THE ECONOMIC IMPACT OF THE BEER INDUSTRY IN SOUTH CAROLINA

Supported by The South Carolina Beer Association

Division of Research

March 2003

EXECUTIVE SUMMARY
THE ECONOMIC IMPACT OF THE BEER INDUSTRY IN SOUTH CAROLINA
The activities associated with beer brewing, distribution, and retailing contribute substantially to the overall level of economic activity in South Carolina. The beer industry adds to the economy by producing economic output, supporting employment and labor income, and by generating tax revenue for governments at all levels. Jobs in many sectors, including manufacturing, wholesale trade, retail trade and services can be directly attributed to the activities of the beer industry. Meanwhile, economic multiplier effects lead to further economic activity supported in virtually every sector of the South Carolina economy. After accounting for all of the direct, indirect, and induced economic benefits of the beer industry in South Carolina, the following results are revealed:

The beer industry helps support a total of $1.6 billion in economic output annually in South Carolina A total of 17,314 full-time jobs in South Carolina can be directly or indirectly traced back to the activities of the beer industry. The total labor income associated with these jobs amounts to $397.1 million each year in South Carolina. The full range of activities associated with the beer industry work to support a total of $153.4 million in tax revenue annually for the State of South Carolina

South Carolinas beer excise tax currently stands at $0.77 per gallon, or 43.2 cents per six-pack. As shown in Figure A, this is the second highest state tax rate in the nation, behind only Hawaii. South Carolinas excise tax is roughly quadruple the U.S. median tax rate.

Figure A. State Beer Excise Tax Rates per Gallon

$1.00 $0.90 $0.80 $0.70 tax per gallon $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 WY WI MO PA OR KY CO NV MD RI MA NJ IN TN NY MT MN ID ND DE AZ WV OH KS IL TX IA CT MI CA NE AR VA WA VT SD NH LA UT ME AK OK NM MS GA FL NC AL SC HI

SC: $0.77. South Carolinas beer excise tax rate is 4 times the national average.

US Median: $0.19

Source: Federation of Tax Administrators, rates as of January 1, 2002.

However, even this does not tell the full story. Per capita income in South Carolina, as is well known, stands at just under 82 percent of the U.S. average (see Figure B). Therefore, South Carolinians are faced with a state beer tax rate that is second highest in the nation while average incomes are among the lowest in the nation.

Figure B. State Per Capita Personal Income, 2001

$45,000 $40,000 $35,000 $30,000 per capita income $25,000 $20,000 $15,000 $10,000 $5,000 $0 CT MA NJ NY MD NH CO MN IL CA DE VA W AK PA RI NV MI W WI HI FL NE OH GA VT TX KS M OR IN NC IA TN ME SD ND AZ OK KY SC ID AL LA UT MT NM AR W MS

South Carolinas per capita income is 81.7% of the national average. SC: $24,886

US Average: $30,472

Source: Bureau of Economic Analysis, 2001 annual average per capita personal income.

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As shown in Figure C, after accounting for differences in relative income levels, South Carolinas beer tax as a share of per capita income is more than five times the national average.

Figure C. Size of State Beer Excise Tax Rate Relative to Per Capita Income, Indexed to US Average
600 500

400 index, US = 100

SC = 510. Accounting for the states lower per capita income, South Carolinas beer excise tax rate as a fraction of per capita income is more than 5 times the national average.

300

200

100

US = 100

0 WY WI MO CO MD PA MA OR NV NJ KY RI NY IN CT MN TN DE IL MT ID CA ND AZ OH KS TX MI IA WV NE VA WA NH VT AR SD AK LA ME UT OK FL GA NM NC MS AL SC HI

Source: Division of Research, Moore School of Business.

Currently, the states excise tax on beer generates in excess of $79 million each year. While the beer excise tax rate may appear to be a candidate policy tool for raising revenue, economic theory and empirical research suggests the following:

An increase in the state excise tax on beer would result in a higher price of beer and an associated unpredictable decrease in beer purchases A higher beer tax would likely be ineffective in addressing problem drinking; however, it will reduce in-state purchases by light and moderate drinkers, thus impairing the revenue-raising impact of the tax increase A given percentage increase in the states excise tax rate would result in a less than proportional increase in total tax collections An increase in the states excise tax rate already the second highest in the nation would further increase the differential

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with neighboring states inducing more cross-border shopping, further dampening the revenue-raising ability of the tax hike
Overall, the findings of this report support the economic importance of the beer industry in South Carolina. The economic impacts in terms of output, employment, and earnings are substantial and likely are often overlooked. Meanwhile, the fiscal implications of changing the excise tax rate on beer are uncertain. It is true that an excise tax hike would reduce beer purchases; however, it would do so by an unpredictable amount. Further, the reduction in beer purchases would come from light and moderate drinkers, while problem drinkers would be much less responsive to higher beer prices. The uncertainty surrounding the precise elasticity of beer demand, coupled with the impact of cross-border shopping, render the final impact on beer tax collections highly uncertain.

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1. Introduction
The activities associated with beer brewing, distribution, and retailing contribute substantially to the overall level of economic activity. Taken together, these separate activities constitute the beer industry as shown in Figure 1. The beer industry adds to the economy by producing economic output, supporting employment and labor income, and by generating tax revenue for governments at all levels. Jobs in many sectors, including manufacturing, wholesale trade, retail trade and services can be directly attributed to the activities of the beer industry.

