South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution from Mini-Bottles

South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution from Mini-Bottles to National Restaurant Standards

An Analysis of State Tax Revenue Impacts to the Year 2020

Report by:

Steve Morse, Ph.D. Economist

School of Hotel, Restaurant and Tourism Management College of Hospitality, Retail and Sport Management

University of South Carolina Columbia, SC

January 2003 South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution from Mini-Bottles to National Restaurant Standards

Table of Contents

Executive Summary 3

I. Purpose of the Study 4

II. Methodology 4

A. Current Mini-bottle Tax Structure 4 B. Converting Current Mini-bottle Taxes to per Liter Bottle Taxes 5 C. Convert Current Off-Premise Retail per Case Taxes Per Liter Taxes 6 D. Tax Revenue Impacts of 1998 Mini-Bottle Demand 8 E. Tax Revenue Impacts of 1998 Mini-Bottle Demand Taxed at Retail Bottle Tax Rates 8

III. Comparison of Tax Revenues Generated by Mini-Bottle Taxes vs. Retail Per Liter Taxes 9

IV. Replacing the $14 Million Liquor Tax Revenue Shortfall 9

V. Tax Revenues Automatically Increase With Inflation 10

VI. Conclusions 13

VII. References 13

VIII. About the Author 15

2 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution from Mini-Bottles to National Restaurant Standards

Executive Summary

 The purpose of this study is to examine the tax revenue impacts of shifting the current on-premise liquor distribution system from mini-bottles to a system consistent to national restaurant standards.

 Under the current tax system for liquor, on- premise mini-bottle sales are taxed at a rate equal to $5.94 per liter, while off-premise retail bottles are taxed at a rate equal to $1.42 per liter.

 The analysis shows that if mini-bottles were replaced with national restaurant standards of liquor distribution, a 5% liquor sales tax and current per liter sales tax would generate higher tax revenue than the current system of mini-bottle taxation.

 Twenty-year projections to the year 2021 show that South Carolina liquor tax revenues generated over the 20- year period will more than double under the new 5% liquor sales tax and current $1.42 per liter taxes.

 Thus, the new tax system will automatically increase liquor tax revenues generated as inflation increases over time with no required increase in liquor consumption.

3 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution From Mini-Bottles to National Restaurant Standards

I. Purpose of the Study

The purpose of this study is to examine the tax Analysis by: revenue impacts of changing the current on-premise Steve Morse, Ph.D. mini-bottle liquor distribution system in South Economist Carolina to a system equal to national restaurant standards of liquor distribution. The specific School of Hotel, objectives of the study are to: 1) review the current Restaurant and Tourism Management tax structure associated with mini-bottle sales distribution, 2) examine the tax structure of shifting College of Hospitality, existing mini-bottle taxes to per liter and per drink Retail and Sport taxes, 3) estimate the level of tax structures on Management bottles that would equal current mini-bottle taxes University of South with the criteria of being tax revenue neutral, and 4) Carolina, Columbia, estimate liquor tax revenues generated as a result of SC inflation.

II. Methodology

To achieve the objectives of this study, the current mini-bottle tax structure will be examined and a per liter equivalent tax structure will be analyzed. In particular, the study seeks to examine the tax structure on liter bottles and unit sales that could replace the current mini-bottle tax structure and remain tax revenue neutral.

A. Current Mini-bottle Tax Structure

This analysis is the sole view of The current tax structure on mini-bottles in South the author and does not necessarily represent the views Carolina is a mix of five different taxes at various of the University of South Carolina. This analysis is for levels of the distribution system. Table 1 shows the informational purposes and not current mix of five taxes on the mini-bottle sales intended to aid or hinder any bill before any state, county, or distribution system. municipal legislative bodies. 4 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. Table 1. Current South Carolina Tax Rates on Mini-bottles

Tax Tax Type and Rate Tax Sales Units No. 1 Wholesalers Tax = $1.81 Per case of mini-bottles a 2 Retailers Tax = $2.99 Per case of mini-bottles a 3 Mini-bottle Tax = $0.25 Per mini-bottle b 4 Additional Case Tax = $0.56 Per case of mini-bottles a 5 Surtax = 9% [Sum of Tax No.1+2+3+4] X .09 Total Mini-bottle Taxes Sum of Tax No.1+2+3+4+5 Notes: a 1 case of mini-bottles = 240 mini-bottles; b 1 mini-bottle = 50 ml. Source: S.C. Department of Revenue, Liquor Wholesalers Monthly Report, Form L-101, Schedule A-1, p. 3, (copy enclosed).

