Noble Experiment

Entrepreneur. Cocktail and spirit champion. Old world wine provocateur.

The impact of the new Maryland alcohol tax

Just a quick rant…

Maryland has recently decided to increase the tax on alcohol from 6% to 9%.  This is an effort to help overcome a portion of the dramatic budget shortfall that  this state faces.  There is no doubt that the state needs to come up with some money.  There is doubt, however, that this might be a productive or useful way to find it.

The hospitality industry was one of the hardest hit industries during the recession of the last few years.  When people start losing their retirement accounts and the equity in their homes, they choose to spend less money.  The first place that gets cut back is food and drink.  People can replace their meals out and their drinks out by cooking and entertaining at home.  And although luxury spending and shopping gets hit as well, people can’t build their own tv’s and rarely do they sew their own clothes.  So while retail takes a hit, the hospitality industry takes a dive.

You have seen this decline taking shape in Annapolis over the past few years.   Restaurants have been closing, changing business models, rethinking pricing strategies and laying off workers.  No one has been hiring as numbers have been down dramatically.  Those that did survive were either very savvy, had deep pockets, or have favorable circumstances regarding their fixed costs (re: they own the building they are in). But rest assured it wasn’t easy for anyone.

Now that the worst of the recession is in the rear view mirror, the hospitality industry is finally starting to get back on track.  People are hiring, tourism is returning, money isn’t quite as tight.  Which is why this alcohol tax comes at such a bad time.  The hospitality industry is built on razor-thin margins.  These aren’t law firms where people bill at hundreds of dollars per hour.  Restaurants survive on single digit percentages and wages that pale in comparison to many other industries.  So every customer counts and every dollar counts.  And this tax is going to reverse some of the progress and hard work of the last few years.

The real financial impact of higher taxes has been addressed by others – paying higher merchant swipe fees, the need to update equipment, money spent on training and reprogramming – but the real issue is the impact this tax has on the consumer.  Will a consumer be less likely to buy a drink in a restaurant or hotel bar because of this tax? Are they going to cut back at the liquor store or wine shop? That is the unknown, and that is where the industry will be hit the hardest.

It is no secret that restaurants make their money on alcohol.  It’s vital to the life of a successful shop.  As alcohol revenues fall, so do revenues as a whole, so does profitability.  As profitability falls, the likelihood of getting a bank loan or an additional investor drops.  As money dries up, working capital dwindles and capital improvements get put on hold.  Without a cash cushion and active capital improvements, a restaurant falls behind the times (sometimes in a matter of months) and can no longer compete as effectively.  When that happens, its only a matter of time.  How long can you survive on your core group of regulars who love you just the way you are? One month? Six months? One year? I guess we’ll see.

This tax isn’t about temperance or excess.  It isn’t about controlling a substance that has run wild and need to be reigned in.  It’s about making up a budget shortfall.  But patching up one hole by cutting out a piece of a different wall doesn’t provide a long-term solution.  And whether like it or not, alcohol and the hospitality industry are hallmarks of our local economies and their impact is far-reaching.  This tax is damaging to the industry, it’s damaging to the economy, and it’s damaging to the state of Maryland.

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This entry was posted on April 17, 2011 by in Rants, Restaurant and tagged , , .

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