Figure 1. Defining the Beer Industry

Brewers Distributors Retailers

The first purpose of this report is to estimate the contribution of the beer industry to the overall economy of South Carolina. Using a standard economic impact analysis methodology, the impact on South Carolina output, employment, labor earnings, and tax revenues can be estimated. At the wholesale distribution level alone there are more than 3,000 establishments nationwide with sales of roughly $35 billion annually employing nearly 100,000 workers. In South Carolina, there are approximately 40 beer distribution establishments that

employ nearly 1,500 workers and have annual sales close to $600 million annually.1 Breweries, while not a significant presence in South Carolina, employ almost another 35,000 workers in the U.S. The retail activities of the beer industry account for an even greater level of economic activity. While not separately identified in government statistics (while brewing and distribution are), beer sales at retail outlets including restaurants, grocery stores, convenience stores and liquor stores help support economic activity many times that seen at the brewing and distribution level. These types of economic activity that are due directly to the beer industry in turn help support yet greater levels of business activity that ripple throughout the economy, both geographically and in terms of the industries that are affected. Beer distribution, for example, requires many different types of inputs and therefore requires the output of other industries such as trucking to deliver its final product. These kinds of interindustry relationships help account for the multiplier effect on economic activity that emanates from the direct activities of the beer industry. Section 2 of this report provides a detailed description of these multiplier effects. The discussion will present the various types of impacts including the direct, indirect and induced impacts. This section will also define the major measures of economic activity that are impacted, including economic output, employment, earnings, and tax revenue. Section 3 then presents the results of this impact analysis. Briefly, the following major results are obtained: The beer industry helps support a total of $1.6 billion in economic output annually in South Carolina A total of 17,314 full-time equivalent jobs in South Carolina can be directly or indirectly linked to the states beer industry, with total labor income from these jobs estimated at $397.1 million each year All activities of the beer industry account for approximately $153.4 million in tax revenue for state government each year

The second major purpose of this report, taken up in Section 4, is to consider the potential impacts of a change in South Carolinas beer excise tax rate. South Carolinas beer excise tax rate currently stands at $0.77 per gallon, or 43.2 cents per six-pack. As shown in Figure 2, this is the second highest state tax rate in the nation, behind only Hawaii. South Carolinas excise tax rate is roughly quadruple the U.S. median tax rate.
Statistics are from the 1997 Economic Census conducted by the U.S. Census Bureau, accessible from http://www.census.gov.
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Figure 2. State Beer Excise Tax Rates per Gallon

$1.00 $0.90 $0.80 $0.70 tax per gallon $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 WY WI MO PA OR KY CO NV MD RI MA NJ IN TN NY MT MN ID ND DE AZ WV OH KS IL TX IA CT MI CA NE AR VA WA VT SD NH LA UT ME AK OK NM MS GA FL NC AL SC HI

SC: $0.77. South Carolinas beer excise tax rate is 4 times the national average.

US Median: $0.19

Source: Federation of Tax Administrators, rates as of January 1, 2002.

However, looking only at the excise tax rate itself does not tell the full story regarding the beer excise tax burden in South Carolina. The states already relatively high rate should be considered relative to overall living standards in the state. South Carolinas level of per capita personal income is well below the national average. As shown in Figure 3, during 2001 per capita income in South Carolina stood at less than 82 percent of per capita income nationwide.

Figure 3. State Per Capita Personal Income, 2001

$45,000 $40,000 $35,000 $30,000 per capita income $25,000 $20,000 $15,000 $10,000 $5,000 $0 CT MA NJ NY MD NH CO MN IL CA DE VA W AK PA RI NV MI W WI HI FL NE OH GA VT TX KS M OR IN NC IA TN ME SD ND AZ OK KY SC ID AL LA UT MT NM AR W MS

South Carolinas per capita income is 81.7% of the national average. SC: $24,886

US Average: $30,472

Source: Bureau of Economic Analysis, 2001 annual average per capita personal income.

Therefore, the average South Carolinian is already facing the second highest beer tax in the country, and sees an average income level that is among the lowest in the nation. As shown in Figure 4, after accounting for state-level differences in per capita income levels, South Carolinas beer tax relative to per capita income is more than five times the national average.

Figure 4. Size of State Beer Excise Tax Rate Relative to Per Capita Income, Indexed to US Average
600 500

400 index, US = 100

SC = 510. Accounting for the states lower per capita income, South Carolinas beer excise tax rate as a fraction of per capita income is more than 5 times the national average.

300

200

100

US = 100

0 WY WI MO CO MD PA MA OR NV NJ KY RI NY IN CT MN TN DE IL MT ID CA ND AZ OH KS TX MI IA WV NE VA WA NH VT AR SD AK LA ME UT OK FL GA NM NC MS AL SC HI

Source: Division of Research, Moore School of Business.

To consider the possible consequences of raising the states beer excise tax rate further, Section 4 turns to standard economic theory to analyze the effects of a hypothetical excise tax hike on the beer market and on overall excise tax collections. The major themes of this analysis are that: An increase in the state excise tax for beer would result in a higher price for beer and an unpredictable decrease in beer purchases A higher beer tax would likely be ineffective in addressing problem drinking; however, it would reduce in-state purchases by light and moderate drinkers, thus impairing the revenue-raising impact of the tax increase A given percentage increase in the states excise tax rate would result in a less than proportional increase in total tax collections

An increase in the states excise tax rate already the second highest in the nation would increase the differential with neighboring states inducing more crossborder shopping, further dampening the revenue-raising ability of the rate hike Section 5 of the report then offers a brief summary of the major findings.