B. Converting Current Mini-bottle Taxes to Per Liter Bottle Taxes

Step 1. Calculate total taxes per case of mini-bottles

a) Convert $0.25 tax per mini-bottle tax to per case equivalent tax.

b Since one case of mini-bottles equal 240 mini- bottles, the existing tax of $0.25 per mini-bottle would be equivalent to $60 tax per case. [Derived by $0.25 (X) 240 = $60]

b) Sum other per case taxes from Table 1. b c Per Case Tax No.1 ($1.81) + Per Case Tax No. 2 ($2.99) + Per Case Tax No. 4 ($0.56) = $5.36.

c) Find case tax equivalent of Tax No. 1 + Tax No. 2 + Tax No. 3 + Tax No. 4.

5 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. d Sum per case taxes from Step 1a ($60) + per case tax from Step 1b ($5.36) = $65.36. Thus, total mini-bottle per case tax = $65.36.

d) Add 9% sur-tax to tax in part (c) above.

Convert current e The 9% sur-tax = $65.36 (X) .09 = $5.89. mini-bottle taxes to per liter taxes e) Find total taxes per case of mini-bottles.

Sum taxes from parts (c) + part (d) = total taxes per case of mini-bottles. $65.36 + $5.89 = $71.25 total tax per case of mini-bottles.

Step 2. Convert $71.25 tax per case of mini-bottles to equivalent tax per liter

f) First, convert one case of mini-bottles to liters. Since one case = 240 mini-bottles, and one mini- bottle = 50 ml, and 1 liter = 1000 ml, the conversion from mini-bottles to liters is [240 (X) 50] / 1000 = 12 liters. Thus, one case of mini- bottles = 12 liters.

g) Second, convert $71.25 tax per case of mini- bottles to equivalent tax per liter. Since 1 case of mini-bottles = 12 liters, the equivalent tax per liter is $71.25/12 = $5.9375 or $5.94 tax per liter.

h) Conclusion is that current mini-bottle tax rate, when converted to a tax rate per liter, is equivalent to a tax rate of $5.94 per liter.

C. Convert Current Off-Premise Retail per Case Taxes to per Liter Taxes

a) Convert the current off-premise license excise tax and per case tax rate on retail liquor shown in Table 2, to a per liter tax rate. The current taxes

6 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. on retail liquor are based on per case tax rates and as shown in Table 2, where there is not one standard case size. Four per case tax rates are constant across different case volume sizes, thus when converted to tax per liter, the tax rate is Off-premise retail different on each case. As shown in Table 2, liquor taxes are when tax rates are converted to tax per liter, tax equal to $1.42 rates range from $1.44 per liter to $1.28 per liter. per liter Since a large majority of cases in the distribution system are in the 12 liter case size, the weighted average tax per liter of all cases sold is $1.42 tax per liter. (South Carolina Department of Revenue, Liquor Tax Revenue Study, Fall 1998)

