue impacts, the model determines the required level of increased sales for expanded spirits retailing to be revenue neutral. Although this report does not advocate for or make any recommendations regarding options to achieve revenue neutrality, our fiscal impact model does makes calculations relative to alternatives that could be used to achieve revenue neutrality in the form of an excise of “gallonage” tax, or ad valorem tax on spirits applied to sales at private retail outlets. Model outputs for one scenario, based on the provision of HB 1251 of the 2012 session of the NH legislature, are presented in Appendix A.

Baseline Scenario A number of possible scenarios for expansion of spirits retailing exist, and a number of variables and assumptions can greatly influence estimated fiscal impacts. There is no “one answer” to the question of “what will be the fiscal impact of expanded spirits retailing in NH”.

Rather, the answer will be “it depends”. To accommodate this, our report creates a baseline scenario of variables and assumptions, based on the provisions contained in HB 1251, which can then be used to demonstrate the sensitivity of fiscal impacts to changes in key variables and assumptions. With this approach, policymakers can gain an understanding of how changes to any proposal, or its assumptions, will affect fiscal impacts. Policymakers can also gain an understanding of the drivers and levers that can help them achieve desired objectives, or increase their confidence in a conclusion that desired policy objectives cannot be accomplished with the policy levers available. In addition, because the model can incorporate different user-defined assumptions, policymakers can have confidence that the fiscal impacts produced with the model are not the result of unrealistic or “black-box” assumptions.

Our baseline scenario for expanding spirits retailing in NH includes the following key assumptions:

•

The distribution of spirits sales between private and state-run stores will eventually become similar to the distribution of wine sales.

•

The model begins by assuming that to achieve that distribution of sales in a fixed system where total spirits sales in NH are neither increased nor decreased, all (100 percent) of the sales made at private retail outlets will

33

have to come at the expense of sales at state-operated stores. However, the model calculates fiscal impacts for a range of values where anywhere from 80 percent to 100 percent of spirits sales at private retailers come at the expense of sales at state-run stores. In addition, the models incorporates user defined assumptions about changes in sales related to “convenience” and price effects for their impact on the distribution of sales between stateoperated and private retail outlets and resulting fiscal impacts

•

The state provides a discount to private retailers equal to 10 percent of the retail price of spirits at state-operated stores for private retailers with combined spirits and wine sales of more than $350,000 and 15 percent for private retailers with combined spirits and wine sales of less than $350,000.

Discussions with private-sector executives involved in spirits sales suggested that about 90 percent of industry sales are likely to go to retailers with combined sales of $350,000 or more and 10 percent to retailers with less than $350,000 in sales. Our model incorporates this distribution of discounts.

•

The price of spirits at private retailers will rise, on average, by 10 percent more than prices at state-run stores and that the price elasticity of demand for spirits will be -.8,12 for a resulting decline in spirits sales by private retailers of 8.0 percent over what sales would have been if prices were similar to prices at state-operated stores. This is offset somewhat by sales growth of 1.5 percent because of added convenient access to spirits.

•

The baseline scenario assumes that 20 percent of the reduced private retail sales of spirits resulting from price increases will be re-captured by via sales at state-operated stores.

•

The model assumes a total combined wholesale and retail mark-up at staterun stores at retail is 47.5 percent of the price of spirits.

•

The model uses a net profit margin on state-operated store sales of 24 percent.13

•

Increased license and warehouse revenue will equal $1.3 million.14

•

The addition of more than 1,000 retail spirits licenses in NH will increase enforcement and compliance costs by $950,000 annually.15

In this scenario, the net fiscal impact to state government ranges from a loss of $13.4 million of state revenue, if 80 percent of private sector spirits sales come at the expense of sales at state-operated stores, to a loss $16.8 million of state revenue, if all private sector sales (except those related to increases due to the added convenience of expanded retailing) came at the expense of sales at state-operated stores. Figure 14 shows 34

the critical relationship between the percentage of sales of spirits by private retailers that come at the expense of state-run stores and the net fiscal impact on the state.