2. Modeling the Economic Impacts

This section provides a brief introduction to the estimation of the quantifiable economic impacts of the beer industrys activities. The business activity associated with the distribution and retailing of beer will have immediate positive impacts on the state economy. These activities will generate economic activity that can be measured in terms of the impact on overall economic output, labor earnings, and employment. More precisely, the flow of funds associated with the beer industry will support a certain quantifiable level of economic activity in South Carolina. For example, money spent in restaurants at the retail level will support a portion of the economic activity in the states eating and drinking establishment sector. Money spent by distributors to pay for transportation costs will affect activity in the states trucking industry. All of these types of expenditures will support additional activity in virtually every sector of the state economy. Expenditures directly on beer at either the retail or wholesale level constitute the direct impacts on the economy. If consumers spend $100 million on beer at retail outlets, this $100 million provides a direct boost to the retail sector. However, the direct spending associated with the beer industry will have a much larger impact on the economy. Money initially injected into the state economy through the beer industry will ripple throughout the economy via two distinct channels. The simple example that follows outlines the flow of economic benefits arising from initial spending at the retail level. The increased level of activity in the retail trade sector supported by the beer expenditures will also have an impact on those industries that are suppliers to the retailer, or the retailers first-tier suppliers. Among the industries that are the largest suppliers to South Carolinas retail sector are services, wholesale trade and finance, insurance and real estate. Based on detailed industry linkage information, a given direct impact on the retail sector can be traced backward to the associated impact on the suppliers. Additionally, these suppliers suppliers, or the retailers second-tier suppliers, will also be met with additional demand, and so on. All of these impacts working through interindustry linkages represent the indirect impact of the beer industrys activities. So far, we have the straightforward direct effects, and the indirect effects that rely on the precise inter-industry relationships present in the economy. However, there is yet one more important source of additional impacts. A portion of the employment, and the

associated labor earnings, at the businesses affected by the direct and indirect effects can be attributed to the beer industry. A portion of these employee wages and salaries will be spent in the local economy, beginning yet another round of impacts. For example, restaurant workers will spend a portion of their wages locally on, for example, food, clothing, entertainment and health services. A portion of the wages earned in those industries is attributable to the restaurant workers spending, which in turn supports further household expenditures. These impacts stemming from household spending are termed the induced impacts. Figure 5 summarizes the direct, indirect and induced impacts. The total impact of the spending associated with the beer industry is the sum of these separate impacts.

Figure 5. Economic Impact Definitions

Direct Impact. This is the level of economic activity
occurring directly at the distribution and retail levels in South Carolina.

Indirect Impact. These are the ripple effects on

other industries based on an input-output model of interindustry relationships.

Induced Impact. These are impacts of household expenditures from directly and indirectly generated labor earnings. Total Impact. This sums the direct, indirect, and
induced impacts.

The successive rounds of indirect and induced impacts do not go on forever. For example, a portion of an increase in household income will be saved, used to pay taxes, or spent outside of the local economy. Money that leaks out of the local area in this way cannot be used to support additional activity. Therefore, the indirect and induced impacts become smaller and smaller over time until eventually the additional activity in each round goes to zero. Because of these leakages, it is useful to consider the notion of an economic multiplier. An economic multiplier can be used to determine what the total impact (direct plus indirect plus induced) will be given a certain value for the direct impact. For example, if $100 of direct spending within a particular sector ultimately results in a total

spending impact of $200, it can be said that the output multiplier is 2 the $100 in direct spending times the multiplier of 2 equals $200 in total spending or total output. The value of this multiplier varies from sector to sector, and is determined largely by the size of the local supplier network. At a broad industry level, the construction and manufacturing sectors typically have among the largest multipliers, while multipliers for the service and retail trade sectors are generally smaller. The above discussion implies that economic impact analysis essentially involves: 1) determining the appropriate levels of direct business activity, and 2) determining and applying the correct values for economic multipliers to calculate the total impact on output, earnings, and employment. Data used to estimate the direct expenditures associated with the beer industry come from the 1997 Economic Census conducted by the U.S. Census Bureau. Appendix A provides the details of the methodology used. To accomplish the second step, a detailed structural model of the South Carolina economy was utilized. This model is known as an input-output model. An input-output model contains specific information on economic linkages between different industries. Therefore, the input-output model of the South Carolina economy is equipped to quantify, for example, the pattern of local input purchases by the states restaurant sector. This model can be used to estimate the full range of indirect and induced impacts described previously. The Division of Research utilizes the input-output modeling software IMPLAN. With this software, the researcher is able to tailor the model to a specific local area or to the state or national level economy. More details on input-output modeling are available in Appendix B to this report. The input-output model can be used in conjunction with the direct expenditure data to estimate the direct, indirect and induced economic impacts in terms of three distinct measures as shown in Figure 6: total output, labor earnings, and employment. Total output can be thought of as an aggregate measure of total spending resulting from the initial direct expenditure. It includes all spending by consumers and businesses on both goods and services, including labor services by businesses. It is therefore a broad, all-inclusive measure of the impact on total economic activity. It is important to note that this concept of total output is not comparable to measures such as Gross Domestic Product (GDP) or Gross State Product (GSP). These measures are designed to only capture the value of final goods and services, and in this way they do not include spending on intermediate goods or services. Total output as used in this report and as typically used in impact analysis refers to a much broader concept that does include spending on intermediate goods and services.

