Drinking Local: Round Two
Posted January 20, 2017
Last week’s article on local producers of alcoholic beverages drew a lot of correspondence. Some of it was supportive, but most found the argument unsatisfactory. The matter merits further exploration.
Many readers think the tax versus subsidy argument is a valid test:
“Local producers employ local people who pay taxes here, and make profits which are in turn taxed—all flow back into the province’s coffers. I don’t have the statistics to say whether that makes up the $12 million which NSLC loses on sales from local producers, but it may come close…”
This is amazingly similar to the arguments offered by proponents for other subsidies such as those for Irving shipbuilding, film makers, and the Yarmouth ferry.
The unspoken premise is that if the taxes collected are at least as big as the subsidy, everything is fine. It isn’t.
Nova Scotia is only barely breaking even on its budget (and that will only be true if the government achieves its goals in bargaining with public sector employees).
That means that every cent collected in tax dollars is necessary to pay for our health care, education, roads, and other public services. If one group of us does not pay its share—or pays nothing at all—the rest have to pay even more to keep things in balance.
Some readers want the numbers:
“Disappointing article that took a view point without having the numbers on important factors like the investments these entrepreneurs have made in the province and the taxes from the hundreds of jobs…”
I’m glad you asked.
The average winery in Nova Scotia does about $1,000,000 in sales. There are lots of expenses for things like bottles, agricultural materials, transportation and so on, but let’s assume that $600,000 of that is for labour.
An employee making $30,000 pays, at most, 5.8 % of that in provincial income taxes (PIT). If that is representative of the employee group, the total PIT on $600,000 of payroll would be $34,800. Adding the provincial portion of HST those employees might pay still is unlikely to exceed $50,000. Provincial taxes on corporate profits in our example are unlikely to exceed $3,000.
The reduction in margins at NSLC for local producers is a subsidy. On average, the sales are evenly split between those sold by NSLC and those sold by the producer. In that situation, the subsidy is about 31% of sales, or $310,000. In other words, the subsidy is vastly higher than the taxes paid. It is not surprising—the subsidy is equal to half the payroll.
Other readers would like to see
“…the monopolistic NSLC being forced to examine ways to reduce their costs to aid the bottom line.”
Perhaps they should, but that is a different topic. If there are savings to be had, why should they go to wineries and breweries instead of health care or paving roads?
Last week’s article argued for two things: (1) Make the subsidy visible, and (2) limit its future growth.
As stated in the article and reiterated by many readers, there are good economic, cultural, and esthetic reasons for providing a level of support. It is perhaps reasonable to maintain the current program for makers with in-province sales up to a certain level. If that was $1,000,000, it would include most of the wineries and almost all the craft breweries.
But for sales in excess of that, further subsidies should quickly taper off. It would be great if the industry became two or three times as big as it is today but, in doing so, the larger makers should become more and more self-sufficient.
It is interesting to note that Benjamin Bridge sells its wines across Canada as well as in Japan and in the UK. Glen Breton Canadian Whiskey is likewise widely available in Canada and in several states south of the border. Jost Vineyards’ Selkie is exported to four provinces. Apparently, this is profitable for them without subsidy. Clearly, all three are able to continue growing sales profitably without further increasing their annual support.
We have seen filmmakers and some call centers quickly decamp when subsidies were uncompetitive with other provinces, no matter how large the operation. They never became self-sufficient.
Local producers of alcoholic beverages are much more wedded to their location. You can’t put a vineyard on a truck to Toronto.
A growing and financially sustainable industry is a worthwhile goal. Let’s be transparent about how much we are spending to support the industry, and keep it under control.
Related ArticlesBudget Season
- The Tax Changes Proposed for Small Businesses will have Side Effects August 25, 2017
- Drinking Local: This Party Comes With A Hangover January 13, 2017
- How Not To Do Provincial Cooperation January 6, 2017