Figure 14

The More Private Retailers Draw Sales from State-Operated Stores, the More Negative Will be the Net Fiscal Impact from Expansion %of Private Sector Spirit Sales That Come From State-Store Sales -$10 80 .0%

85.0%

90.0%

95 .0%

100. 0%

-$11 -$12

e t Fiscal Impact

Millions

-$13 -$14 -$15 -$16 -$17

($13.4) ($13.6) ($13.7) ($13.9) ($14.1) ($14.2) ($14.4) ($14.6) ($14.8) ($14.9) ($15.1) ($15.3) ($15.4) ($15.6) ($15.8) ($16.0) ($16.1) ($16.3) ($16.5) ($16.7) ($16.8)

-$18

When private sector sales come at the expense of spirits sales at state-run stores, the state loses the wholesale and retail margin (about 47.5 percent on average) of the sale, but gains an amount equal to the difference between its cost of goods sold and either the 85 or 90 percent of retail prices it will charge private sector retailers of spirits.

The

average price of a bottle of spirits in NH in 2011 was $14.91 suggesting a wholesale and retail margin of about $4.80 on each bottle of spirits sold in state-run stores. In contrast, the margin earned on each sale to a private retailer, discounted at either 10 or 15 percent discounted sale to a private sector retailer would have produced margins of between $3.24 and $3.31 on the average price of a bottle of spirits.16 Thus when spirits sales at state-operated stores are replaced by sales at private retail outlets the state earns substantially less revenue on each sale.

Figure 15 illustrates the impact that losing sales at state-operated stores to private retailers has on revenues from sales to private retailers will have (positive) and the overall net revenue impact on state revenue of exchanging sales at state-operated outlets for sales at private retailers (decrease in state-operated store sales plus increases in revenue from discounted sales to retailers). The higher the percentage of spirits sold at private retail outlets that come at the

35

expense of sales at state-operated stores, the more revenue from discounted sales to retailers increases but the larger the overall net negative fiscal impact.

Figure 15

The More Private Sector Spirit Sales Draw From State Store Sales the Larger are the Negative Fiscal Impacts of the Proposal $135

-$10

$125 $120 $115 $110 $105 $100

-$11 $ 124.2 $1 22.9 $12 1.7 $120 .4 $119.2 $ 118.0 $1 16.7 -$1 3.4-$ 13.6 $ 115.5 $1 14.2 -$ 13.7-$13.9 $11 3.0 -$14.1 $11 1.7 -$14 .2-$1 4.4 $110 .5 -$14 $109.3 .6 $ 108.0-$1 4.8 -$ 14.9 $106.8 -$15.1 $ 105.5 -$15.3-$15.4 $1 04.3 -$15 .6 $10 3.1 -$15.8 $101 .8 -$16 .0 $100.6 -$1 6.1 $9 9.3 -$ 16.3-$16.5 -$16.7-$16.8

-$12 -$13 -$14 -$15

Millions et Fiscal I mp act

Reven ue From Sales to Private Retailers Million s

$130

-$16

Rev enue F ro m Dis counted Sales to P riv ate Retailers

-$17

$95

et F iscal Impa ct $90

-$18 80.0%

85.0%

90.0%

95.0%

100.0%

% o f Privat e Secto r Sales That Come From State-Store Sales

Achieving Revenue eutrality Some policymakers open to the concept of expanded spirits retailing in New Hampshire will evaluate the efficacy of HB 1251 or any similar proposal based on its ability to be “revenue neutral,” neither adding nor subtracting from the revenues of the state’s general fund. Transfers from the NH Liquor Commission to the general fund are NH’s fourth largest source of general fund revenue, behind only business taxes, the meals, rooms and rentals tax, and tobacco taxes.

Transfers to the general fund resulting from the sale of spirits and wine have played a large role in helping NH policymakers achieve two fiscal policies that enjoy broad public support among New Hampshire citizens: exporting as much of the burden of paying for government in NH to residents of other states as is possible, and avoiding the imposition of any broad-based tax. Trends in the economy and state government revenue suggest that NH’s revenue structure will continue to be challenged to produce the resources sufficient to fund state programs and services. Any proposal that risks reducing the revenue transferred from the Liquor Commission to NH’s general fund also risks increasing pressures to adopt policies that would place an additional or objectionable increase in tax burden on the citizens of New Hampshire.

A number of levers exist that could allow HB 1251 or any proposal for expanded spirits

36

retailing achieve a goal of revenue neutrality. All of them would be objectionable to some lawmakers as they require increasing fees, charges, or taxes to compensate for the net loss of revenues resulting from the shift in spirits sales from state-operated to private retail outlets. It is not the purpose of this report to advocate for any policy designed to achieve revenue neutrality under a system of expanded retail spirits sales. This report seeks to inform policy debates by highlighting the likely magnitude of the revenue neutrality issue should it become a part of a debate over expanding spirits retailing. With a loss of transfers from the NH Liquor Commission to the state’s general fund of between $13.4 and $16.8 million, revenue neutrality is a challenging task. There are at least four approaches that can be undertaken individually, or in combination, to achieve a goal of revenue neutrality:

•

Adjust licensing and other fees administered by the NH Liquor Commission.

