Like most whiskey fans, I always check out the liquor stores when I get out of my home state. Iowa has a fairly unique liquor tax system and it is not uncommon to find much better prices on booze in other states. For cheap whiskies and spirits, the difference between Iowa and surrounding states rarely makes it worth buying out of Iowa. However, a unique feature of Iowa’s taxing structure quickly drives up the price of the more expensive bottles.
Before I get into why those prices on quality or rare bottles can be so high, here is an interesting graphic showing the different taxes around the U.S.:
(c) Copyright Tax Foundation
If you look at the map, it is clear that according to this calculation, Iowa is among the worst states when it comes to taxing spirits. What drives this high tax is a levy of 50% on product sold through the Iowa Alcoholic Beverages Division wholesale liquor distribution system. This means that if the ABD buys a bottle wholesale for $20 it marks it up to $30 for distribution to an approved Iowa spirits retailer. The retailer must then add its own markup in order to recover its own costs. This means that the $20 bottle may be marked at $35. (a fairly tight markup). If we are talking about a $5.50 bottle of cheap booze, then the final price might be $8.25 before the retail profit is added. But look what happens when the original wholesale price is $100. That bottle will have a $50 markup moving the price to $150 before retailer profit.
If people could only buy whisky in their own state then this would not make much difference. However, lets look at these same numbers in Missouri, which taxes bottles by the gallon. At $2.00 per gallon, that $5.50 bottle of cheap booze will only have a tax of $.69 (this assumes a 750ml bottle).The price ends up being $6.19. That expensive $100 bottle (wholesale) ends up being $100.69. There is a lot of space between $150 and $101 (before retail mark-up). What is missing in this equation is the fact that Iowa handles the distribution of all spirits. This includes processing and inventorying the cases, storing them in warehouses, moving them to retailers by truck, and processing all of the sales to retailers. In most other states, including Missouri, distributors handle that process. They each have competing warehouses, competing trucking services, and duplicative accounting functions. Of course, if capitalism was really inefficient then we would have the hammer and sickle instead of the stars and stripes on our flag. We all know how socialism turned out so well in the Soviet Union. That begs the question of what is the value of Iowa’s distribution service? Well, Iowa posted operating and general and administrative expenses of $7,238,209 in 2013. It handled $19.993M bottles. That works out to about 36 cents per bottle to run the IBA and distribute that bottle. Let’s go with Lenin and Mao and assume that capitalism is twice as bad at capitalism than socialism is and say that it costs 72 cents per bottle to distribute booze in Missouri. At $2.00 per gallon, that $5.50 bottle of cheap booze will only have a tax of $.69 and a distribution mark-up of $.72 for a total wholesale cost of $6.91. That expensive $100 bottle (wholesale) ends up being $101.41. There is still a lot of space between $150 and $101 and if we assume that Iowa and Missouri stores have the same profit mark-up then the difference is frozen. There is just no way that an Iowa retailer can compete at the high-end. So, if someone were to want to buy several bottles of higher-end booze, then the price difference warrants a trip to Missouri, Minnesota or Illinois. I’ve not been impressed with the prices in Nebraska lately so I can’t weigh in on that state. I can say that the selection is much better in certain Omaha locales than anywhere in Iowa.
Also note that I’m not addressing the laws on how much booze you can transfer between state lines in this posting. I still recall the days when the IBA would have agents in Omaha liquor store parking lots radioing in the Iowa plates of customers so that they could be pulled over by the troopers on the Iowa side of the I-80 bridge. I do not know what the current law is in Iowa on out of state purchases.
How did Iowa end up with this practice? The mark-up system was enacted with the privatization of state stores in 1987 and the tax was originally set at 60%. The General Assembly reduced the mark-up to 50% later that year in April 1987. The law does not appear to mandate the 50% mark-up. It states that “The price of alcoholic liquor sold by the division shall include a markup of up to fifty percent of the wholesale price paid by the division for the alcoholic liquor.” Iowa Code § 123.24(4). Therefore, the division has the statutory discretion to lower the mark-up. It has not done so for many years and they will laugh at you if you suggest that they do that.
Iowa is now addicted to the tax revenue generated by this massive tax on spirits and odd venture into socialism. About $119M went to the state treasury in 2013. If the legislature was asked to abandon the principles of Mao and Lenin I’m sure that there would be a chorus of protest. After all, where would Iowa find revenue to replace the lost taxes? That is an odd protest in favor of socialism if I ever heard it. We might as well socialize car dealers and grocery stores using the same logic. I’m sure that everyone can get used to buying Ladas and tinned fish. Of course, that is sort of what we are getting now in the spirits industry. Look at the shelves. You won’t find many out of state craft distilled whiskeys. If you find a good scotch whiskey then you can almost be sure that you are paying too much if you buy it in Iowa. Selection is poor and there is no incentive for distributors to market rare or new products in Iowa. This leads to market stagnation and a lack of choice.
The result is that Iowa is a wasteland for super premium spirits. In a comment to an earlier posting, Kolin Brighton, Master Distiller of Cedar Ridge Distillery noted: “It unfairly punishes higher price brands, and contributes to the domination of the bottom shelf swill. . . . People wonder why our shelves are completely devoid of super-premium whiskies, this exponential tax rate is the reason. Why would a store ever order a super rare Scotch if the state is going to mark it up $300 per bottle? They won’t because they know the consumers we have for these bottles are smart enough to cross state lines and purchase these items without the obscene markup.”