Great Minds Drink Alike

Nine days ago, I posted some back-of-envelope math on the proposal to privatize the Liquor Control Board of Ontario (LCBO).

Specifically, I noted that keeping its annual profit of $1.4 billion would be worth more than the estimated sale price of $10 billion, which would reduce provincial debt charges by no more than $0.5 billion per year. PublicValues.ca and the Ontario Public Service Employees Union picked up my calculations.

The University of Western Ontario’s Jim Davies made the same argument using the same numbers in Wednesday’s Globe and Mail. Apparently, great minds really do think alike.

Thursday’s Globe included two letters objecting to the Weir-Davies analysis. Both made points that do not change the conclusion.

The first argued, “Ontario would continue to earn revenue from alcohol through taxation and licensing fees.” But Ontario’s tax on retail liquor sales (12% as opposed to the usual 8% provincial sales tax) is not part of the LCBO’s profit.

Similarly, liquor licence fees are paid to the Alcohol and Gaming Commission of Ontario rather than to the LCBO. These revenues, which the government would collect with or without privatization, have no effect on the costs or benefits of privatization.

The second letter noted that a privatized LCBO would pay corporate taxes on its profits. This point slightly increases the financial benefit of privatization, but leaves it far below the financial cost.

The Ontario government is cutting its corporate tax rate to 10%, so a private LCBO would pay $140 million annually in provincial corporate tax. Adding this amount to the potential reduction in debt charges produces a total of $0.6 billion, which is still below half of what the public LCBO contributes to provincial revenues.

Of course, the government could retain a portion of LCBO profits by continuing to buy alcohol in bulk and mark up the wholesale price, while privatizing only the retail outlets. But the more profit thus retained, the less private investors would be willing to pay for the stores.

There is still no reason to believe that public assets could be sold for amounts worth more than their ongoing contribution to public revenues.

3 comments

  • Your economic argument might make sense, but …

    While the LCBO provides decent union jobs to many retail workers, it has a predatory and competitive relationship with many of Ontario small farmers (grape growers) and is really quite a goliath to many craft/artisinal businesses.

    Besides it being a rather obnoxious reminder that Ontario has yet to shed fully its prohibition era mentalities around alcohol, the LCBO itself ends up playing both regulatory and retail aspects of the alcohol market in Ontario.

    Further, its only real competition in the province are independent brewers and wineries who are (barely, heavily taxed and insanely regulated) allowed to operate a single on-site winery retail store. I say competition because the LCBO really does act in a competitive fashion to these organizations, squeezing out small players and using its lobbying power and influence at the political level to make sure that fruit wines, craft wines and beers, etc. are heavily regulated and effectively available only through its retail system.

    To me the LCBO is a kind of modern day “Family Compact” in Ontario, and not exactly the paragon of socialized public institutions that progressives ought to be defending.

  • “Ernie Eves concurs.”

    Well that seals the deal.

Leave a Reply

Your email address will not be published.