This approach would be unpopular and it would be unable to achieve revenue neutrality on its own. Current licensing revenue amounts to less than $4 million annually.

•

Adopt an excise tax on spirits. NH is one of only a few states that do not levy a tax on each gallon of spirits sold in the state, preferring instead to generate revenue via high sales volume and mark-ups (NH’s spirits mark-up is in-line with what appears to be a control-state average of about 45 percent). NH does apply a gallonage tax to sales of beer. Under our baseline scenario, PolEcon estimates that the gallonage tax rate in NH required to achieve revenue neutrality under the provisions of HB 1251 would have to be about $6.10 per gallon if the tax is applied only to private sector sales, and between $2.50 and $3.00 per gallon if it were applied to sales to both private and state-operated retail outlets. Figure 16 shows how NH’s gallonage tax would compare with other states under each of those scenarios. The price implications of a gallonage tax at the $6.10 rate would have added and average of $1.81 to each bottle of spirits sold at private outlets if applied only to sales at private sector retail outlets, and about $.72 to $.90 if applied to spirits sales at any outlet. The price increase related to a gallonage tax would reduce sales and produce feedback effects that have not been incorporated into our revenue model. This could increase the loss of revenue for the state, the magnitude of which would vary significantly depending on whether the tax was applied to all or just private sales, but which could push the tax rate required for revenue neutrality higher.

•

Many states levy their general sales taxes on the sale of spirits and wine, although Massachusetts recently repealed such a provision. Other states, like Pennsylvania, apply selective sales taxes on spirits and wine. Achieving revenue neutrality via a selective sales tax applied to spirits would require a tax rate of between 4.8 and 5.9 percent if applied to all spirits sales. The price impact on the average bottle purchased in 2011 would have been between 72

37

Figure 16

Applied Only to Private Sector Sales, a Gallonage Tax to Achieve Revenue Neutrality Would Place NH’s Tax Rate in the Middle of the Pack. Applied to All Spirits Sales it Would Be Relatively Lo w – But Price Impacts Would Lower Sales and Increase Tax Rates Required for Revenue Neutrality $30 $25 $20 $15 $10

H Rate Applied to Private Sector Sales Only H Rate Applied to All Spirit Sales

$0

Washington Oregon Virginia Alabama Alas ka Iowa orth Carolina Utah Idaho Michigan Ohio Montana I llinois Pennsylvania Mississippi Kentucky Florida ew York H (Private Sector Only) ew Mexico Hawaii Oklahoma ew Jers ey Delaware Maine Minnesota South Carolina Connecticut Tennessee Mass achusetts South Dakota Georgia ebraska Rhode I sland evada California Wiscons in A rizona H (All Spirit Sales) I ndiana Arkans as Kansas Louisiana orth Dakota Texas Colorado Missouri West Virginia D.C. Maryland Vermont Wyoming

$5

Source: Alcohol Polic y Information System, National Institutes of Health , PolEcon calcula tions

and 90 cents per bottle. As with a gallonage tax, these price increases would reduce and/or shift sales depending on how applied, potentially increasing the amount of revenue and thus tax rate needed to achieve revenue neutrality.

Those feedback effects have not been calculated here.

•

Recoup lost revenue via a higher volume of sales at private outlets, producing more revenue to the state from discounted sales to retailers. This only contributes to revenue neutrality if increased sales do not come at the expense of sales at state-operated stores. For every sale at a state-operated store to a private outlet, the state will take in less revenue than in the prior year and the bar for revenue neutrality gets higher. If we the distribution of sales of spirits between state-operated and private retail outlets would initially be similar to the distribution of sales for wine, overall spirits sales in the state would have to increase by between 22 and 28 percent to achieve revenue neutrality (Figure 17).

