From beer freedom to taxpayer hangovers

National Post, November 27, 2018, FP7 
Mark Milke 

Ralph Klein and Rachel Notley both inherited a fiscal mess when they became premiers of Alberta 23 years apart. In his new book, Ralph vs. Rachel: A Tale of Two Alberta Premiers, author Mark Milke looks at how both used the crisis to wrench Alberta in a new direction - Klein by slashing spending and taxes; Notley by imposing higher taxes, strict climate rules and activist government - and the stark difference in outcomes. In this first of two excerpts, Milke examines how Notley's NDP turned Klein's free-market approach to liquor sales on its head, and stuck Alberta taxpayers with a hangover.

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Alberta's beer market had great appeal for the NDP government, given beer as the "everyman" drink. It was also politically attractive for another reason: the government caucus had little private-sector experience and, if the Notley government could somehow "juice" the craft beer business, it would demonstrate sympathy for small business and how a mild dose of government intervention was just what the Alberta economy needed. That might help alleviate nagging public doubts about the government's general ideological proclivities and competence.

To grasp the needless intervention in Alberta's beer industry, it helps to know that when the Klein government privatized all government liquor stores starting in 1993, it also scrapped any cumbersome regulations on imports of alcoholic beverages into Alberta. An importer of beer, wine, or spirits could risk their own cash on what might sell. So long as they paid the provincial markup (the hidden tax on alcohol applied at the import stage at the warehouse), importers took the risk and reaped the possible reward. Also, other provinces' breweries, wineries, and distilleries were not discriminated against with higher markups just because they were located in Creston, Montreal, or Halifax. For 25 years, any Canadian brewer producing less than 20,000 hectolitres of beer annually could sell into the Alberta market at the same tax rate as locals: 20 cents per litre. It was a model of sensible policy, and it allowed entrepreneurs with a great beer to test it out in Alberta, serve consumers with plentiful choice, and potentially flourish nationwide and internationally if the new product was popular. Alberta was a free-trading nirvana and a test-market for beer entrepreneurs nationwide.

Protectionist beer follies

As of 2015, the free-trade experiment in beer was over, perhaps another one of those "ridiculous 1990s ideas" that Premier Notley derided in a speech to partisans in early 2018. In ending Alberta's come-one, come-all free-trade approach to beer producers, the NDP government sought to remedy a non-existent problem. The government's approach to frothy suds was signalled in the first NDP budget, in 2015. There, the province noted its intent to refine the markup structure on beer "to promote made-in-Alberta products."

Refine was one word for it; gouging was another. All brewers outside of Alberta, British Columbia, and Saskatchewan were henceforth charged $1.25 per litre, a 525-percent increase over the previous markup. In the earlier March 2015 budget from the Progressive Conservatives, the province had already increased its hidden markup by 10 per cent and $75 million. The October 2015 NDP budget added another five per cent and $39 million, in part from the hidden beer markups. That forced craft brewers outside Western Canada to dramatically raise their prices. After the October budget, one Montreal-based brewery, Dieu du Ciel, noted the extra taxes meant a three-dollar hike in the price of its six-packs sold in Alberta.

Other critics and an Ontario company later involved in the lawsuit against the province noted that the Canadian constitution prohibited any such favourable markup treatment based on provincial boundaries. The province soon revamped the beer tax to apply the 525-per-cent increase to all brewers "regardless of size or location." The province then publicly declared the problem fixed and that its tax-all-beer-more policy created a level playing field.

Except the province anyway raked tens of millions of extra dollars from thirsty consumers, and, problematically for free trade, also used some of the extra-tax cash to subsidize small Alberta brewers. It was tax-and-subsidy protectionism, and it exacerbated a problem pointed out by Quebec's Dieu du Ciel at the start: how Canada's craft brewers could more easily export beer to the United States and Europe than to other provinces.

At the time of the revised policy, NDP Finance Minister Joe Ceci claimed the new direction would diversify Alberta's economy and create more "beer jobs." Premier Rachel Notley called the beer-tax move an "economic development strategy." It was a standard defence used by politicians and governments the world over to favour a local business or sector, be it supplicants in aerospace, automobiles, energy, Hollywood film productions, or a drink made from barley, water, hops and yeast.