Labor earnings represent total employee compensation. This measure of earnings includes all payroll expenses for labor, such as wages, salaries and benefits. Finally, employment measures the impact on jobs in terms of full-time equivalent positions. The total impact on the number of positions is likely larger because some of the full-time equivalent positions will actually represent a greater number of full- and part-time positions.

Figure 6. Measures of Economic Activity

Output. This is the broadest measure of economic activity, it captures all spending by households and businesses, including expenditures on labor services. Earnings. This measures all labor income, including
wages, salaries, and benefits.

equivalent jobs.

Employment. This measures the number of full-time

3. The Economic Impacts of the Beer Industry

The economic impacts of the beer industry in South Carolina begin with the initial direct effects that occur in the wholesale trade sector via the distribution of beer and in the retail sector via the final sales of beer. As outlined in detail in Appendix A to this report, the Division of Research has calculated that final beer sales totaled nearly $758 million in 1997. These sales are spread across various types of retail outlets and eating and drinking establishments. These sales at the retail level are used as the inputs to the economic impact model to determine the resulting total benefits. At the wholesale level, distributors employed a total of 1,511 workers in 1997. This direct level of employment in the wholesale sector is used as the input for the model to determine the total benefits related to the distribution of beer in South Carolina. The indirect and induced economic benefits then ripple across the entire economy, affecting every sector in South Carolina. The purpose of this section is to detail these total economic benefits in terms of both the magnitude and the distribution across sectors. This examination is organized according to the three measures of economic activity: output, employment, and labor earnings. All output and earnings impacts are presented in terms of 2002 dollars. That is, the direct, indirect and induced impacts that are generated using data from the 1997 Economic Census are all adjusted to reflect the rate of inflation between 1997 and 2002. This adjustment only corrects for changes in prices of all goods and services in the economy, it does not inflate the numbers based on any beer industry growth that may have occurred since 1997. Therefore, these dollar figures all represent the contribution of the beer industry to the economy today, based on the size of the industry as of 1997. Any real growth in the industry since that time would translate into even larger economic impacts today.

Economic Output Impacts The level of economic activity at the retail and wholesale levels attributable to the beer industry constitutes the direct impacts on output. In terms of 2002 dollars, this direct output impact totals just over $1 billion annually. Figure 7 provides the level of indirect and induced output impacts arising from this initial direct impact. The indirect impacts, representing the interindustry linkages between the directly affected trade sectors and their suppliers, amount to $382.4 million annually. The induced output impacts working through the spending and re-spending of household income account for an additional $192.5 million each year.

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Figure 7. Output Impacts of the Beer Industry in South Carolina

$1,600 $1,400 $1,200 $millions $1,000 $800 $600 $400 $200 $0 Direct Indirect Induced Total $382.4 $192.5 $1,003.7 $1,578.6

All values are in terms of 2002 dollars.

Summing these impacts yields a total contribution to economic activity in South Carolina of nearly $1.6 billion annually. This is the level of economic activity that is directly and indirectly supported by the beer industry in South Carolina each year. These results imply that the economic output multiplier for South Carolinas beer industry is just less than 1.6. That is, every dollar directly spent on beer at the wholesale or retail level supports an additional 60 cents of spending via the economic ripple effects. The direct activities at the wholesale and retail level occur in every part of the state. The indirect and induced economic benefits similarly spread geographically across South Carolina, helping support economic activity in both urban and rural communities. Another way in which these economic benefits are dispersed throughout the economy is in terms of the impacts across different industries in the state. While the state-level data on beer sales and distribution do not allow for a precise geographic breakdown of the impacts, they do result in estimates of the impacts by sector of the economy. This industry-level detail is given in Table 1. This table shows how the direct, indirect, induced and total impacts on economic output are distributed across sectors. The direct output impacts are clearly centered within the states trade sectors, including eating and drinking establishments, grocery stores, other retail outlets such as gas stations, wholesale trade (beer distribution), and accommodations. Beyond these direct effects, however, the indirect and induced impacts are felt in every sector of the

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economy. Representing industries that supply to the trade sectors, the finance, insurance and real estate (FIRE) sectors, other service sectors, and the transportation, communications and public utilities (TCPU) sectors enjoy the largest indirect benefits. The induced impacts are then spread even more widely across all sectors reflecting typical household expenditure patterns. Table 1. Output Impacts by Industry, in $millions Industry Direct Indirect Agriculture 0 5.6 Mining 0 0 Construction 0 26.4 Manufacturing 0 49.0 TCPU 0 62.9 Wholesale Trade 151.0 18.6 Grocery Stores 266.2 0.4 Eating & Drinking 329.6 6.4 Other Retail 230.4 5.3 FIRE 0 98.2 Hotels 26.4 7.8 Entertainment Services 0 5.1 Health Services 0 0 Other Services 0 81.2 Education 0 0.4 Government 0 15.2 Miscellaneous 0 0 TOTAL 1,003.7 382.4

Induced 2.0 0 5.6 16.8 14.4 7.4 5.0 11.3 24.4 46.9 2.8 3.7 27.1 17.4 2.6 4.5 0.6 192.5

Total 7.6 0 32.0 65.8 77.3 177.1 271.6 347.4 260.0 145.1 37.1 8.8 27.1 98.6 2.9 19.6 0.6 1,578.6

Notes: All values are in millions of 2002 dollars. TCPU refers to Transportation, Communications and Public Utilities. FIRE refers to Finance, Insurance and Real Estate. Elements may not sum to totals due to rounding.

