ï»¿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 Wednesdayâ€™s Globe and Mail. Apparently, great minds really do think alike.
Thursdayâ€™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 Ontarioâ€™s tax on retail liquor sales (12% as opposed to the usual 8% provincial sales tax) is not part of the LCBOâ€™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.