Drinking Local: This Party Comes With A Hangover

Posted January 13, 2017

Nova Scotia has seen an explosion of home grown tipple in recent years. Enjoying too much of it might impair our judgment.

There are now 21 wineries and 40 brewers of craft beer, as well as growing numbers of distillers and makers of apple cider. Sales exceed $20 million and are growing fast.

It’s all great fun. The grape growers and wineries have been increasing their acreage and improving their product. Wines using the Tidal Bay appellation, used by a dozen labels, are interesting and distinctive. They can be found in many restaurants around the province.

Craft beers from places like Shelburne, Liverpool, Tatamagouche, and Guysborough compete in Nova Scotia Liquor Corporation (NSLC) stores with global giants. Smaller craft brewers just sell from their own storefronts and to nearby restaurants.

There is a nice tourism spinoff. Visitors can experience the local products when dining out, and like to visit the places where they are made. Wine tours are common in the Annapolis Valley; the Glen Breton distillery, happily proximate to the booming Cabot Links golf destination, does a thriving tour business.

The downside is the impact on the provincial treasury.

The Nova Scotia Liquor Corporation produced net profits of $241 million for the provincial treasury last year, about 40% of sales. Expenses are about 16% of sales and the product costs are 44%.

Profit margins for the NSLC on local product are less than half of what they make on other sales, because the local producers keep a much larger share of the purchase price. The result is that taxpayers made $4.5 million less in 2015-2016 than they would have if the margins were the same as for out-of-province products.

On sales from their own stores, the winemakers and craft brewers keep more than 97% of the price, so profits for the NSLC are negligible. The total loss in profits on domestic products compared to usual margins exceeds $12 million per year, and keeps growing.

The local producers might find it outrageous for NSLC to expect a big profit margin on product that they make and sell themselves, and they would be right. But that is the wrong lens through which to view the question.

The NSLC is granted a monopoly on sales of alcoholic beverages so that the treasury can achieve a revenue goal. NSLC’s elevated profit margins are set by government and are, effectively, a tax we pay, in addition to the HST.

That is why booze costs a lot more here than, say, in Florida. Even after allowing for differences in currency, a bottle of Oyster Bay Sauvignon Blanc is 43% more expensive in Nova Scotia; a 1.75 litre bottle of Beefeater Gin is 60% more expensive.

The high prices we pay for alcohol are one of the reasons we get, for free, medical care for which Floridians pay a fortune.

Taking a reduced margin on locally produced product that the NSLC sells, and a tiny margin on product sold by the producers, is a reduction in that contribution to the cost of our health care. The amount foregone this year is about the same as the taxpayer handouts to film producers.

In 2016, the government announced a $12-million strategy to help double our province’s grape production by 2020. Perhaps something similar will be offered to craft brewers. If successful, we will enjoy even more local product, but on current form the $12 million annual cost to the treasury could double.

There is something to be said for efforts to nurture these businesses in their formative years—not just for the modest economic benefit, but also because it makes Nova Scotia a more interesting and fun place to live.

But the government needs to put a cap on what is effectively a subsidy. One way would be to gradually increase government’s share of the price on locally produced product. Better would be to leave the small producers alone, but to gradually increase the provincial take on larger and better-established producers.

Secondly, the amount of this subsidy should be disclosed every year so that taxpayers can see the real cost of their habits.

Like fine wines, subsidies should be enjoyed in moderation.

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  • I am informed that that the “Farm Winery Policy” has not been without significant problems in its 30-odd year existence. The NSLC was initially stuck with a politically-concocted and imposed incentive scheme that invited and was open to abuse.In the early years, for example, farm wineries only had to have acreage planted to sell tax free wine, most often sourced from elsewhere. The quality was often low and there was no cap on how big a farm winery could grow (thinking Jost here) before it would be deemed “commercial” (such as Andres in Truro) and not warranting tax-free status. It took years to force local content requirements, make indigenous fruits eligible, and initiate a quality assurance regime (which apparently is still a work in progress). Over the decades the winery group proved adept at lobbying and routinely rolled out claims (as they still do) about all the economic benefits accruing to the rural areas. Successive ministers have been seduced and the LC probably looked self- serving in its calculations of cost and its questioning of the viability of small wineries.Without a doubt the industry has successfully lobbied government for various marketing advantages unavailable to imports and non-farm wineries thereby arguably increasing its dependency on tax and other concessions and, as well, creating trade friction between provinces and inviting international challenges. Liquor authorities have in fact been subject to disputes with the US and EU over preferential treatment of local products and most recently the EU insisted on specific disciplines in the Canada-EU Trade Agreement (CETA) to counter these practices. These trade conflicts and losses,however,have not deterred the lobby from pursuing growth based on preferential treatment. Indeed, it appears that the LC management eventually ” got with the program “, and reluctantly accepted an economic development component in its mandate. This helped pave the way for successive governments to get more easily sucked into the “good news story” with the tourism aspects and explosion of wineries and microbreweries testifying to the apparently infinite potential available, if only government would get out of the way with pesky taxes. There has also been the attitude that it’s all a win-win, that consumption of local product is somehow incremental to what the LC sells, that there is no significant impact on revenues. However, it must be recognized that the reality of overcapacity and amalgamations within the liquor sector it may not be possible to grow and sustain small scale local. operations into the future based on government concessions and a protective blanket.
    The success story must primarily be built on the hard work, investment, and ingenuity of the growers, vintners, and brewers who carve out market niches that are not dependent on disproportionate subsidies and concessions.
    As with the film industry one cannot simply take for granted that targeted tax breaks,etc. are fully justifiable in times of austerity.

    G | January 19, 2017

  • I haven’t had a family doctor in five years! Where is the taxation of our alcohol being spent? How about 25 million on the blue nose 2 for starters. I personally know two craft brewers and neither of them has ever received any subsidies. If this province was not so mismanaged, we would enjoy our craft brew at a lower price AND I’d have a family doctor. Besides, craft beer has no additives such as propylene glycol. A quality, naturally brewed beer contains significant amounts of magnesium, selenium, potassium, phosphorus, biotin, and is chock full of B vitamins. Cheers to our local brewers!

    Claude | January 18, 2017

  • I enjoyed your column on the tax policies surrounding the support of local wineries and craft brewers. I do think however there are some broader issues when it comes to how the province of NS among others handles policies surrounding the sale of alcohol. By giving themselves the monopoly on liquor sales, initially I suspect to control the sale of a product that was deemed to be dangerous, they put themselves in a compromised position as a regulator. To see this clearly one just has to compare how the government regulates tobacco vs. alcohol. Alcohol is glamorized, with big full colour signs on the side of liquor stores showing fresh faced young attractive people enjoying their drinks. If you compare this to tobacco where you can’t display the product and the packages contain large images depicting every form of cancer. I think you are seeing two extremes and it illustrates the dangers of having government given the monopoly on liquor sales.

    A better system would be for the provincial government give up their role as the monopolistic seller of alcohol so they would be able to regulate the sale of alcohol without the inherent conflict of interest. There would be no need to earn less for the NS taxpayer and the social ramifications of alcohol would be better served. It would be a cost reduction move in a province that surely needs to balance its budget, and it may further promote entrepreneurship, also something that needs to be fostered in NS.

    Warren Maynard | January 17, 2017

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