Table 2. Current South Carolina Tax Rates For Off-Premise Retail Liquor

Case Size & Volume 48/200 ml. 24/500 ml. or 24/375 ml. or 6/1.75 liter bottles 12/1 liter 12/750 ml. bottles Tax Type bottles bottles (total case volume (total case volume (total case volume (total case volume = 12 liters) = 9 liters) = 10.5 liters) = 9.6 liters) License $6.895 per case $8.619 per case $6.465 per case $7.542 per case Excise Tax ($0.72 per liter) ($0.72 per liter) ($0.72 per liter) ($0.72 per liter) Retailers $2.99 per case $2.99 per case $2.99 per case $2.99 per case Case Tax ($0.31 per liter) ($0.25 per liter) ($0.33 per liter) ($0.28 per liter) Wholesalers $1.81 per case $1.81 per case $1.81 per case $1.81 per case Tax ($0.19 per liter) ($0.15 per liter) ($0.21 per liter) ($0.17 per liter) Additional $0.56 per case $0.56 per case $.56 per case $0.56 per case Case Tax ($0.06 per liter) ($0.05 per liter) ($0.06 per liter) ($0.05 per liter) 9% Sur-tax on Excise & $0.12 per liter $0.11 per liter $0.12 per liter $0.11 per liter Case Tax Total Tax $1.40 tax $1.28 tax $1.44 tax $1.33 tax per liter per liter per liter per liter per liter

7 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. Weighted Average Total Tax per liter = $1.42 per liter a Note: a Weighted average tax per liter weighted by percent of each type cases sold Source: S.C. Department of Revenue, Liquor Wholesalers Monthly Report, Form L-101, Schedule A, p. 2, (copy enclosed.)

D. Tax Revenue Impacts of 1998 Mini-Bottle Demand

Mini-bottle taxes a) Using 1998 mini-bottle demand as an example, are equal to convert 1998 mini-bottle demand to equivalent $5.94 per liter liters. One mini-bottle equals 50 ml., and 1998 demand was 62,113,904 mini-bottles. To find the equivalent liters the 1998 mini-bottle demand represents, use the following conversion: [62,113,904 mini-bottles (X) 50 ml.] / 1000 ml. = 3,105,695 liters. This conversion means that in terms of liters, 1998 mini-bottle demand equaled 3,105,695 liters.

b) Calculate liquor tax revenues from 1998 mini- bottle demand. From Table 1, it was found that mini-bottle taxes were the equivalent of $5.94 per liter. Given the 1998 mini-bottle demand was the equivalent of 3,105,695 liters, the liquor taxes generated equal: 3,105,695 liters (X) $5.94 per 1998 Mini- liter = $18,447,828. bottle taxes generated $18.4 c) Conclusion: 1998 mini-bottle demand generated million in tax $18,447,828 in liquor taxes.

E. Tax Revenue Impacts of 1998 Mini-Bottle Demand Taxed at Retail Bottle Tax Rates

a) What would be the impact on liquor tax revenues if 1998 mini-bottle demand were taxed at the retail bottle tax rate of $1.42 per liter? 1998 mini- bottle demand was the equivalent of 3,105,695 8 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. liters. At the current retail tax rate of $1.42 per liter, tax revenue generated would be: 3,105,695 (X) $1.42 = $4,410,086.

b) Thus, if 1998 mini-bottles were taxed at the retail tax rate per liter, this tax rate would generate $4,410,086.

III. Comparison of Tax Revenues Generated by Mini-Bottle vs. Retail Per Liter Tax Rates

If mini-bottles are a) From above, it was found that 1998 mini-bottle taxed at off- demand taxed at the mini-bottle, per liter premise retail equivalent rate of $5.94 per liter, would generate rates of $1.42 per $18,447,828. Also, it was found that if 1998 liter, would result mini-bottle demand were taxed at the retail per in $14 million tax liter rate of $1.42 per liter, this would generate revenue shortfall $4,410,086. Thus the difference in tax plans is: (mini-bottle taxes $18,447,828 – mini-bottles taxed at retail bottle taxes $4,410,086) = $14,037,742 in revenue shortfall.

b) Thus, taxing 1998 mini-bottle demand at retail bottle tax rates would generate a $14,037,742 (or $14 million) liquor tax revenue shortfall.

IV. Replacing the $14 Million Liquor Tax Revenue Shortfall

a) Convert mini-bottle unit sales to new unit sales with equivalent liquor per ounce. One mini-bottle unit at 1.7 ounce per unit is the same as 1.36 mini-bottle sales units at 1.25 ounces. It is assumed that new ounces per unit with using liter bottles will be 1.25 ounces. Thus, converting 1998 mini-bottle units to new units using liter bottles would be the equivalent of 62,113,904 mini-bottle units (X) 1.36 = 84,474,909 sales units. Industry standards on amount of liquor 9 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. per unit sales are varied. Although national corporations like Marriott and others use 1.0 ounce per unit in automated dispensing machines, others in the industry use an amount as high as 1.5 ounces per unit as the industry standard. Thus, the average of both these two industry values is 1.25 ounces per unit, and is used in this analysis.