Employment Impacts The level of economic activity supported by the beer industry can also be stated in terms of the number of full-time equivalent jobs needed to generate the economic output effects of the previous section. That is, the direct, indirect and induced impacts on economic output can be translated into the direct, indirect and induced impacts on employment based on detailed data on the amount of output produced per worker within each different industry.

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The employment impacts are shown in Figure 8. A total of 11,154 full-time positions are directly supported by the beer industry in South Carolina. This total includes 1,492 jobs at the wholesale level with the remainder at the retail level. A majority of these direct jobs (6,840 positions) are at eating and drinking establishments across the state. These jobs represent a fraction of the total jobs at these establishments, and are determined according to the portion of total sales at these outlets that are beer sales. An additional 3,953 jobs are supported due to the indirect effects. Again, these jobs therefore represent positions at the various suppliers to the wholesale and retail outlets. The induced employment impact yields another 2,208 jobs.

Figure 8. Employment Impacts of the Beer Industry in South Carolina

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 17,314 11,154

FTE jobs

3,953 2,208

Direct

Indirect

Induced

Total

Overall, the beer industry helps support a total of 17,314 full-time jobs in South Carolina. During 2001, total employment in South Carolina averaged 1,835,300. The number of jobs that can be traced to the beer industry therefore represents slightly less than 1 percent of all jobs in the state. In other words, of every 100 jobs in South Carolina, roughly 1 position can be linked either directly or indirectly to the presence of the beer industry. As was the case with the output impacts, these jobs are spread across every region and every sector of the South Carolina economy. Table 2 provides the sector-level detail of the employment impacts. The largest indirect job impacts are felt in the services and FIRE sectors, while the induced job effects are again spread quite evenly across all sectors.

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Table 2. Employment Impacts by Industry Industry Direct Indirect Agriculture 0 118.6 Mining 0 0.1 Construction 0 379.5 Manufacturing 0 294.9 TCPU 0 342.4 Wholesale Trade 1,491.7 183.8 Grocery Stores 1,592.8 2.2 Eating & Drinking 6,840.3 132.9 Other Retail 865.8 72.9 FIRE 0 645.4 Hotels 363.6 107.5 Entertainment Services 0 74.2 Health Services 0 0.6 Other Services 0 1,472.8 Education 0 9.1 Government 0 115.6 Miscellaneous 0 0 TOTAL 11,154.2 3,952.5

Induced 41.4 0 62.2 93.6 82.4 73.4 29.8 235.1 373.1 198.3 39.2 84.4 380.5 344.4 77.2 27.2 65.4 2,207.6

Total 160.1 0.2 441.7 388.5 424.8 1,748.9 1,624.7 7,208.3 1,311.8 843.7 510.3 158.6 381.1 1,817.1 86.2 142.9 65.4 17,314.2

Notes: All values are full-time equivalent positions. TCPU refers to Transportation, Communications and Public Utilities. FIRE refers to Finance, Insurance and Real Estate. Elements may not sum to totals due to rounding.

Because the total employment impact of 17,314 jobs represents the number of full-time equivalent positions, the number of full- and part-time jobs is actually greater. That is, the beer industry in South Carolina supports more than 17,314 jobs when both full- and part-time jobs are considered. Indeed, many of the jobs supported by the beer industry are in the retail trade sector, where the average number of hours worked per week per job is less than the 40 hours associated with a full-time job. Table 3 shows the average hours per week for jobs in a variety of sectors. These data, along with the sector-level breakdown of employment impacts, allows for the calculation of the total number of positions supported by the beer industry. In total, 21,692 full- and part-time positions in South Carolina are supported by the beer industry.

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Table 3. Hours Per Week by Industry Industry Average Hours per Week Agriculture 40.0 Mining 40.0 Construction 39.3 Manufacturing 40.0 TCPU 38.2 Trade 30.8 FIRE 36.1 Services 32.7 Government 32.7 Other 32.7 Source: U.S. Bureau of Labor Statistics, data from 1997

Earnings Impacts Industry wage and salary data can be used to determine the level of labor income earned by the workers whose jobs are supported by the beer industry. The direct, indirect, induced and total earnings impacts are shown in Figure 9. Workers in South Carolina whose jobs are directly linked to the beer industry earn a total of $210.9 million annually. This represents the labor income being earned by workers at the wholesale level, and those at the various retail outlets for beer in the state. South Carolinians whose jobs are supported by the indirect effects of the beer industry enjoy annual earnings of $124.7 million. Meanwhile, the induced effects generate an additional $61.5 million in yearly earnings for South Carolina workers. Summing these impacts yields a total annual earnings impact of $397.1 million. These impacts on labor earnings are spread across every sector of the South Carolina economy as shown in Table 4. The largest total earnings impacts are felt in eating and drinking establishments ($98.8 million), wholesale trade including beer distributors ($73.1 million), and in other service sectors ($50.7) million. Besides representing a substantial contribution to total personal income in South Carolina, these earnings impacts are important in that they directly result in sales and income tax revenues for the state of South Carolina. These and other tax revenue impacts are considered in the following section.

