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The fiscal impacts of expanding spirits retailing in New Hampshire
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The Fiscal Impacts of
Expanded Spirits Retailing in
�ew Hampshire
January 2012
Prepared by:
2
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
3
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 state-
operated 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
4
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.
5
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:
6
• 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
7
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
Retail and
Wholesale:
Licensed
Retail Agents
Retail and
Wholesale:
Contracted
Retail Agents
State-Run Retail
and Wholesale Iowa Maine Ohio Alabama
Michigan Montana Oregon Pennsylvania
Mississippi New Hampshire Vermont North Carolina
West Virginia Idaho Virginia
Wyoming Utah
Washington
8
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 “state-
run” 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
9
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
Table 3 �umber of State Spirit and Wine Control Systems by
Degree of Control (APIS Category)
Control Wine Retail
Wine Wholesale
Spirits Retail
Spirits Wholesale
State-run 2 4 8 12 Mixed/Not Overlapping
1
7
3
4
Mixed/Overlapping 10 5 3 2
License 5 2 4 0
10
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, near-
term, 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.
11
• 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
Index 1980=100
50
60
70
80
90
100
110
120
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
NH U.S.MA Northeast
Figure 1
Growth in Spirits Sales (Volume) Since 1980
12
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.
�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
Figure 2
Only D.C. Comes Close to NH’s Volume of Spirits Sales Per Capita (Age 21+)
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Source: Alcohol Policy Information System, Na tional Institutes of Health , PolEcon calcula tions
13
(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.
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-
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%
14
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, socio-
economic, 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 Year
“Privatized”
Wine as a
%
of Sales
Year Prior
% of
Regional
Avg.
% Wine
Year After
Privatization
% of
Region
Comparison
Region
NH 1978 7.3% 92.4% 8.7% 101.2% Northeast
Montana 1979 4.5% 75.0% 6.1% 93.8% Mountain
Alabama 1980 3.9% 81.3% 5.2% 98.1% South
West Virginia 1981 2.9% 51.8% 4.1% 70.7% S. Atlantic
Iowa 1985 2.8% 50.0% 4.7% 71.2% 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
15
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.
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
Volume Sales of Alcoholic Beverages in the U.S. (Index 1976=100)
60
80
100
120
140
160
180
200
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
Spirits Wine Beer
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
16
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).
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.
Figure 4
OnlyD.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. �ot Dolla r Value)
4.7%
6.3%
6.7%
7.1%
8.9%
9.5%
6.0%
5.7%
2% 3% 4% 5% 6% 7% 8 % 9% 10%
Vermont
U,S. Average
Maine
�ortheast Region
Massachusets
�evada
� ew Hampshire
D istrict of Columbia
Source: Nationa l Institutes of Health, Alcohol Polic y Information System, PolEcon Calculations
17
• 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
18
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.
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
Figure 5
Transfers to General Fund Per Capita from “Control State” Systems
(Does not Include Sales Taxes Not Administered Through State Liquor Commission s)
$8.3
$16.0
$19.4
$21.5
$21.8
$23.5
$26.2
$29.5
$29.6
$31.3
$38.5
$39.8
$49.5
$84.8
$13.2
$10.5
$0 $10 $20 $30 $40 $50 $6 0 $70 $80 $90
West Virginia
Pennsylvania
Virginia
Michigan
Wyoming
Ohio
Iow a
Vermont
Idaho
Mississippi
Oregon
Montana
Utah
Alabama
Washington
� ew Hampshire
Source: U.S. Census Bureau, State a nd Local Government Finances, 2008, PolEcon
19
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 6
Net Impacts on General Fund Per capita (“Profits” from Liquor
Operations Minus Revenues From Taxes)
-$16.6
$0.0
$7.5
$9.9
$10.4
$13.4
$15.7
$16.9
$17.0
$19.6
$21.0
$22.4
$25.6
$72.6
-$1.1
-$5.4
-$30 -$20 -$10 $0 $10 $ 20 $30 $40 $50 $60 $70 $80
Pennsylvania
Virginia
Vermont
Maine
W est Virginia
Washington
Montana
W yoming
Mississippi
Alabama
Iowa
Ohio
Idaho
Utah
Oregon
�ew Hampshire
Source: U.S. Census Bureau, State and Local Government Finances, 2008, PolEcon
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
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
�e
w H
am
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ire
Ala
ba
ma
Wa
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nM
on
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aU
tah
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iss
iss
ipp
iP
enn
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Vir
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iaT
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see
Or
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erm
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outh
Ca
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org
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ioId
ah
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wa
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ns
as
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ina
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tuc
ky
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ite
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tate
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ou
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ak
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lah
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aW
est
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gin
iaH
aw
aii
�e
va
da
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no
isA
rka
nsa
sW
yo
min
g�
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ra
ska
�ew
Je
rse
yA
rizo
na
Ma
ine
Lo
uis
ian
aA
las
ka
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aw
ar
e�
ew Y
or
kM
inn
eso
taR
ho
de
Is
lan
dC
olo
ra
do
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co
nsi
nIn
dia
na
Co
nn
ect
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t�
or
th D
ak
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Ma
ssa
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sett
sM
isso
ur
iC
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nia
Ma
ry
lan
d
Source: U.S. Census Bureau, PolEcon calculations
20
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 state-
run 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
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.