•

Assume other revenues will grow in response to expanded sales of spirits. PolEcon econometrically tested the relationships between off-premise wine sales (a surrogate for what would occur under expanded spirits retailing) and found no statistically significant relationship between off-premise (those at private retail outlets), and tobacco tax, gasoline tax, or meals and rooms tax revenues. Wine sales at stateoperated stores did evidence a small, positive, and statistically significant relationship with both gasoline tax revenue and meals and rooms tax revenue but not cigarette tax revenue. This result is expected given the knowledge gained about the wine customer base of both private retail and state-operated retail outlets. Customers of stateoperated stores (especially highway stores) are much more likely to be residents from another state and their presence or absence from NH is more likely to affect

38

Figure 17

To Achieve Revenue Neutrality, Spirits Sales Would Have to Increase 22 to 28 Percent Over Levels That are Already the Highest (by Far) in the Country 35%

-$10

33%

-$11

31% -$12

-$13.7 -$13.9 -$14.1 -$14.2 -$14 -$14.4 -$14.6 -$14.8 -$14.9 -$15.1 -$15.3 -$15 -$15.4 -$15.6 -$15.8 -$16.0 -$16.1 -$16.3 -$16 -$16.5 -$16.7 -$16.8 Increa se in Sales to Achieve Revenue eutrality

25% 23% 21% 19%

Millions

-$13

-$13.6 27% -$13.4

et Fis cal I mpa ct

Who les ale Reven ue

29%

-$17

17%

et Fiscal Impact of HB1251

15%

-$18 80.0%

85.0%

90.0%

95.0%

100.0%

% of Private Sec tor Sal es That Come From State-Store Sale s

collections of selective sales tax revenues in NH than are in-state wine purchasers who will purchase cigarettes, dine out, or buy gasoline in their normal course of activity, irrespective of their decision to purchase wine or spirits in NH or where in NH they make those purchases. Interestingly, changes in collections of selective sales taxes were not associated with changes in spirits sales at state-operated stores.

Again, this fits completely with the insights gained about customers at state-operated and private retailers. Wine customers at state-operated stores are more likely to be from out-of-state than are customers at private retailers, while spirits customers at state-operated stores reflect more balance between in-state and out-of-state resident because there are no private sellers of spirits. The relationship between sales of spirits and changes in selective sales tax revenues at state-operated stores would become more muted in that circumstance. Business taxes will not contribute much to revenue neutrality. As noted, the employment impact of expanded spirits retailing is negligible, meaning business enterprise tax revenues will not be affected. Our baseline scenario assumes that the dollar value of spirits sales at private retailers would be approximately $120 to $148 million dollars initially. Although retail margins on spirits may be as high as 25 percent, the overall net profit of the retailers likely to sell the vast majority of spirits is much lower, with supermarkets typically at less than two percent. If retail margins are 25 percent of sales, about $30 to $37 million would be earned on spirits sales by retailers, but the overall profit margin of supermarkets and big-box retailers is what will determine the profit on which they make business profits tax payments. If their overall margin is about two-to- four or even six percent, this indicates that only about $600,000 to $2,200,000 of profits would be subject to business profits taxes and less than $51,000 to $187,000 in additional BPT would be paid as a result of expansion of spirits sales in New Hampshire.

39

IX. Conclusions Allowing spirits sales by private retailers in New Hampshire is an important issue with significant implication for the finances of state government, as well as retailers in the state. The risks of debating any policy proposal that impacts state finances, including the expansion of spirits retailing, on the basis of rhetoric and ideology are great. This study adds empirical evidence to the debate by employing standard tools of economic analysis to years of alcoholic beverage sales, economic and demographic data in New Hampshire and all 50 states, to better understand the key variables that will determine the fiscal impacts of any proposal to allow private retailers to sell spirits in New Hampshire.

Results of our analyses suggest that by nearly all sales and fiscal metrics, New Hampshire’s system of retail spirits sales exceeds the performance of other states, including states that exercise little control over spirits sales. We find that the factors that typically have prompted privatization efforts in other states are not present in New Hampshire, and that any expected benefits in terms of sales associated with expansion of spirits sales by private retailers are likely to be minimal. Our examination of wine sales at state-run and private retail outlets, as well as our examination of wine and spirits sales at different state-run retail outlets, suggests differences in the customer base and sales patterns of state-run and private retail outlets will result in most of the sales of spirits at private retail outlets being drawn from sales at state-operated stores. Under a baseline scenario that assumes the distribution of spirits sales at state-operated and private retailers will approximate that of wine sales, we estimate that the net annual fiscal impacts of expanded spirits retailing to be a loss of between -$13.4 and -$16.8 million dollars to the state’s general fund. Spirits sales at private retailers would have to produce an overall increase in spirits sales in the state of between 22 and 28 percent in order for the proposal in HB 1251 to achieve revenue neutrality.