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Figure 9. Earnings Impacts of the Beer Industry in South Carolina

$400 $350 $300 $millions $250 $200 $150 $100 $50 $0 Direct Indirect Induced Total $124.7 $61.5 $210.9 $397.1

All values are in terms of 2002 dollars.

Tax Revenue Impacts The beer industry in South Carolina contributes to the states general revenue fund in several ways. The direct and indirect level of economic activity supported by the beer industry will translate into additional revenues primarily consisting of individual income tax and sales tax collections. The distribution of beer results in excise tax collections at the wholesale level. Retail sales of beer are subject to the states 5 percent sales tax, with 4 percent going to the general fund and 1 percent going directly to education via the states Education Improvement Act. By far, the two largest sources of tax revenues for South Carolinas general fund are the individual income tax and the sales tax. The labor earnings supported by the beer industry will directly lead to income tax revenue, while the spending of this income will lead to additional sales tax revenue. One way to calculate these tax impacts is to use actual data on South Carolina earnings, and tax revenue. Table 5 shows a brief history of data on labor earnings, income and sales tax revenue, along with total general fund revenue.

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Table 4. Earnings Impacts by Industry, in $millions Industry Direct Indirect Induced Agriculture 0 1.7 0.6 Mining 0 0 0 Construction 0 13.4 2.1 Manufacturing 0 11.1 3.3 TCPU 0 16.4 3.7 Wholesale Trade 62.4 7.7 3.1 Grocery Stores 31.9 0 0.6 Eating & Drinking 93.8 1.8 3.2 Other Retail 15.2 1.9 8.4 FIRE 0 18.7 6.8 Hotels 7.6 2.3 0.8 Entertainment Services 0 1.3 1.4 Health Services 0 0 15.3 Other Services 0 41.9 8.9 Education 0 0.2 1.4 Government 0 6.4 1.3 Miscellaneous 0 0 0.6 TOTAL 210.9 124.7 61.5

Total 2.2 0 15.5 14.4 20.0 73.1 32.5 98.8 25.6 25.5 10.7 2.7 15.3 50.7 1.6 7.7 0.6 397.1

Notes: All values are in millions of 2002 dollars. TCPU refers to Transportation, Communications and Public Utilities. FIRE refers to Finance, Insurance and Real Estate. Elements may not sum to totals due to rounding. Table 5. South Carolina Labor Earnings and Selected Tax Collections FY 1999-2000 FY 2000-2001 FY 2001-2002 Total Labor Earnings 59,877.5 62,182.0 62,677.3 Sales Tax Revenue* 1,964.1 1,983.7 2,010.4 Income Tax Revenue 2,445.6 2,498.8 2,349.2 General Fund Revenue 5,387.3 5,484.3 5,306.9 Notes: Earnings data source: U.S. Bureau of Economic Analysis, Tax Revenue data source: S.C. Board of Economic Advisors. All values are in millions of dollars. Reported sales tax figures represent only sales tax collections to the general fund. Of the states 5 percent sales tax, 4 percent goes to the general fund, the other 1 percent is allocated directly to education as per the Education Improvement Act of 1984.

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The data in Table 5 suggest that every dollar of labor earnings in South Carolina results in about 3.9 cents of income tax revenue and 4 cents of sales tax revenue (3.2 cents to the general fund, 0.8 cents directly to education). These percentages along with the total earnings impact of $397.1 million yields a positive income tax impact of $15.5 million and a sales tax impact of $15.9 million. Therefore, the earnings supported by the beer industry help generate a total of $31.4 million each year towards the states general fund. This tax impact only represents the taxes generated by the direct and ripple effects on labor earnings. Wholesale beer distributors in South Carolina are required to pay the beer and wine excise tax, with beer taxed at a rate of $0.006 per ounce. This amounts to an excise tax of $0.77 per gallon (128 ounces) of beer sold at the wholesale level. As of January 1, 2002, South Carolinas excise tax on beer was the second-highest in the nation, behind only Hawaii where excise taxes are $0.92 per gallon. The states beer excise tax is well above the U.S. median rate of $0.188 per gallon. The beer tax generated roughly $79.4 million in South Carolina during fiscal year 2001-02, going directly into the states general fund.2 In addition to the excise tax at the wholesale level, retail sales of beer are subject to the state sales tax. It has already been shown that an estimated $758 million was spent on final beer sales in South Carolina during 1997. After adjusting for inflation, this amounts to annual sales of $852.6 million in 2002 dollars. Taxed at a rate of 5 percent, these sales account for a total of $42.6 million annually in sales tax revenue. Table 6 summarizes these various tax revenue impacts. On an annual recurring basis, the beer industry in South Carolina directly and indirectly contributes a total of $153.4 million to the states revenue collections. Table 6. Summary of Annual Tax Revenue Impacts Revenue Source Value ($millions) Income Tax Earnings Impact 15.5 Sales Tax Earnings Impact 15.9 Sales Tax Beer Sales 42.6 Beer Excise Tax 79.4 TOTAL 153.4

Based on S.C. Department of Revenue statistics.

