In Op-Ed, Economists John Caskey and Philip Jefferson Debunk Myth of Pennsylvania's Liquor Sales "Border Bleed"

Philadelphia Inquirer: Liquor 'border bleed' not a big issue

Eighty years ago this month, the Pennsylvania Liquor Control Board opened its first stores to sell wine and spirits. Now, Gov. Corbett wants to privatize this system. There are several good reasons to support such a move, but there is also at least one bad one: "border bleed," the idea that Pennsylvania loses significant liquor sales to surrounding states and would regain much of this business if it were to privatize wine and spirits sales.

Clearly, some Pennsylvanians buy liquor in surrounding states, but the extent is often exaggerated. Two years ago, the Corbett administration asked the PFM Group to analyze potential gains to the state from privatizing liquor sales. The report stated, "Multiple studies of this 'border bleed' suggest that . . . lost sales to other states may be in the range of 10 to 30 percent of total sales." If true, wow!

In fiscal year 2012-13, Pennsylvania Wine and Spirits Stores had sales of $2.2 billion, so a 20 percent loss (the midpoint of the PFM range) would mean lost sales of $440 million. Moreover, since about a quarter of sales are turned over to the state as tax receipts or store profits, this would mean the state is losing more than $100 million in revenue due to border bleed.

This is undoubtedly why Corbett stated, "In Philadelphia, we know that there are a few people - make that many people - who get in their cars and travel down [Interstate] 95 into Delaware or over into Jersey to buy their alcohol. I want a system that gives our people the flexibility to [make] purchases here. . . . I can tell you that we are losing millions of dollars a year in people purchasing their alcohol by going around the system."

Border bleed, however, is actually not that big and would not be greatly reduced with privatization.

In a recent study, we used statistical analysis to estimate lost cross-border sales. No one paid for this study, so we had no patron who had any vested interest in what we might find. Our statistical model indicated that Pennsylvania's liquor sales would be 3 to 8 percent higher were there no border bleed, nothing close to 20 percent.

Any statistical model can be questioned, but our findings are consistent with common sense. In the summer of 2012, we compared the prices of the five most popular wines and spirits sold in Pennsylvania with the prices in stores in surrounding states. Wine prices in Delaware, Maryland, and New Jersey were generally lower, but usually by less than $1 a bottle. Wine prices in New York, Ohio, and West Virginia did not show a consistent pattern relative to Pennsylvania prices. Delaware and Maryland prices for spirits were lower than those in Pennsylvania, often by $2 to $3 a bottle. Spirits prices in the other surrounding states were either higher or showed no consistent pattern.

Such price differentials might justify someone driving from Delaware County to the state of Delaware for a case of wine (illegally, by the way) but not for just a bottle or two, nor would one drive from Pittsburgh to Ohio even for a case. Moreover, most people probably do not buy spirits by the case, so a $6 savings on two to three bottles does not likely justify a 45-minute round trip.

In other words, common sense and a quick glance at a map indicate that nearly all border bleed comes from the Philadelphia region, and probably just from those communities with easy access to Delaware, Maryland, or New Jersey. Even if 20 percent of the drinkers in these communities frequently went out of state for their purchases, it wouldn't have a big effect on state-wide sales.

So what if border bleed is well under 10 percent? Isn't this still lots of lost sales? Yes, but there is no reason to think privatization would significantly reduce that loss.

In order to be roughly revenue-neutral, proposals to privatize Pennsylvania liquor sales do not call for significant reductions in liquor taxes. So price reductions on Pennsylvania wine and spirits are likely to be modest under privatization. Of course, service and selection could improve, but people traveling out of state for just these factors account for only a subset of border bleed. Moreover, Delaware has no sales tax on wine and spirits. Pennsylvania's is 6 percent. This won't change under privatization, so price-sensitive people who drive to Delaware are likely to continue to do so.

The conclusion is clear. There may be good reasons to privatize Pennsylvania liquor sales, but regaining many millions of dollars in lost state revenue is not among them.

John Caskey has been a member of the Swarthmore community since 1988. An expert on consumer finance and banking, Prof. Caskey most recently has focused on pawnshops, check-cashing operations, payday lending and financial firms that primarily serve lower-income people, which he discusses in his book Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor. 

Philip Jefferson has been at Swarthmore since 2005.  A former research economist at the Federal Reserve Board, Jefferson teaches macroeconomics and econometrics. His recent research has delved into such issues as the role of education as a buffer against unemployment, the effect of business cycles on poverty rates, and the distribution of income between labor and capital.