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Does closing a liquor store reduce tax revenue?

Customers waiting for cashiers meander inside of The Surdyk’s liquor store in Minneapolis on Sunday, March 12. The store has opened for business even though Minnesota’s new Sunday liquor-sales law does not take effect until July.
Customers waiting for cashiers meander inside of The Surdyk’s liquor store in Minneapolis on Sunday, March 12. The store has opened for business even though Minnesota’s new Sunday liquor-sales law does not take effect until July. Star Tribune

Tempests in tiny teapots often provide examples for econ teachers.

The Legislature of my home state of Minnesota repealed a 159-year-old ban on Sunday liquor store sales effective July 1. The scofflaw owner of a Minneapolis store did not wait: He opened on Sunday immediately. He truculently defied telephoned orders to close and now has been hit with a $2,000 fine and suspension of his license for 30 days starting on Sunday, July 2.

The public generally approves. The owner has supporters. One, in a letter to the editor, argued that state authorities were chumps. He asserted that the loss to the state and federal treasuries of taxes levied on liquor that now wouldn’t be sold by the store far outweighed the value of the fine. Government would lose more than a million dollars in liquor tax revenue from a closed store and get back only $2,000.

Some readers asked whether this is correct. That led me to the economics of “substitutes and complements.”

These are part of the basics of supply and demand and are taught together with “elasticity,” a numerical measure of how big a change in quantity is associated with a given change in price. Simple elasticity questions are: If the price of ground beef drops to $2.99 per pound from $3.49, how much will the quantity sold rise? If the price of soybeans rises 10 percent, how many more beans will farmers produce?

One of the most important factors determining this sensitivity is the availability of substitutes, either in consumption, for demand, or in production, for supply.

For example, if beef prices go up but other meats stay the same, then the quantities of beef people buy will drop. Pork, chicken and turkey are acceptable substitutes. But if gas prices go up, quantities bought drop little. There is no ready substitute.

What does this have to do with a liquor store, and whether closing it for a month really will cut tax revenues by a million dollars?

As long as there are good substitutes for liquor sold at the offending shop, total sales to consumers will fall little. There are good substitutes, namely identical brands at competing nearby stores.

The assertion that the government would lose much revenue if one store is closed for 30 days assumes all of this store’s customers would suddenly become teetotalers. This is preposterous.

People may like a particular location or proprietor, but if that store is not open, they will drive to another, just as when a favorite store for milk is closed.

The kicker is that overall consumer demand for alcohol is quite inelastic. That is due to alcohol’s addictive qualities for some drinkers. Total quantities purchased in the entire market do not decline much when retail prices go up.

However, when you move from all alcohol lumped together to individual categories, demand becomes more elastic. If the price of distilled spirits increased by 20 percent while beer and wine stay the same, some hard liquor drinkers would shift to nondistilled alternatives.

Similarly, if all imported beers go up in price, say because of a decline in the exchange value of the U.S. dollar, then, at the margin, some Corona or Heineken fans will switch to domestics. And if any individual brand, be it bourbon, chardonay or pilsner, rises much against competing brands in the same category, its sales will drop.

Liquor is not a “durable good.” If you want a new car or clothes dryer and the dealer of choice is closed for a week, it is easy to wait. But regular drinkers out of their favorite won’t wait 30 days, or even five, just to see a familiar checkout clerk.

Nor are alcoholic beverages a “differentiated product” on the basis of the store. Yes, dedicated Coors or Jack Daniels drinkers scorn other brands. But they don’t fuss over whether their favorite came from store X or store Y.

The availability of substitutes determines price-setting ability. If a higher state minimum wage increases costs at restaurants, only ones on state lines will be unable to pass most of the increase along to consumers. As long as competitors’ costs go up as yours do, it’s no big problem. You will not lose business. But if a wage increase applies only to one city and there are meals and groceries in adjacent suburbs, city businesses suffer.

Similarly, farmers in the U.S. sell hundreds of millions of dollars worth of soybeans to China. That doesn’t mean China will keep buying identical quantities no matter what. If U.S. soybean prices go up, there is a good substitute called Brazilian soybeans.

In contrast, there are not good substitutes for pacemakers, heart valves and other devices manufactured in the U.S. So a trade war or currency fluctuations will not necessarily affect agriculture and medical devices equally. In general, commodities, by definition, have good substitutes, and their producers are more vulnerable to purchasers going elsewhere.

One final point: We don’t know much about why consumers are loyal to familiar brands or stores. The expense of getting information about the desirability of new competitors is a factor. So is the psychological security of familiar actions or things. But if closing our favorite store for a month forces us to elsewhere, the information we gain may convince us that it really is easier to buy at that new big-box liquor outlet.

St. Paul economist and writer Edward Lotterman can be reached at boise@edlotterman.com.

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