Everything's Different in Texas, Even Liquor Prices

I thought I’d have some fun with my last blog post and discuss one of my favorite topic genres: differences between Texas and Virginia. During last Monday’s class, we discussed how the state of Virginia has set prices for every alcohol sold in its stores. The state imposes this price floor in the name of public interest and benefits from the tax and sales revenue. The liquor manufacturers benefit from the barriers to entry imposed and decreased competition. Do Virginia’s laws make liquor more expensive than in other states? I happen to know that I can buy a 1.75L handle of Tito’s vodka for as low as $28 in Texas when it often costs about $40 in Virginia, and I want to know why these prices differ so drastically.

According to a 2013 study, liquor prices in state-operated stores, where the state has a monopoly, tend to be $2 higher on average than in states where liquor stores are licensed. Virginia has state-operated stores, while Texas has licensed stores, so this difference could account for around $2 of the spread in prices. Further, out of all 13 state-operated states, Virginia has the 2nd highest average mean and median prices, but this still does not explain the $12 Tito's price spread.

The map below illustrates the State Spirits Excise Tax Rates in dollars per gallon in 2013. While Texas imposes a tax of $2.40 per gallon, Virginia's tax is $20.56 per gallon, which is the 3rd highest state liquor tax rate in the country. I would think the law of one price and the no-arbitrage principle would necessitate that liquor prices, and taxes, at least be more closely aligned, but this is clearly not the case. In fact, most of the states with the highest taxes also have state-controlled liquor stores, which again makes sense, but I still do not understand this $18 difference in taxes.

After accounting for transportation costs, the fact that Tito’s is made in Austin, and that Texas generally has more lax laws regarding alcohol than Virginia, I now have a better understanding of why Tito’s specifically, and all liquor in general, is more expensive in Virginia. Virginia’s liquor laws were imposed after prohibition, so the laws are supported by temperance groups and groups like MADD. Not only does the state bring in at least $230M in revenue from ABC stores, it also has the support of interest groups that see liquor as a public bad, which allows the state to impose both higher prices and higher taxes on liquor.