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Total Economic Impacts Figure 10 provides a summary of these beer industry impacts. The results of this section indicate that the beer industry directly and indirectly contributes substantially to the South Carolina economy. Of particular interest for the remainder of this report is the extent to which the states beer excise tax rate influences the size of the beer industry. More specifically, the issue to be considered concerns the impact on beer sales and excise tax revenue for a hypothetical change in the states excise tax rate. This will be the focus of Section 4.

Figure 10. Total Impacts of the Beer Industry in South Carolina

$1,800 $1,600 $1,400 $1,200
$millions

$1,578.6

17,314

$1,000 $800 $600 $400 $200 $0

$397.1

Direct Output

Total Output Impact

Total Total Jobs Earnings Impact Impact

All dollar values are in terms of 2002 dollars.

19

FTE jobs

$1,003.7

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

4. The Fiscal Impact of Changing the Beer Excise Tax Rate

From the point of view of tax revenue collections, the most directly observable fiscal impacts of the beer industry in South Carolina are beer excise tax collections. In particular, the excise tax on beer may appear to be a straightforward policy lever by which revenue collections can be easily affected. However, the end result of possible changes in the states beer excise tax rate is unpredictable in terms of the effect on beer tax collections. For the purpose of this section, the hypothetical and general case is that of an increase in the state beer excise tax rate of X percent. Specifically, the conclusion is this: An increase in the excise tax rate on beer will lead to an increase in tax collections that is less than proportionate and highly unpredictable. It would be incorrect, therefore, to assume that an X percent increase in the tax rate will translate into an increase in tax collections of X percent. The purpose of this section is to provide the economic rationale for this conclusion. There are two major and related explanations. The first approach considers the impact on the demand for beer following an increase in the excise tax. A higher excise tax rate will result in an increase in the price of beer. This higher price will reduce the demand for beer, and hence beer tax revenue will not increase by the same proportion of the tax hike. To fully present this argument, it is first necessary to present the economic tools needed to analyze this. Thus, this section first turns to an overview of the potential market effects of higher excise taxes, and then to what economists refer to as elasticity. The second rationale used to support the conclusion stated above is the likely impact on cross-border sales following an increase in South Carolinas beer excise tax rate. Higher beer taxes and hence higher beer prices may increase the incentive for South Carolinians to purchase beer out-of-state where practical, and this will further reduce instate purchases and hence beer tax collections.

The Possible Market and Fiscal Effects of an Increased Excise Tax The total level of beer tax collections in South Carolina is simply the quantity of beer in gallons sold at the wholesale level multiplied by the excise tax rate, currently $0.77 per gallon or 43.2 cents per six-pack. If the beer tax rate is increased, the resulting level of total tax collections of course depends on what happens to the number of gallons sold by distributors. For a given percentage increase in the tax rate to translate into an

20

identical increase in tax collections, it must be the case that the quantity of beer sold is unchanged. To the extent that the higher tax rate results in lower volume sales, the new level of tax collections will be proportionately less than the tax rate increase. The quantity of beer sold at the wholesale level in South Carolina is determined by the quantity of beer sold at the retail level. That is, even though the beer tax is levied at the wholesale level, beer tax collections are ultimately determined by the market conditions for beer at the retail level. Therefore, to analyze the effect on beer tax collections after an increase in the excise tax rate, it is necessary to consider the resulting impact on the final in-state market for beer. Towards this end, the general potential market impacts following a tax increase are considered in the market for a hypothetical product widgets. The first step is to consider various possibilities for the ultimate impacts on the widget market following a tax rate increase. Consider first a hypothetical model of the widget market that is composed of buyers (demand) and sellers (supply). Figure 11 provides a graph of the widget market assuming a typical market demand curve and a typical market supply curve. The downward sloping demand curve implies that as the price of widgets falls, the quantity of widgets demanded will rise, and as the price of widgets increases the quantity demanded falls. Meanwhile, the upward sloping supply curve shows just the opposite relationship. If widget sellers can receive a higher price they will be willing to supply more, at lower prices suppliers will only be willing to supply fewer widgets.

Figure 11. Market Example 1, Initial Conditions

Price Supply

$2.50

Demand

500

Quantity

21

The actual quantity of widgets purchased and the price paid is determined by the interaction of both market demand and market supply. In particular, the equilibrium price of widgets is the one price at which the quantity of widgets that buyers would like to purchase exactly equals the quantity of widgets that sellers would like to sell. In Figure 11, this price is $2.50 and the associated quantity of widgets purchased is 500. If widgets are currently subject to an excise tax, then a portion of the final purchase price of $2.50 is used to cover the widget excise tax. To continue this example, suppose the current excise tax rate is $0.10 per widget. Thus, in this example, the current level of widget tax collections would be $50 (500 widgets multiplied by the tax of $0.10 per widget). Again, the focus now is only on widget excise tax collections ignoring the additional revenue via the sales tax. This simple model of demand and supply can now be used to consider the effects of an X percent increase in the excise tax rate a tax increase of $0.10 times X% per widget for total excise taxes of $0.10 plus $0.10 times X% per widget. Because the excise tax is levied on the supply-side of the market, a higher tax rate will result in an upward shift of the supply curve, amounting to a decrease in supply. The explanation for this is straightforward. Under the initial tax rate, sellers were willing to supply 500 widgets at a price of $2.50. Now, with the $0.10 times X% increase in the excise tax levied on the sellers, these sellers will be keeping $0.10 times X% less of the purchase price than they were initially. That is, of the $2.50 received per widget, an additional $0.10 times X% must now go directly to the state government. Because their after-tax price is now less, the amount they will be willing to sell at a price of $2.50 is now less. Looked at the other way, to continue selling 500 widgets, these suppliers would now require a total price equal to the initial $2.50 plus the increased taxes of $0.10 times X%. As the supply curve shifts upward, the prevailing price and quantity in the widget market also change. In particular, given these typical demand and supply curve shapes, this change in market conditions can be illustrated as in Figure 12. Now, the supply curve has shifted, and the prevailing price is higher while the prevailing quantity being purchased and sold is now lower. As drawn in this example, the new equilibrium price is $Y while the new quantity being bought and sold has fallen to Z widgets. Under these new market outcomes, total widget tax collections would now stand at Z widgets times the new tax of $0.10 plus $0.10 times X% per widget. It is of course impossible to determine the ultimate impact on widget tax collections without knowing precisely the values of X and Z the percentage increase in the tax rate and the new quantity of widgets. Further, Z is determined simultaneously with Y (the new price of widgets), and both of these are then a function of X, the tax rate increase.