A 5% liquor b) What percent liquor sales tax would generate the sales tax would $14,037,742 tax revenue shortfall? At an average more than price of $3.91 per unit and a per unit tax of 5%, replace $14 total liquor tax revenue generated would be million tax $16,514,844 and would more than cover the revenue shortfall revenue shortfall. Although there are no published national, regional or state averages for on-premise liquor unit prices, according to industry experts in South Carolina, an average price per unit of $3.91 is a conservative estimate of average prices statewide and does not overstate average prices.

V. Tax Revenues Automatically Increase With Inflation

a) As Table 3 shows, projections of liquor tax revenues generated are made to year 2021. The projections are made using the following assumptions: (1) price per unit increases 3.5% each year, (2) demand is constant over the period (at 84,474,909 units), (3) per liter tax is constant at $1.42 per liter over the period. Below is an explanation of why these assumptions are considered very conservative assumptions.

b) Assumption (1): The price per unit (inflation) increases by 3.5% each year. This assumption concerns the increasing price level of sales units or liquor unit inflation each year. In South Carolina, the service economy now (2000) employs more workers than the state’s manufacturing economy. Projections over the 10 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. period 1996-2006 by the South Carolina Employment Security Commission and the U.S. Department of Labor’s Bureau of Labor Statistics estimate a 28% increase in the demand for employees in the state’s food and beverage sector of the economy, compared to a smaller 16% increase in the demand for all South Carolina workers. Increased demand for food and beverage workers in the state will put upward pressure on labor rates, especially in labor-intensive food and beverage sectors of the economy. Higher labor rates put upward pressure on consumer prices and With 5% liquor are partially passed on to the consumer as the sales tax, liquor tax National Restaurant Association projects wage revenues increase rates of employees in the food and beverage automatically with industry to increase 4.5% in 2000. Thus, over a inflation twenty-year period to 2021, an average inflation rate each year of 3.5% is considered a conservative estimate.

c) Assumption (2): Demand is constant over the 20- year period. Population and cultural factors effect demand, and as the population of South Carolina increased by 1.1% from 1998 – 1999, projections are for South Carolina’s population to continue to grow over the 20-year period. Thus, the assumption that demand will be constant over the 20-year period as the population increases is a conservative assumption.

d) Assumption (3): In Table 3, it is assumed the current per liter tax rate of $1.42 is constant over the 20-year period. Thus, if tax rates are increased, this assumption is considered a conservative assumption.

e) As shown over the 20-year period in Table 3, total liquor taxes are projected to increase to $40.3 million, nearly double the 1998 liquor tax revenues of $20.9 million. (with the assumptions Liquor tax revenues of unit prices increasing 3.5% each year, demand projected to double over the next 20 years 11 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. not increasing and held constant at 1998 levels, and per liter tax rates held constant at $1.42 per liter.)

Table 3. Projected South Carolina Liquor Tax Revenue Generated With 5% per unit Sales Tax and per Case Tax, 1998 – 2021

Partial Tax Total Liquor Tax Sales Revenue Year Revenue Revenue a Generated at 5% Generated c of Sales b 1998 $330,296,894 $16,514,844 $20,924,930 1999 $342,123,381 $17,106,169 $21,516,255 2000 $353,949,868 $17,697,493 $22,107,579 2001 $366,211,105 $18,310,555 $22,270,641 2002 $379,292,341 $18,964,617 $23,374,703 2003 $392,808,326 $19,640,416 $24,050,502 2004 $406,324,312 $20,316,215 $24,726,301 2005 $420,685,046 $21,034,252 $25,444,338 2006 $435,045,781 $21,752,289 $26,162,375 2007 $450,251,265 $22,512,563 $26,922,649 2008 $466,301,497 $23,315,074 $27,725,160 2009 $482,351,730 $24,117,586 $28,527,672 2010 $499,246,712 $24,962,335 $29,372,421 2011 $516,986,443 $25,849,322 $30,259,408 2012 $534,726,174 $26,736,308 $31,146,394 2013 $553,310,654 $27,665,532 $32,075,618 2014 $572,739,883 $28,636,994 $33,047,080 2015 $593,013,861 $29,650,693 $34,060,779 2016 $614,132,588 $30,706,629 $35,116,715 2017 $635,251,315 $31,762,565 $36,172,651

