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Three billion dollars is a lot of scratch. It’s also the forecast state budget shortfall for the 2009-2011 biennium.

You know how when shit’s looking really bleak, and you see your life teetering at the edge of a crucible? You know how your throat gets all dry and raspy? Like someone got down in there with 50 grit sandpaper and just went to town? In those times, all you want is something cool and refreshing. It’s as if a cold beer could ease all your troubles.

After reading the revenue forecast released this morning, our legislators have some powerful dry throats. And for Representative Ben Cannon (HD 46) and company, beer is looking awfully good right now.

I spoke with a legislative staff member at Rep. Cannon’s office today, who was able to clarify some issues about the proposed increase in the excise tax for malt beverages. The Bill (HB 2461) would raise the excise tax on a barrel of beer (31 gallons or 2 kegs) from the current $2.60 to $52.21, an increase of $49.61. As opponents to the bill like to point out, that’s more than an 1800% increase in the excise tax.

Cannon says the tax has not been raised in 32 years. His allies also say that the tax would only increase the cost of a pint an estimated 20 cents. So why do opponents say that a pint will increase by $1.25? The legislative aid I spoke to was honestly stumped. She has her own percentage: It’s 625%. According to the bill’s sponsors, that’s how much they say distributors and retailers would be marking up the price of beer in response to the tax. “All in profit as far as I can tell,” the staffer told me, noting that a tax does not add costs to transportation/production that might necessitate that kind of increase.

The suggestion here is that if you were to walk into, say, Full Sail brewery (Cannon has some Full Sail in his office fridge, I was told), and go straight to the keg at point of production, a pint drawn off that keg should only cost about 20 cents more after the new excise tax. Somewhere along the line, the bill’s supporters suggest, the price is jacked up for some unknown reason at distribution or point of sale. It’s perplexing.

The bill’s proponents say they calculated the proposed tax increase by simply estimating how much the state spends on addiction prevention and recovery services. The idea is that this tax increase would take care of those costs, immediately freeing up some $114m in the state’s general fund.

Personally, I still hold to the semi-articulate-hysterical-rant that I posted on Monday (to wit: this is one hell of a fucking major excise tax increase for producers!), but I may need to direct some of my questions about quashing one of the only pleasures in this poor man’s life—cheap beer—towards the distributors.

I think we can all agree that drinking a pint of beer that costs twenty cents more wouldn’t be that much of a burden if we knew we were doing the state a solid. But a buck twenty-five increase in this economy is pretty drastic. Where’s that other dollar being tacked on?

But at least the supporters of HB 2461 are willing to talk. These questions may be answered at a hearing about the proposed beer tax next Monday, 8 am (prohibitively early for beer hounds), at the Capital. The Oregon Brewers Guild will have a posse going up, leaving from the Green Dragon at 6 am. You can call Brian Butenschoen at 288-2739 if you want to catch a ride.

I’ll be up there Live Blogging the hearing, so check in early and come back often for updates, pictures, and juicy quotes.

11 replies on “Winter Boozy Taxes”

  3. I think Cannon’s office fails to realize that the middlemen aren’t going to just mark the beer up $.20 cents a pint (FYI they said $.15 cents on their letter they were sending out on Tuesday). The distributors will mark up and so will the bar.

    Tons of bars around town had to raise the price of beer when the price of barley went up thus raising the price of their kegs by a few dollars. Imagine what a $46 raise is going to be.

    File this tax under worst.idea.ever.

  5. Okay, if that adds .20 to the cost at the brewery, (or more likely, the distributor,) and gets passed on as $1.25 to the customers, that means my $4 beer only really costs $0.64 after paying wait staff, delivery drivers, (this is why I use my bicycle trailer for moving beer,) materials, energy, rent, etc, and that the other $3.36 is purely profit for the 2 people involved in that supply chain. And for some reason, (like, I know someone that owns a bar,) I just have a hard time believing that…

  7. “i heart lille ads”

    Agreed. I should place a Mercury personal that says “I want to buy underwear from lille and I need someone to wear it.”

  8. Ugh, I thought this has been explained enough, PAC, that you and the staffer shouldn’t be so “stumped”. But then again, I don’t expect a staffer whose plans on spending other people’s money for the rest of his life to understand such things as how business actually works and sustains itself.

    It doesn’t matter if a cost increase is due to a tax or anything else, it looks and functions the same to the restaurant and other links in the supply chain. What is the difference for me as a restaurant owner between an increase of $50/keg because of tax increases and $50/keg for hop price increases or transportation cost increases? To me, it’s all just $50.

    A retailer never passes costs along directly. A retailer worries about margins and maintaing their costs as a percentage of their revenues. I’m sure as a food writer, you’ve heard figures like 33% for COGS (costs of goods sold) for restaurants or similar other benchmarks. Any retailer has a goal for their COGS. For most restaurants, it’s somewhere between 30%-40%.

    These margins are established for a reason. They’re not arbitrary, but built on industry experience and sound economic principles. A lot of factors go into why they are what they are, but profit margins are a primary way of assessing a company’s health and trends in health. Declining profit margins are a sign that a company is declining in health and increasing its risk. You can’t maintain profit margins merely by passing along costs. You MUST mark those costs up. Here’s a simple formula:

    Gross Profit Margin = (Revenue – Cost)/Revenue

    So, look below at what happens based on this formula.

