Wine and liquor prices are expected to rise in July even though the business-friendly HST will actually lower tax rates on booze.
Internal industry research reveals that while consumers will pay the equivalent of an 8 per cent provincial sales tax after July 1 — instead of the existing 12 per cent on alcohol — retail prices will not drop.
Harmonized sales tax»
by Robert Benzie Queen's Park Bureau Chief
by Robert Benzie Queen's Park Bureau Chief
You can expect to pay more to drown your sorrows over the 13 per cent harmonized sales tax this summer.
Wine and liquor prices are expected to rise in July even though the business-friendly HST will actually lower tax rates on booze, the Star has learned.
Internal industry research reveals that while consumers will pay the equivalent of an 8 per cent provincial sales tax after July 1 — instead of the existing 12 per cent on alcohol — retail prices will not drop.
Nor will drinks necessarily be any cheaper in your favourite pub or bistro, despite the fact bar owners and restaurateurs will also effectively pay 8 per cent, down from the current 10 per cent tax for licensees.
While Premier Dalton McGuinty wants savings passed on to consumers, the LCBO has a policy of "social responsibility" which prevents them from bringing prices down to a level which would encourage alcohol abuse.
"It's counter-intuitive. Tax rates are decreasing because of the harmonization, but the prices on the shelf are actually going to be increased," warned one senior industry official, who spoke on condition of anonymity due to fear of retribution from the Liquor Control Board of Ontario.
"And that's going to surprise consumers. They should be expecting a reduction."
That's because the LCBO has quietly increased its mark-up by 7.5 per cent. On imported wines the mark-up has soared to 71.5 per cent from 64 per cent, and on domestic wines it has risen to 65.5 per cent from 58 per cent.
To keep prices the same, sources say the markup should at most increase just 6.5 per cent.
For example, a 750 millilitre bottle of Wolf Blass Yellow Label Cabernet Sauvignon, a popular Australian red wine that currently retails for $16.35, should be dropping in price to $15.80 thanks to the HST.
However, sources say the retail price will jump to $16.45 — only a dime more than it is now, but 65 cents higher than it needs to be.
Similarly, the HST should lower the price of a 750 millilitre bottle of Pelee Island VQA Chardonnay, an Ontario white, from $17.95 to $17.35. Instead, it will go up to $18.05. That's 70 cents in lost savings to wine drinkers.
"They want to preserve government revenue and they also want to preserve pricing in the interest of social responsibility. That's a big thing. In that sense, it's not about social responsibility, it's all about revenue," said the industry source.
On Wednesday night, finance ministry officials insisted any retail price changes are to offset a $24 million tax break to licensees that was handed over in January to soften the blow of the HST. They argued the government ultimately will not gain any more revenue.
The LCBO's Steve Erwin said the province has ordered its retailer to ensure any changes due to the HST will be "revenue neutral."
"So the tax comes down, the mark-up goes up from the LCBO point of view. The expectation is that any change you would see in the stores would be minimal. Certainly it varies from product to product," said Erwin.
"It's early days and we're just getting information now from suppliers in terms of their re-quotes, but the early expectation is that you won't see too much of a difference – a few pennies, maybe, in some cases.
"If you just lowered the tax rate without making any other changes to price, then prices would fall."
That would contradict LCBO's long-standing policy of keeping prices "socially responsible" to discourage drinking and driving, underage imbibing, and general abuse of alcohol.
Indeed, the 610-store chain works closely with organizations like Mothers Against Drunk Driving to promote safe consumption of alcohol.
But another industry insider questioned the social responsibility argument when it comes to the looming price changes.
"The problem is these liquor prices are going to be so much higher than … the 'social reference price,' which is the minimum price that products should hit the market. There's very few that are at the floor. Most products are priced higher than that," the source said.
The blending of the 8 per cent provincial sales tax with the 5 per cent federal GST takes effect on Canada Day and will mean higher levies on about one in six products and services, including gasoline, haircuts, taxi fares, legal fees, and home electricity and Internet bills.
Economists argue that while consumers will pay more, the measure should jolt the economy and create 600,000 new jobs.
Ironically, any LCBO price hike would contradict advice from McGuinty, who wants businesses to pass along to consumers the savings from the new tax.
"It's my expectation," McGuinty told reporters Wednesday, when asked if the lower cost of doing business in Ontario should mean cheaper prices.
"We know that 85 per cent of the savings are passed through by the third year and the balance shortly thereafter," the premier said, referring to the experience in the 140 jurisdictions around the world that have harmonized taxes.
"There's a pretty solid record of the impact this will have on spending and what happens in terms of savings and whether they are in fact passed on and they are," he said.
"It's a highly competitive business world. If you're not passing on your savings to me, he is and I'm shopping from him."
Asked if businesses were "gouging" if they didn't lower prices, McGuinty said: "I'm just saying in a competitive world, you're going to want to pass along the savings."
Reprinted from the Front Page of the Thursday May 13, 2010 edition of the Toronto Star.
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