By JOHN WILLIAMSON (Vice President of Research)
02 Sep 2016
Lower beer prices from New Brunswick Liquor have produced greater sales. This is how markets work, and not just for alcohol purchases. When government taxes investment highly, it suppresses investment overall. Accordingly, governments could spur economic growth by lowering taxes. Read this article on the Telegraph-Journal website.
Beer sales and provincial taxes might appear to be unrelated. But the lesson of lower beer prices in New Brunswick has broader policy implications, which is how people respond to public policy incentives.
Not long ago many New Brunswick consumers living near Quebec routinely crossed the border to purchase less expensive beer. Prices in Quebec are considerably cheaper because taxes are lower. But these cross-border shoppers weren’t just getting a cool deal. They were also breaking the law since it is a crime for consumers to purchase more than the equivalent of 12 pints of beer (about 20 bottles) from retailers outside of the province and enter New Brunswick.
Tracadie resident Gérard Comeau decided enough was enough and challenged the provincial law after being charged in 2012 for bringing home beer and liquor he purchased legally in Quebec. Mr. Comeau won his case in April when a provincial court judged declared the law violated his rights under the constitution. His win was a victory for consumers. Or at least it would have been had the province not quickly appealed the ruling to a higher court. Mr. Comeau’s legal struggle will continue and could end up before Canada’s Supreme Court.
But the story doesn’t end here because the political optics weren’t good for the Gallant government. Many beer consumers vote. Most don’t like being told by a government that they must pay for significantly overpriced beer from a government-owned monopoly. It’s the sort of pocketbook issue that can hurt at election time.
In mid-July, NB Liquor announced a summer beer promotion and dropped the price on six popular brands. Customers can mix and match four 15-can packs for $74.99 (tax and can deposit included). That’s a savings of $37 versus the regular fixed price of $112. The popular markdown was set to expire this Labour Day weekend, but has been extended to Thanksgiving.
The predictable result of a steep price cut is an increase in sales. And indeed, consumers are buying more of the promotional beer, as economists would expect. (Let’s not call it cheap beer since 18 bottles of Rolling Rock sell for US$9.99 in New Hampshire.) But something else is happening that doesn’t involve New Brunswick residents.
Sales near provincial borders are up. Massively so near Nova Scotia. That province didn’t drop prices to match NB Liquor’s promotion. The result? Receipts at the Sackville liquor store more than doubled, increasing by nearly $364,000 or 125.7 per cent compared to the same two-months in 2015. Evidently, some Nova Scotia residents are now buying beer in our province. As well, vacationers and travellers to other Maritime provinces are likely buying beer from NB Liquor instead of waiting to buy in provinces with higher prices.
Sales near Quebec are up too, albeit by a more modest 16.4 per cent in Campbellton. Further from the border we find sales in Caraquet, Dalhousie and Beresford increased by 13.1 per cent, 34.2 per cent and 30.2 per cent respectively. New Brunswick consumers are buying less beer in Quebec and more at home. At the same time, Quebecers aren’t enticed to shop here since beer prices are already low in La Belle Province.
This is how markets work. Drop the price and sales increase. And the reverse is true – a price increase lowers public demand and sales. Consumers respond to price incentives every day.
But what if beer is substituted for investment or wages? Does it not seem reasonable that investors and workers react as consumers do when faced with high taxes, resulting in a higher marginal cost on investing or even working in New Brunswick? Of course they do. Yet, provincial policymakers and politicians ignore the impact of rising costs when it comes to taxes on businesses, investments and wage earnings.
As the provincial government has steadily increased taxes our province’s economic outlook has deteriorated. Evidence demonstrates that jurisdictions with low-tax levels in Europe, North America and elsewhere generally have stronger economies and create more jobs than high-taxed states and provinces. Even Nordic countries, which are frequently cited as high tax yet successful economies, maintain low taxes on business and investment. They understand investment dollars can cross borders swiftly in today’s global economy. If taxes on capital are excessively high, which makes investment costlier, entrepreneurs and businesses go elsewhere for better returns – just like Mr. Comeau on a Tracadie-to-Quebec beer run.
People do not move as easily as capital. If a Swede wants to live in a Swedish milieu there is only one choice: Sweden. The country’s high taxes on personal income and consumption are unavoidable. But an Atlantic Canadian can more easily escape our high tax environment by moving to another province, like Saskatchewan or British Columbia. (Of course, there are culture differences between the West and Atlantic Canada, but they are not nearly as deep as in Europe.) Advocates for high taxes insist these workers move for work, and in many cases that’s true. But how many New Brunswick families have decided not to return because taxes are too high and our economy is depressed? Punitive tax levels are a double whammy, first on economic growth and second on working families.
Of course, many over-taxed Europeans do leave for countries with lower taxes. Great Britain has been a magnet for workers and investment from elsewhere in Europe. Taxes were cut under both Labour and Conservative governments. Since 2010 the United Kingdom with 65 million people has created more jobs than the rest of the European Union combined, which has a population of 440 million.
New Brunswick meanwhile has steadily increased taxes on just about everything. The result? Little job creation and an unemployment rate that hasn’t dropped since 2010. Do you suppose Great Britain taxes investment and income from wages at New Brunswick levels? That’s something to consider while enjoying a beer this Labour Day weekend.