The political justifications always skipped the litany of failures, the lousy economics, and the perennial shifting of jobs and tax revenues that merely moved employment and taxes from one jurisdiction to another with no new net economic gains created.

A subsidy to a craft beer maker might well create a few new jobs in Calgary but displaces brewery employment in the Kootenays, Saskatoon, and Montreal, exactly the intent of the premier and the finance minister. In such politically inspired job redistribution, Canada as a whole is no further ahead. It is a shell game and old-fashioned protectionism. The technical name for the practice is industrial policy, or "targeting" (as in targeting a specific sector for government support). The more colloquial references include crony capitalism and corporate welfare. None of it is new and the economic literature is overwhelmingly against the practice. But the Notley government, as with many grant-givers in government, rarely read (or cared) about such empirical diversions. They, as with many politicians, either sincerely believe that using taxpayer cash to favour one business over another is economically sensible or know it is a misallocation of tax dollars but keep it up as political theatre, for potential votes.

The constitution and courts vs. the NDP government

Evidence on subsidy policy aside, the province was undeterred. The more pressing problem, legal and constitutional, was how the finance minister's protectionist fingerprints were all over the NDP's craft beer policy. As came out later in court, the minister wrote to the Alberta Liquor Control Board in 2016, asking the provincial agency to mark all beer up with the $1.25-per-litre increase "regardless of the production levels or location of the brewer." He also wrote that the increase would "work in concert with an Alberta small-brewer focused program."

In other words: Apply the 525-percent markup to every company so the government can publicly assert it complied with free-trade provisions in the New West Partnership (the free-trade agreement between the three Western provinces) and the constitution. However, worry not! Alberta will send cheques to Alberta brewers to make up for the increase. And then there was the 2017 column from the finance minister in the Calgary Sun, defending the government's beer policy against critics. The minister wrote of his reasons and plan: "To foster economic diversification and assist an industry that was poised to grow, and grow quickly, our government implemented a grant to Alberta brewers."

In the 2016 court case launched by an Ontario brewer, Steam Whistle and one from Saskatchewan, Great Western, the presiding judge noted the 2016 letter but also an internal Finance Department briefing note given to Ceci that advised on how to sideline trade concerns and still subsidize Alberta brewers. The memorandum pointed to an advantage in this strategy compared with the original October 2015 budget beer strategy, how an Alberta brewers-only subsidy would grant them even more of a competitive price advantage compared to brewers from B.C. and Saskatchewan. The NDP government tried to game the Alberta beer market not only against Central Canadian and Atlantic brewers; but they also happily undermined brewers in the two neighbouring provinces, Alberta's partners in the interprovincial free trade agreement.

$2.1 million = 56,870 cases of Bud Light beer

In court, the presiding justice, Honourable Madame Justice Gillian Marriott, found the subsidy program in violation of the constitution, specifically Section 121, which prohibits a province from enacting protectionist policies against businesses from other provinces. (The exact language: "All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.") "The grant program," she wrote, "discriminated between craft brewers and craft beer based on provincial origin." She ordered the province to pay restitution of $164,964.98 to Steam Whistle and $1,938,660.06 to Great Western, the two out-of-province craft breweries who had initiated the lawsuit against the province. The finance minister was in a free-trade corral, naked except for his protectionist "cowboy hat" and exposed as such by the court.

That $2.1-million judicial rebuke to the provincial government paid for by taxpayers was equivalent to the cost of 56,870 cases of a 24-pack of Bud Light.

The great irony of the fight over beer suds came from Premier Notley in July 2016. After Saskatchewan premier Brad Wall complained about the Alberta grant program for brewers at a premiers' meeting in Whitehorse, Notley, who lectured Albertans on the automobiles they should avoid in favour of a bus or a cold weather trot, protested Wall's pointed rebuke: "I will not be lectured about any efforts that our government might take... to support our small brewers, our economic diversification, our workers and our industries."

In true interventionist nature, and despite the Court of Queen's Bench's judicial rebuke to the Notley government's protectionist beer policy, the province appealed the decision in the hot, thirsty summer of 2018.

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Excerpted from Ralph vs. Rachel, a Tale of Two Alberta Premiers. Copyright Mark Milke 2018. Reprinted with permission of Thomas and Black.