Pennsylvania is debating whether to privatize its liquor sales as a way to raise money and bridge its budget gap. Estimates show the state could raise anywhere from $1 to $6 billion by selling off its stores to private buyers, though that would be a one-time cash infusion and the state would give up its stream of roughly $90 million in annual profits; though it would still collect sales tax revenues.
Whether that’s good fiscal policy is debatable. But so is the projected effect that privatization would have on alcohol consumption....
Debatable? The present value of $90 million in perpetuity is $3 billion at a 3% discount rate. Put another way, $3.5 billion (the midpoint of $1 to $6 billion) invested at 3% interest would generate $105 million each year without touching the principle. What am I missing? I'm no public finance economist but It seems almost like a no-brainer that selling the ABC stores would improve the Commonwealth's fiscal position.
As Philips makes clear, the effect on consumption is not clear as contrasting studies produce wildly different results. But, who cares? If the Commonwealth wants to discourage consumption then they should raise the tax on alcohol. Even inelastic demanders will cut back at some point.
There is little reason why the government should run liquor stores (or why I can't pump my own gas in New Jersey).