We find that expectations that other revenue sources such as business taxes, cigarette taxes, or meals and rooms taxes would increase significantly in response to expanded spirits retail to be unsupported by statistical analysis. Revenue from the sale of spirits and wine at NH’s stateoperated retail outlets plays an important part in helping the state fund state services without resorting to a sales or income tax. Changes proposed in HB 1251 would reduce state revenues and place added pressures on other sources of state revenue. In addition, shifting spirits sales from state-operated to private retail outlets will reduce the ability and flexibility the NH Liquor

40

Commission has to generate any level of revenue desired by state lawmakers.

Although achieving revenue neutrality by instituting either an excise or sales tax on spirits has not been proposed as a part of HB 1251, and would be politically infeasible and have little public support, this report calculates the gallonage and sales tax rates that would be required to maintain revenue neutrality under HB 1251. These rates would generally place NH in the middle of all states in terms of tax rates on spirits, but at the same time it would negatively impact NH’s reputation as the low price, tax-free retailer of spirits in the region.

41

Appendix A Fiscal Impact Model Based on FY2011 Actual State Sales Data Assumptions and User Defined Model Inputs (Yellow Boxes) Average Price Per Bottle Total Markup Est. Cost of Goods Sold/Bottle

% of Private Sales From State Stores 80% 81% 82% 83% 84% 85% 86% 87% 88% 89% 90% 91% 92% 93% 94% 95% 96% 97% 98% 99% 100%

State Store Sales

10,634,607 10,533,504 10,432,400 10,331,296 10,230,193 10,129,089 10,027,985 9,926,882 9,825,778 9,724,674 9,623,571 9,522,467 9,421,363 9,320,260 9,219,156 9,118,052 9,016,949 8,915,845 8,814,741 8,713,638 8,612,534

$14.91

10% % Retail Price Increase

$0.475

Lg. Retailer Discount Sm. Retailer Discount

$10.11

Price to Sm. Retailer

$13.42

Price to Lg. Retailer Blended Price

$12.68 $13.35

15%

Price Elasticity of Demand

Convenience Sales Growth

10%

1.5%

-0.8

Loss of Private Sales % Re-Captured by State Stores

-8.0% 20%

% -43.2%

State Store Sales Revenue $160,538,060

Change in Profits From State Store Sales -$38,225,843

Revenue From Discounted Sales to Retailers $99,327,898

Profits From Discounted Sales to Retailers $24,086,616

Change in License & Warehousing $1,300,000

Added Enforcement Costs $950,000

et Fiscal Impact -$13,387,463

(8,189,396)

-43.7%

$159,054,294

-$38,703,666

$100,569,497

$24,387,698

$1,300,000

$950,000

-$13,559,182

(8,290,500) (8,391,604) (8,492,707) (8,593,811) (8,694,915) (8,796,018) (8,897,122) (8,998,226) (9,099,329) (9,200,433) (9,301,537) (9,402,640) (9,503,744) (9,604,848) (9,705,951) (9,807,055) (9,908,159) (10,009,262)

-44.3% -44.8% -45.4% -45.9% -46.4% -47.0% -47.5% -48.1% -48.6% -49.1% -49.7% -50.2% -50.8% -51.3% -51.8% -52.4% -52.9% -53.5%

$157,570,528 $156,086,761 $154,602,995 $153,119,229 $151,635,463 $150,151,696 $148,667,930 $147,184,164 $145,700,397 $144,216,631 $142,732,865 $141,249,099 $139,765,332 $138,281,566 $136,797,800 $135,314,034 $133,830,267 $132,346,501

-$39,181,489 -$39,659,312 -$40,137,135 -$40,614,958 -$41,092,781 -$41,570,604 -$42,048,427 -$42,526,250 -$43,004,073 -$43,481,896 -$43,959,719 -$44,437,543 -$44,915,366 -$45,393,189 -$45,871,012 -$46,348,835 -$46,826,658 -$47,304,481

$101,811,096 $103,052,695 $104,294,293 $105,535,892 $106,777,491 $108,019,090 $109,260,688 $110,502,287 $111,743,886 $112,985,484 $114,227,083 $115,468,682 $116,710,281 $117,951,879 $119,193,478 $120,435,077 $121,676,676 $122,918,274