    Say I currently by a keg for $100 and the sales of all the pints add up to $300. I get this:

    $100 keg, $300 sales = 66% profit margin

    Now, if my keg price goes up $50 and I only pass along the rise in costs directly, selling the keg for $350, my profit margin falls significantly:

    $150 keg, $350 sales = 57% profit margin

    In order to maintain my profit margins, maintain the health of my restaurant, and maintain the level of risk as a company, I need to maintain the markup:

    $150 keg, $450 sales = 66% profit margin

    Because the cost — a tax — is levied at the level of the producer, there will be multiple proportional price increases along the supply chain, each business trying to maintain its profit margins and maintain the health of its company. For a distributor, that might only be 25%. But the costs compound along the way. So we get something like this:

    Tax = $50

    Cost to Produce = $75
    Normal Producer Markup = 10%

    Pre-Tax Price to Distributor = $82.50
    After-Tax Price to Distributor = $137.50

    Normal Distributor Markup = 25%

    Pre-Tax Price to Retailer = $103.13
    After-Tax Price to Retailer = $171.88

    Normal Retailer Markup = 300%

    Pre-Tax Price to Consumer = $309.39
    After-Tax Price to Consumer = $515.64

    Tax’s Real Cost to Consumer = $206.25

    So if each chain on the supply link maintains their profit margins, maintaining the necessary markups to sustain their business’s health, that $50 tax has added $206.25 to the cost for the consumer. Of course, in reality this isn’t what will happen. Each link on the supply chain will have to balance the increase in costs vs a decrease in demand due to increased prices to maximize their profits, so they’ll eat some of the tax themselves, making their company less profitable, possibly causing them to have to lay off employees or cut costs in other ways.

    The only way such a tax can be levied without having such a drastic effect is at the point of sale, as a sales tax directly on the consumer. But that’s not politically correct and would cause a much broader and vocal backlash. Self-serving politicians in Salem don’t have the balls to tell the electorate what they’re doing, so instead they will do something that will hurt the consumer more, but can be done less conspicously by dressing it up as a modest tax on businesses.

    Instead of talking with some know-nothing, state-level, political staffer with head up his polls, do your research and talk to economists and MBAs who specialize in these subjects. Find one sympathetic to business concerns and find one sympathetic to social welfare concerns and have each explain the possible and likely outcomes and requirements of such a tax, learn something, and then inform your readership, rather than just blogging about how uninformed you are. Be a journalist.

  9. “The legislative aid I spoke to was honestly stumped. She has her own percentage: It’s 625%.” Christ! That aid’s not saying 625% is the tax increase, huh? 49/2.6 = 18.8 = 1880%

  10. extramsg, no, you need to go talk to an economist or an MBA or something other than an ostrich. First of all, no business that I know of makes a profit margin of 66%. The good ones bring in more money than they spend, and the bad ones don’t, but nobody makes 66% in PROFIT. The typical markup on beer is around 200% right now, you are right, but that money is used to pay the rent/mortgage on the building, the waitstaff, the electric bill, the furniture, etc, etc. In other words, there are a whole bunch of other costs than just the kegs themselves, and you are ignoring them. The “profit” (which goes to the owner, after what they make for their work, which is why some businesses can be in theory unprofitable, but still stay open,) is a couple percent at best. Now, when this tax increase goes into effect, the bar/restaurant will have to pay more for beer, but the rent isn’t going to go up at the same time, the waitstaff isn’t all going to get 50% raises, the only thing that will happen is that the keg of beer will cost more. So there will be no reason to raise the price of beer at the counter 50% to still make the same profit, no, instead the price of beer will be about 20 cents higher, and the markup per keg, (as a percentage,) will go down. The key is, and why it works, is that the markup, IN DOLLARS, will stay about the same, so they’ll still be able to pay the waitstaff, the rent, etc…

    Lets look at an example: The main component of gasoline is crude oil. There are other costs too: you have to refine it, (which takes special equipment that you have to buy, which is kind of like a mortgage,) and then distribution and labor to put it in the car. In 2003, crude oil was about $30/barrel, and gasoline was about $1.75/gallon after taxes. There are $0.42 of taxes (state+fed) per gallon in Oregon, (taken at the pump,) so the consumers paid about $1.33 before taxes. There are 42 gallons in a barrel of crude, (same as whiskey barrels, which is what it used to be shipped in,) so that means that a gallon of crude oil was about $0.70. So the markup from buying crude, turning it into gasoline and distributing it and selling it to consumers is $0.63 or about 90% markup in 2003. In mid-2008, the price of crude oil hit $140/barrel, or $3.33/gallon. What was the price of gasoline at that time, was it closer to?
    a) $3.33*(1+0.90)+tax=$6.75 (constant markup as a percentage.)
    b) $3.33+$0.63+tax=$4.38 (constant markup in dollars.)
    I don’t know, I’ve bought one tank of gasoline since Katrina. However, I heard it was above $4, and not anywhere near $7 (except at rental car companies.)

  11. The problem, Matthew, is that a business owner doesn’t look through the causes of his price increases. He just sees something going up in price and doesn’t go back and ask, “Hey, how much of that is a tax, how much is transportion increases, and how much of that is commodity market fluctuations?” He just knows that his prices have gone up and knows that certain markups have been necessary to maintain his business. As I said, there’s some degree to which a company eats the margins when prices go up, but in general you try to maintain. You can never merely pass along the cost. While the dollars of profit may stay the same, the ratio of costs to revenue is increasing, making the business riskier and riskier. (A company whose costs are $2000, but makes $5000 is much less risky than a company whose costs are $150000 with revenues of 152000, even though, technically, they have the same profits — in dollars.) So while a tax may only be 20 cents to the government, it will never only be 20 cents to the consumer unless they make it at the point of sale, like with a sales tax.

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