Figure 8
Net Profit Margin of State Controlled Liquor and Wine Operations
Profit Margins of State Run Alcoholic Beverage Systems
6.0%
9.0%
9.0%
12.0%
13.0%
14.0%
14.0%
18.0%
19.0%
19.0%
27.0%
28.0%
29.0%
32.0%
37.0%
-2.0%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 3 0.0% 35 .0 % 40.0%
Vermont
Alabama
Pennsylvania
Wyoming
Washington
West Virginia*
Idaho
Montana
Virginia
Mississippi
Michigan*
�ew Hampshire
Utah
Iowa*
Ohio*
Oregon*
Source: U,S. Census Bureau, “Finances of State and Local Gov ernment, 2008”, NH Liquor Commission Annual Repor ts,PolEcon
21
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.
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
Figure 9
There is Little Relationship Between Profit Margins and Per Capita Transfers to State General Fund
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
-5.0% 0.0% 5.0% 10 .0 % 1 5.0% 20 .0 % 2 5.0% 30 .0 % 35.0% 40 .0 %
�et Profit Marg in
Per
Cap
ita
Tra
nsf
er
to G
ene
ral
Fu
nd
New Hampshire
Source: U.S. Census Bureau, State and Local F inances, 2008, PolEcon calculations
Oregon
Utah
OhioIowa
Washington
Alabama
Virginia
Michigan
Pennsylvania
22
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 state-
run 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
23
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.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
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
Iowa West Virginia
Maine U.S
Northeast
Privatized in 1987
Privatized in 2004
Privatized in 1991
Figure 10
Changes in Per Capita (Age 21+) Sales of Spirits in States Before and After Privatization
Source: National Institutes of Health, Alcohol Policy Information Sytem, PolEcon Calculations
24
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 state-
run 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
25
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 pre-
privatization 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.
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
Figure 11
Annual Revenue from Maine Alcoholic Beverage Operations
$24.2
$2.2$0.0
$2.6 $4.4 $5.6 $6.2 $6.8
$10.0 $15.6
$15.6$15.6
$15.6 $15.6 $15.6
$12.9$13.5
$13.9
$14.4
$14.4
$14.8
$17.0$17.4 $17.4 $16.9
$26.1$25.2
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Mil
lion
s
From Bev erage Sales Annuitized Lease Payments Taxes
Source: State of Maine , “Revenue Trends”, PolEcon calc ulations
26
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 state-
operated 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
27
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
28
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
29
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.
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
Monthly Wine (Bottles)
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
02 03 04 05 06 07 08 09 10 11
Seasonally Adjusted Wine Sales Actual
Model Predicted Wine Sales
Figure 12
State Stores Wine Sales Can be Predicted With Reasonable Accuracy Using a Few Key Variables
30
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 state-
operated 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).
Monthly Change s in the Volume of W ine Sales (Index)
0
2 0
4 0
6 0
8 0
10 0
12 0
14 0
16 0
18 0
20 0
03 04 05 06 07 08 09 10 11
Highway Stores Off-Premise Sales
Figure 13
State Stores on Highways Show More Dramatic Seasonal Patterns of Wine Sales Suggesting They Attract the Bulk of Non-Resident Wine Sales
31
• 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, state-
operated liquor and wine outlets will move a giant step toward becoming
dependent on patterns and trends in NH’s leisure, recreation and travel
industries.
32
• 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 spreadsheet-
based 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
33
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
34
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 state-
operated 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 state-
run 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
35
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.