$24,688,781 $24,989,864 $25,290,946 $25,592,029 $25,893,112 $26,194,195 $26,495,277 $26,796,360 $27,097,443 $27,398,525 $27,699,608 $28,000,691 $28,301,773 $28,602,856 $28,903,939 $29,205,021 $29,506,104 $29,807,187

$1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000 $1,300,000

$950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000 $950,000

-$13,730,900 -$13,902,618 -$14,074,337 -$14,246,055 -$14,417,773 -$14,589,492 -$14,761,210 -$14,932,928 -$15,104,646 -$15,276,365 -$15,448,083 -$15,619,801 -$15,791,520 -$15,963,238 -$16,134,956 -$16,306,674 -$16,478,393 -$16,650,111

(10,110,366)

-54.0%

$130,862,735

-$47,782,304

$124,159,873

$30,108,270

$1,300,000

$950,000

-$16,821,829

Change in State Store Sales (8,088,293)

End otes 1

Although a significant percentage of NH residents may disagree with these objectives and would prefer changes to NH’s revenue structure, public opinion polls from all sources consistently find that nearly two-thirds of NH residents do not want the state to institute a general sales or income tax.

2 Sales for “control” and “license” states are not included in this because the number of control and license states changed over the time period, distorting changes in sales volumes as states changed from control to license. For per capita and other measures that do not require an absolute level of sales, control and license states are included.

3 There are various estimates of the degree to which cross-substitution of alcoholic beverages occurs and most of this research focuses on cross-substitution resulting from price increases rather than access constraints. Some recent research that addresses the issue includes: Gustafsson, N. , “Changes in alcohol availability, price and alcoholrelated problems and the collectivity of drinking cultures. What happened in southern and northern Sweden?,” Alcohol & Alcoholism, 2010, 45:456–67; and Adams, M., Tobias, E., “Effective Prevention against Risky Underage Drinking — The Need for Higher Excise Taxes on Alcoholic Beverages in Germany,” Alcohol & Alcoholism, 2010 Vol. 45, No. 4, pp. 387–394.

4

The annual Census of State and Local Governments was used as a data source because it homogenizes into similar categories data on state finances that may be reported differently across states. NH data is for 2010 and derived from the Annual report of the NH Liquor Commission.

5 For example, Pennsylvania levies an 18% “Johnstown Flood Tax” on spirits and wine sales as well as applying the state’s 6% general sales tax.

6 “Regression to the mean” describes a phenomenon where the value of a variable for an individual case differs significantly from the mean variable value for all cases, and over time, absent any extraordinary factors that explain the difference, it is likely that the value for that case will move closer to the average of all cases.

7 The per capita measure used here is sales (gals.) per state resident age 21 and older.

8 Alcoholic Beverages Division, State of Iowa, Privatization of Retail Liquor Sales in Iowa, 1999.

9 For simplicity the present value of the payments is spread equally over the ten years rather. In reality, $150 received today is worth more than $150 million received in 10 annual installments.

10 Any observed differences in sales between groups will be sharpest the more the composition of the groups reflect actual distinctions among stores. To the extent that some stores that do not share the same unique attributes get blended, this will tend to minimize any differences found in the sales patterns between groups. The fact that significant differences between groups were found, even with imperfect categorization of some stores suggest that a more definitive or refined categorization would result in stronger results (greater distinctions between the sales patterns of stores in different categories).

11 Because of long-term trends of declining gasoline consumption, because of more fuel efficient cars etc., the relationship between gasoline and alcohol sales at state-run stores has changed in recent years and other indicators of travel and non-resident visits, such as traffic counts should be more valuable in predicting liquor and wine sales.

12 A six percent price increase above that of state-run prices appears to be conservative given the experience of other states with privatization. An elasticity of -.8 appears to be about the most common figure used in the research literature.

13 Net retail profit margins at state-operated stores have ranged from 24-27 percent. We use 24 percent in our baseline fiscal impact scenario. Choosing a 24 percent net margin rather than a 27 percent net margin for our baseline scenario produces a somewhat smaller net negative fiscal impact for privatizing spirits sales in NH. A 24 percent net margin was used to avoid concerns that this analysis would overstate the state revenue loss from proposals to privatize retail spirits sales.

14 This is the combined amount used in a 2008 NH Grocer’s Association report.

15 This is the figure assigned by the NH Liquor Commission in the fiscal note attached to HB 1251 of 2012.

16 The average price here is the total sales revenue from spirits sales divided by the number of bottles sold.