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Jonathan Davis is a University of Oregon assistant professor of economics. He says proposed liquor price hikes could hurt restaurants as they try to recover.

Jonathan DavisIn late January, the Oregon Liquor Control Commission asked for public input on a proposal called "minimum pricing." This policy sets a new artificial price floor on "bottom shelf" liquor. The OLCC is vague on why it's proposing this now but mentions "decreased social harms and adverse health impacts" as one possible reason.

This proposal would raise prices on more than one out of every 10 distilled spirits products. On average, the affected bottles' prices will increase by nearly 20% for 1.75L (popular among bars and restaurants) and by 23.5% for 750 ML bottles (popular among consumers). In many cases, prices will go up by more than 40%.

Budget-conscious consumers will bear the cost of these price increases. Using sales over the last year as a benchmark, I find that the policy will disproportionately affect stores in lower-income and rural areas. Ten percent of sales in the lowest income areas will be affected. In contrast, less than 5% of sales in the wealthiest areas will be affected.

Restaurant and bar owners are especially poorly positioned to bear these price increases. Oregon's restaurant industry has paid the costs of the public health response to the COVID-19 pandemic. Nationally, restaurant sales fell 15% in 2020.

The decline is likely more significant in Oregon, given more sustained public health measures. Restaurant employment in Oregon is down by 76,800 jobs in the last year. Many of our favorite restaurants have already closed. Any price increases could push more restaurants or bars to close permanently.

Are these costs justified by OLCC's apparent objective of decreasing social harms?

The "Law of Demand" says people will buy less of a product when its price increases. But just because sales of affected products fall does not necessarily mean that overall alcohol consumption is declining. Many consumers will buy higher-priced alternatives instead. Even if they don't, I estimate that minimum prices will decrease alcohol consumption by at most 1% or 2%, given that most products are unaffected. If the goal is to encourage Oregonians to drink less alcohol, this policy won't do it.

OLCC's minimum pricing proposal is also unlikely to reduce driving under the influence. The distribution of DUIs across the state is unrelated to the lower-income, rural places on the map that would feel the price hike's burden. Simply put, the policy narrowly targets low-priced products, but (on average) drunk drivers drink everything.

If reducing drinking and driving is the OLCC's proposal's goal, this policy won't get us there.

For argument's sake, let's say this policy's goal is instead to raise revenues for the state. Then too, minimum pricing is a curious path to take. Higher-income consumers spend two to three times more on alcohol than even middle-income individuals. A minor price increase spread across a broader base of products would increase revenues and be a more progressive tax.

After a year, we can finally see the light at the end of the tunnel in this once-in-a-century public health crisis. Lower-income individuals and restaurants were among the hardest hit by the pandemic. Is now really the time for a policy that narrowly targets enormous price increases on products that these groups disproportionately consume?

Jonathan Davis is a University of Oregon assistant professor of economics.


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