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
Figure 14
The More Private Retailers Draw Sales from State-Operated Stores, the
More Negative Will be the Net Fiscal Impact from Expansion
($13.4)($13.6)
($13.7)($13.9)
($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)
($14.1)
-$18
-$17
-$16
-$15
-$14
-$13
-$12
-$11
-$10
80 .0% 85.0% 90.0% 95 .0% 100. 0%
Mill
ion
s
%of Private Sector Spirit Sales That Come From State-Store Sales
�et Fiscal Impact
36
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.
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
Figure 15
The More Private Sector Spirit Sales Draw From State Store Sales the Larger are the
Negative Fiscal Impacts of the Proposal
$9 9.3$100.6
$101 .8$10 3.1
$1 04.3$ 105.5
$106.8$ 108.0
$109.3$110 .5
$11 1.7$11 3.0
$1 14.2$ 115.5
$1 16.7$ 118.0
$119.2$120 .4
$12 1.7$1 22.9
$ 124.2
-$1 3.4-$ 13.6
-$ 13.7-$13.9
-$14.1-$14 .2
-$1 4.4-$14 .6
-$1 4.8-$ 14.9
-$15.1-$15.3
-$15.4-$15 .6
-$15.8-$16 .0
-$1 6.1-$ 16.3
-$16.5-$16.7
-$16.8
$90
$95
$100
$105
$110
$115
$120
$125
$130
$135
80.0% 85.0% 90.0% 95.0% 100.0%
Mil
lio
ns
% o f Private Secto r Sales That Come From State-Store Sales
Re
ve
nu
e F
ro
m S
ale
s to
Pr
iva
te R
eta
iler
s
-$18
-$17
-$16
-$15
-$14
-$13
-$12
-$11
-$10
Mil
lio
ns
�e
t F
isc
al
Im
pa
ct
Rev enue F ro m Discounted Sales to P riv ate Retailers
�et F iscal Impa ct
37
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
38
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 state-
operated 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 state-
operated 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
Figure 16
Applied Only to Private Sector Sales, a GallonageTax 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 Low – But Price Impacts Would Lower Sales
and Increase Tax Rates Required for Revenue Neutrality
$0
$5
$10
$15
$20
$25
$30
Wa
shin
gto
nO
reg
on
Vir
gin
iaA
lab
am
aA
las
ka
Iow
a�
ort
h C
aro
lin
aU
tah
Ida
ho
Mic
hig
an
Oh
ioM
on
tan
aI
llin
ois
Pen
nsy
lva
nia
Mis
siss
ipp
iK
entu
ck
yF
lor
ida
�ew
Yo
rk
�H
(P
riv
ate
Sec
tor
On
ly)
�ew
Me
xic
oH
aw
aii
Ok
lah
om
a�
ew J
ers
eyD
ela
wa
re
Ma
ine
Min
ne
sota
So
uth
Ca
ro
lin
aC
on
ne
ctic
ut
Ten
ne
sse
eM
ass
ach
use
tts
So
uth
Da
ko
taG
eor
gia
�e
br
ask
aR
ho
de
Isl
an
d�
ev
ad
a
Ca
lifo
rn
iaW
isco
ns
inA
rizo
na
�H
(A
ll S
pir
it S
ale
s)I
nd
ian
a
Ark
an
sa
sK
an
sas
Lo
uis
ian
a�
ort
h D
ak
ota
Te
xa
sC
olo
rad
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isso
ur
iW
est
Vir
gin
iaD
.C.
Ma
ry
lan
dV
er
mo
nt
Wy
om
ing
�H Rate Applied to Private
Sector Sales Only
�H Rate Applied to
All Spirit Sales
Source: Alcohol Polic y Information System, National Institutes of Health , PolEcon calcula tions
39
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.
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
-$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
15%
17%
19%
21%
23%
25%
27%
29%
31%
33%
35%
80.0% 85.0% 90.0% 95.0% 100.0%
% of Private Sec tor Sal es That Come From State-Store Sale s
Wh
ole
sa
le R
ev
en
ue
-$18
-$17
-$16
-$15
-$14
-$13
-$12
-$11
-$10
Mil
lio
ns
�e
t F
isc
al
Im
pa
ct
Increa se in Sales to Achieve Revenue �eutrality
�et Fiscal Impact of HB1251
40
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 state-
operated 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
41
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.