12 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. 2018 $657,214,792 $32,860,739 $37,270,825 2019 $680,023,017 $34,001,150 $38,411,236 2020 $703,675,992 $35,183,799 $39,539,885 2021 $718,036,726 $35,901836 $40,311,922 Notes: a sales revenue = price (X) unit sales of 84,474,909 (constant demand) b represents sales tax of 5% of sales revenue c represents total liquor sales of 5% of sales revenue + per case tax of $4,410,086.

VI. Conclusions

a) Replacing the current mini-bottle system of on- A 5% liquor premise sales with a system consistent with sales tax + $1.42 national restaurant standards and implementing a per liter tax is new liquor tax with a tax of $1.42 per liter and a projected to liquor per drink sales tax of 5% is projected to increase tax generate liquor tax revenues greater than the revenues to the current mini-bottle tax rates. Thus, the new tax State system is projected to generate additional tax revenues for South Carolina.

b) Under a new liquor tax equivalent to national restaurant standard sales, a $1.42 per liter tax and 5% liquor sales tax are projected to increase Liquor tax automatically with inflation each year, thus liquor revenues tax revenues are projected to nearly double over automatically the 20-year period to the year 2021 and generate increase with additional tax revenues for South Carolina. inflation and projected to double in next 20 years

VII. References

13 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. 1)Morse, Steve C. Economic Impact of College of Applied Professions Graduates in the 21 st Century. University of South Carolina, March 1999.

2)National Restaurant Association. “2000 Restaurant Industry Forecast.” Restaurants USA. Vol. 19. No. 11. December 1999.

3)South Carolina Department of Revenue. 1998 Year End Alcoholic Liquor Summary. Contains tax revenue generated by on-premise mini-bottle sales and off-premise retail bottle sales for 1998. Columbia, SC. July 1999.

4)South Carolina Department of Revenue. Liquor Wholesalers Monthly Report. Form L-101, revised 4/1998. Contains wholesale and retail license excise tax, case tax, and sur-tax reporting schedules including: a) Schedule A (for ½ pint or larger liter category), and b) Schedule A-1 (for 2oz. or less mini-bottle category), pp. 1-4. Columbia, SC. April 1998.

5)South Carolina Department of Revenue. Liquor Tax Revenue Impact Report, Mr. Gordon Shufford. Columbia, SC., 1998.

6)South Carolina Employment Security Commission, Labor Market Division. South Carolina Industry and Occupation Projections, 1994-2005. Columbia, SC., 1996.

7)U.S. Department of Labor, Bureau of Labor Statistics. U.S. Occupational Employment Projections, 1994-2005. U.S. Government Printing Office, Washington, DC, 1996.

14 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. VIII. About the Author

Dr. Steve Morse is an economist and professor in the School of Hotel, Restaurant and Tourism Management in the College of Hospitality, Retail and Sport Management at the University of South Carolina in Columbia. He teaches economics and finance courses in both the Bachelors and Masters degree programs in the hotel, restaurant and tourism curriculum. His research areas are in economic and finance issues in hotel, restaurant and tourism issues in the hospitality industry. Dr. Morse received the Ph.D. in Applied Economics from the University of Tennessee, and the B.S. in Agricultural Economics from the University of Georgia. Dr. Morse can be contacted at the University of South Carolina in Columbia at Ph. (803) 777-3458, or e-mail at [email protected].

15 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC. 16 Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management University of South Carolina, Columbia, SC.