Alcohol tax increase expected to bump up prices at the bar
Andrew Burke, proprietor of John Steven Ltd. (pouring beer) believes Maryland's new alcohol tax, which kicks in July 1, 2011, will have an impact on business. The bar owners must decide between "eating" the increase or charging more. (Baltimore Sun photo by Gene Sweeney Jr. / June 28, 2011)
But when the increase kicks in Friday, bar patrons could see prices going up by twice as much.
Chalk it up to pub economics: Bar owners, who typically include the sales tax as part of a beverage's advertised price, don't like dealing in pennies, nickels or dimes. Prices, particularly at the local joints, are set in 25-cent increments.
"If you are tending bar, and it is a Saturday night, you can't make change," explained Andrew Burke, the owner of John Steven Ltd., a bar in Baltimore's Fells Point neighborhood. "The guy at the bar isn't going to count out 86 cents while three more people are waiting for a drink."
That means that when the state adds a 3 percent surcharge for alcohol on top of the 6 percent sales tax Friday, bar owners say, your $3 Bud Lite will cost $3.25.
It was one of several wrinkles that went unmentioned in the debate over the alcohol tax during the waning hours of this year's legislative session. But as bar and small-business owners work through pages of explanations about the new tax from the the state comptroller' office, they are discovering that the tax is likely to hit in some unpredicted ways.
It's the first tax hike targeted at booze in a generation, and the most significant change to the tax code since 2007, when the sales tax on all goods was bumped up a percentage point.
When the sales tax surcharge on alcohol was introduced in the General Assembly this year, it was seen by the powerful liquor lobby as an improvement over the so-called dime-a-drink increase on wholesale prices, which advocates had pushed for years as a way to boost funding for the developmentally disabled.
The reason: With a sales tax, the price on the shelf remains static; the true cost is clear to the consumer only at the cash register. Restaurant and store owners liked the new approach — but nobody, it appeared, realized that bars would still be stung.
The state expects the new tax to bring in roughly $87 million annually. It wasn't needed to balance the budget for the fiscal year that begins Friday — lawmakers did that with a combination of cuts and fee increases — but the continuing stream of new revenue is expected to make future deficits smaller.
About 80 percent of the money the increase raises this year will be spent on school construction, mostly in Baltimore and the Washington suburbs, heavily Democratic areas where support was needed for final passage. The rest will go to services for the developmentally disabled.
Next year, the cash goes into the state's general fund — though lobbyists for disabled people already are pressuring Gov. Martin O'Malley to commit funds to their cause. They are planning a news conference on the subject Thursday.
Democratic lawmakers say they are unmoved by the complaints from bar owners who are contemplating adding a quarter or two to prices. After all, the difference between the actual tax and the bars' increases will be profit.
"If they think it will cause us to undo what we did, I think they will be drowning in their own beer," said Del. Sandy Rosenberg, a Baltimore Democrat on the tax-writing House Ways and Means Committee.
Sen. Rich Madaleno, a Montgomery County Democrat on the Senate Budget and Taxation Committee, predicted that if bars decided to raise prices in 25-cent increments, Annapolis would be blamed.
"I guess that is a role we are doomed to play," he said.
The staff in the wood-paneled second-floor lounge at Sláinte Irish Pub and Restaurant in Fells Point let out groans and a few expletives last week when owners announced that new, higher prices were in the works. It's the first time in three years they've touched prices.
"You need to let people know it is not our fault," said Chris Marquis, a chef. "It is that guy O'Malley."
Democratic Gov. Martin O'Malley put his signature on the bill last month. Marquis suggested posting a sign on the door encouraging customers to direct their anger at the government.
Owner Bill Irwin told his crew that he'd like to absorb the new tax, as he did last summer when Baltimore began collecting a two-cent surcharge on bottles. But he said he's been taking on a lot lately: Food and transportation costs are going up, and brewers are charging more for beer.
Not wanting to be on the vanguard of a price increase, Irwin dispatched a manager to walk the neighborhood and survey how other taverns would handle the tax. His scout found that owners or managers at six other bars in the neighborhood planned to tack a quarter to their price.
Republican lawmakers, who opposed the tax increases but did not have the votes to stop them, said bars and restaurants are already struggling.
Del. Steve Schuh, a Republican from Anne Arundel County, called the increase a "kick in the teeth" that could put the fragile hospitality industry "over the edge."
At least some drinkers, however, say they just aren't that sensitive to price.
"Nobody is going to stay home on a Friday because the bar is charging another quarter," said Mike O'Leary, 47, between sips of a pint of Oliver's Ironman IPA at John Steven. "It is a small amount to pay."
The new law also affects restaurants and liquor stores. But the biggest headache there has been reprogramming cash registers to tax food and beverages at different rates.
A more serious problem in the new law, restaurateurs say, is a little-noticed provision that taxes services connected to alcohol at the higher rate.
The mandatory gratuities that bars, restaurants and caterers charge to larger groups will be also assessed a 9 percent tax. Here's where it gets difficult: The higher rate may be applied only to the alcohol portion of the service charge.
"It's like trigonometry," said Marquis, the chef at Sláinte, who shook his head as it was described.
The solution, for Marquis' employer at least, is very straightforward: End the service charge, which they use only rarely, when they rent out a room for parties. Other price increases should make up the difference.
But businesses that rely on large groups can't quite do that. Edward Dopkin, a co-owner of Classic Catering People in Owings Mills, led a seven-hour meeting with his staff on Tuesday to talk about how the new tax would be applied.
Meticulous accounting will be necessary. Consider glassware: The surcharge for wine glasses will go to 9 percent. Water glasses, which won't be used for alcohol, will be taxed at 6 percent.
"I don't think anyone was aware of the complication for caterers," Dopkin said. "It goes fairly deep."
Deputy Comptroller Linda L. Tanton conceded that the wrinkle is "complicated for everyone." Three lawmakers who were involved with crafting the tax were unaware it was being applied to the service charge and said they'd be open to changing it. All wanted more information from Comptroller Peter Franchot before taking a position.
Republicans blamed the problems on the lightning speed with which the bill moved from concept to final passage. The Senate passed a 3 percent increase that would be phased in over three years, but the House leadership decided to impose the full increase in the first year.
Word of the House leaders' intentions circulated in the State House for about two weeks while the Senate version languished in the House Rules Committee. Then, on the Saturday before the session ended, the tax bill was rewritten and unveiled at a subcommittee meeting.
Lobbyists for the alcohol and hospitality industries looked defeated. Health care advocates bounced around the committee room with smiles.
Within hours, the full committee voted the new bill to the House floor, where it passed shortly before midnight after a raucous floor debate. The final version cleared the House and Senate two days later, hours before the legislature adjourned.
An earlier version of this story did not account for school construction funds going to Montgomery County. The Sun regrets the error.
Sales tax surcharge
Beginning Friday, the state will require bars, restaurants and liquor stores to assess a 9 percent sales tax on alcoholic beverages.
The increase is expected to net the state an additional $87 million annually.
The sales tax on other items will remain 6 percent.