Appendix A
Fiscal Impact Model Based on FY2011 Actual State Sales Data
Assumptions and User Defined Model Inputs (Yellow Boxes) Average Price Per
Bottle $14.91 Lg. Retailer Discount 10% % Retail Price Increase 10%
Convenience
Sales Growth 1.5%
Total Markup $0.475 Sm. Retailer
Discount 15%
Price Elasticity of
Demand -0.8
Est. Cost of
Goods Sold/Bottle $10.11 Price to Sm. Retailer $13.42 Loss of Private Sales -8.0%
Price to Lg. Retailer $12.68 % Re-Captured by State
Stores 20%
Blended Price $13.35
% of Private
Sales From
State Stores
State Store
Sales
Change in
State Store
Sales
%
State Store
Sales Revenue
Change in
Profits From
State Store
Sales
Revenue From
Discounted
Sales to
Retailers
Profits From
Discounted
Sales to
Retailers
Change in
License &
Warehousing
Added
Enforcement
Costs
�et Fiscal
Impact
80% 10,634,607 (8,088,293) -43.2% $160,538,060 -$38,225,843 $99,327,898 $24,086,616 $1,300,000 $950,000 -$13,387,463
81% 10,533,504 (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
82% 10,432,400 (8,290,500) -44.3% $157,570,528 -$39,181,489 $101,811,096 $24,688,781 $1,300,000 $950,000 -$13,730,900
83% 10,331,296 (8,391,604) -44.8% $156,086,761 -$39,659,312 $103,052,695 $24,989,864 $1,300,000 $950,000 -$13,902,618
84% 10,230,193 (8,492,707) -45.4% $154,602,995 -$40,137,135 $104,294,293 $25,290,946 $1,300,000 $950,000 -$14,074,337
85% 10,129,089 (8,593,811) -45.9% $153,119,229 -$40,614,958 $105,535,892 $25,592,029 $1,300,000 $950,000 -$14,246,055
86% 10,027,985 (8,694,915) -46.4% $151,635,463 -$41,092,781 $106,777,491 $25,893,112 $1,300,000 $950,000 -$14,417,773
87% 9,926,882 (8,796,018) -47.0% $150,151,696 -$41,570,604 $108,019,090 $26,194,195 $1,300,000 $950,000 -$14,589,492
88% 9,825,778 (8,897,122) -47.5% $148,667,930 -$42,048,427 $109,260,688 $26,495,277 $1,300,000 $950,000 -$14,761,210
89% 9,724,674 (8,998,226) -48.1% $147,184,164 -$42,526,250 $110,502,287 $26,796,360 $1,300,000 $950,000 -$14,932,928
90% 9,623,571 (9,099,329) -48.6% $145,700,397 -$43,004,073 $111,743,886 $27,097,443 $1,300,000 $950,000 -$15,104,646
91% 9,522,467 (9,200,433) -49.1% $144,216,631 -$43,481,896 $112,985,484 $27,398,525 $1,300,000 $950,000 -$15,276,365
92% 9,421,363 (9,301,537) -49.7% $142,732,865 -$43,959,719 $114,227,083 $27,699,608 $1,300,000 $950,000 -$15,448,083
93% 9,320,260 (9,402,640) -50.2% $141,249,099 -$44,437,543 $115,468,682 $28,000,691 $1,300,000 $950,000 -$15,619,801
94% 9,219,156 (9,503,744) -50.8% $139,765,332 -$44,915,366 $116,710,281 $28,301,773 $1,300,000 $950,000 -$15,791,520
95% 9,118,052 (9,604,848) -51.3% $138,281,566 -$45,393,189 $117,951,879 $28,602,856 $1,300,000 $950,000 -$15,963,238
96% 9,016,949 (9,705,951) -51.8% $136,797,800 -$45,871,012 $119,193,478 $28,903,939 $1,300,000 $950,000 -$16,134,956
97% 8,915,845 (9,807,055) -52.4% $135,314,034 -$46,348,835 $120,435,077 $29,205,021 $1,300,000 $950,000 -$16,306,674
98% 8,814,741 (9,908,159) -52.9% $133,830,267 -$46,826,658 $121,676,676 $29,506,104 $1,300,000 $950,000 -$16,478,393
99% 8,713,638 (10,009,262) -53.5% $132,346,501 -$47,304,481 $122,918,274 $29,807,187 $1,300,000 $950,000 -$16,650,111
100% 8,612,534 (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
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 alcohol-
related 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.
