Maybe I’m Just a Bit Thick, But…

A proposed rise in beer tax in Wisconsin has me scratching my head. Now, I understand that nobody likes new taxes, and no beer drinker wants to pay more for the beers they enjoy, but the math on this one has me confused.

Here’s the deal: the state is proposing the first rise to their beer tax in some 40 years, bringing it from $2 to $10 per 31 gallon barrel. This works out to about 2.4 cents per bottle, which certainly doesn’t sound like much to me, but here’s where it gets confusing. Brewing industry representatives are saying that by the time the increase reaches consumers, that 2 cents per bottle will have turned into 12 cents, “as the product is passed through distributors and retailers.”

I don’t get it. If there is a rise in tax of under 2 ½ cents per barrel, that seems to me as simple as a rejigging of price, so a six-pack, say, will cost distributors 15 cents more. There is no added cost to the distributor other than this 15 cents, so why should that same six-pack cost retailers anything more than 15 cents extra? And since there is likewise no extra expense for retailers, other than that 15 cents, why should it cost Wisconsonites (Wisconsonians?) anything more than and extra 15 cents per six?

If the industry is saying that the tax increase will lead to a 72 cent increase in the price of a six-pack, aren’t they really just saying that retailers and distributors will take advantage of the tax increase in order to take a cash grab of more than half a buck per six? And isn’t that a problem with their distribution system, rather than with the tax itself?

And why don’t we hear similar stories when the breweries decide to uniformly raise their prices, as they sometimes do? Nope, then, for some reason, we only ever hear about the “small increase” they’re making in order to cover rising costs.

7 Replies to “Maybe I’m Just a Bit Thick, But…”

  1. Part of the reason is hitting price points. Your math from the post aside, let’s assume a fancy six-pack were $8.99 retail. If the tax adds fifteen cents, then you’re at $9.14, not at a “nine”, so the wholesale price is adjusted to take it to an attractive shelf price, say $9.29 or $9.49. Consumers don’t flinch at small increments like this, and wholesalers and retailers maintain their margins.

    1. Understood, John, but $9.19 is a “nine,” as well. Just because the consumer doesn’t balk at it — something the Wisconsin brewers are insisting is not the case, or else they wouldn’t be saying that the tax “would hurt their sales” — doesn’t make it any less of a cash grab.

    1. I have, and it’s why I strongly feel that the percentage mark-up is deeply flawed when it comes to booze and other things that are taxed directly by the government at the manufacturer level. (I won’t get into the legitimacy of such taxes, as Lew does, because they’re a fact of life and they’re not about to go away any time soon.) It works something like this.

      A bottle of Champagne that costs a retailer, say, $30, should be hit with a larger monetary increase than will a bomber bottle that costs $4 because: a) The cost of stocking the good is higher; and b) Sales are likely to be slower, thus resulting in a lagging return on investment. That part makes sense. But when a tax increase is applied to beer across the board, as in the Wisconsin case, and it is translated into percentage increases, then it becomes more onerous on the buyer of beer that was initially more expensive even though the base amount of the increase is identical in both cases! Lew implies this but stops short of calling distributors and retailers on their blatant profiteering on the back of the government blame machine. The fact is that this does not have to happen, but does because, as Lew observes, it’s convenient to blame any and all price increases on the government.

      Then there’s also the matter of why it’s only a “small increase” when the breweries do it themselves.

  2. At what level of cost/price increase would a distributor or retailer be justified or allowed to take an additional markup, rather than just passing on the flat increase? Ever? Should a wholesaler determine price increases on their entire inventory on a case-by-case basis? That’s a lot of work, and you know…that costs money too, so that will probably put the price up. Is it profiteering because the price increase comes from taxation, or are retailers gouging if they add markup to an increase from the producer as well? If not, what’s the difference? Aren’t costs fungible? When is a wholesaler, when is a retailer justified in adding markup to a price increase?

    I don’t think anyone thought of the price increases in craft beer between January of 2007 and August of 2008 — driven largely by increased fuel costs and sharply increased materials costs — as “small.” They were, rather, more in the line of a major upwards readjustment, a whole new standard rather than an incremental increase. Given the easing in fuel and materials costs with the contraction of the world economy, you might expect prices to drop. They aren’t. Why not? No downwards pressure from consumer sales; we are still willing to pay the higher prices, proven by the way craft beer sales are still climbing. Higher-end wine sales are sharply down, and prices are coming down there.

    Why the difference (and what does it have to do with this)? I’d venture that it’s because craft beer was underpriced, and wine was overpriced. There WAS profiteering in wine, and wine is paying the price. If there is profiteering in beer, consumers will eventually change their buying habits. It could, of course, be argued that this will hurt the brewers more than the wholesalers and retailers, but that’s risk and business (especially when the wholesalers’ place in the chain is enforced by law, at least here in the States).

    But if you’re looking for profiteering, I’d remind you of something you well know: the markup in bars, particularly high-end beer bars, is a lot more than at distributors or off-premise retailers. And we continue to pay that. At least, some places we do. I noticed Pliny The Elder was selling for $4.50 for a standard shaker glass pour at Toronado last night; a considerably lower price than I’ve seen it other places.

    1. Well, Lew, I think that distributors and retailer should be able to take whatever profit margins their costs and circumstances and customers will bear. That’s pretty much the definition of the free market, innit? My problem is the automatic translation of a small, one time, across the board tax increase into an excuse to fleece the customer for more profit and cast the blame on the government.

      Regarding your last point about high-end beer bars, please see a) and b) above.

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