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To consider some numbers, suppose the tax rate increases by 20 percent to $0.12 per widget. Further, suppose that the new equilibrium price and quantity are $2.51 and 450, respectively. In this case, the new level of tax collections would be $54 an 8 percent increase in tax collections following the 20 percent increase in the tax rate.

Figure 12. Market Example 1, After Tax Increase

Supply (new) Price Supply (old)

$Y

Demand

Quantity

These results can also be used to see how consumers and sellers share the burden of the higher tax rate. While it may be tempting to conclude that a tax that is levied on the seller will only affect the seller, or vice-versa, this is not generally the case. In the current example, the new equilibrium price of a widget is $2.51. This $2.51 represents the purchase price to the consumer. The after-tax price received by the seller is $2.39 (the purchase price of $2.51 minus the total tax of $0.12). Therefore, the imposition of the higher excise tax results in an increase in the purchase price for consumers of $0.01 per widget, and a reduction in the after-tax price of $0.01 for the seller. In this case, consumers and sellers bear an equal burden of the higher tax rate. Of the $0.02 per widget tax increase, the consumer share amounts to $0.01 while the sellers share is also $0.01. This consideration of who bears the burden of the higher tax is referred to as an analysis of the tax incidence.

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Depending on how these demand and supply curves are drawn, the net results in terms of total tax collections and tax incidence can vary dramatically. For example, suppose the demand for widgets looks more like that shown in Figure 13. Here, the widget demand curve is perfectly vertical, meaning consumers will be willing to purchase the same amount of widgets regardless of the price. Here, the initial price and quantity are identical to those shown earlier.

Figure 13. Market Example 2, Initial Conditions

Price Supply

$2.50

Demand 500 Quantity

Consider now the market effects of an X percent increase in the excise tax rate an additional $0.10 times X% per widget. Once again, and for the same reasoning, the supply curve will shift upward identically to the shift in the previous example (Figure 12). However, as shown in Figure 14, the results are much different now because of the extreme shape of the demand curve. Here, the new equilibrium price, $Y, is $2.50 plus $0.10 times X% (the original $2.50 plus the additional tax of $0.10 times X%) while the quantity has remained unchanged. In this case, total tax collections would now stand at 500 widgets times the new tax of $0.10 plus $0.10 times X% per widget. Because the quantity of beer did not fall, the X percent increase in the excise tax rate resulted in an identical X percent increase in widget tax collections. Looking at the tax incidence in this case, the entire burden of the tax increase is felt by consumers. The purchase price for consumers has increased by $0.10 times X%, while the after-tax price received by sellers is unchanged at $2.50. Because consumers showed no response to the change in price, tax collections increased proportionately and consumers felt the entire tax increase while suppliers felt no burden from the higher tax.

24

It is important to note that this is the only way these results can be obtained following any given increase in the excise rate. As long as the supply curve is upward sloping, it would be necessary for demand to be perfectly vertical for tax collections to also double. For now, this serves as a useful example as the various possible impacts on tax collections are considered. Following one more specific example, the discussion will turn to the likely actual shape of the beer demand curve.

Figure 14. Market Example 2, After Tax Increase Supply (new)

Price Supply (old) $Y

Demand 500 Quantity

The other extreme case to consider is one in which the widget demand curve is perfectly horizontal as shown in Figure 15. This demand curve implies that at any price other than $2.50 more specifically at any price higher than $2.50 consumers will not be willing to purchase any widgets. Again, this is also an unlikely scenario, but it serves as another useful illustrative example. Once again, the supply curve is identical to those earlier, and the initial price and quantity are also the same. In this example, an X percent increase in the tax rate will again lead to the same shift in the supply curve. However, once again the results in the widget market are very different this time. As shown in Figure 16, because of the flat demand curve, the equilibrium price is unchanged at $2.50, while the quantity has fallen to Z. For example, suppose a 20 percent tax rate increase leads to a new quantity of 200. Total tax collections would now be $24, less than half of the level before the tax hike. Analysis of the tax incidence shows that in this case, the entire burden of the higher tax rate is borne by suppliers because the purchase price paid by consumers is unchanged at $2.50 while

25

the after-tax price received by suppliers is $2.38 per widget, $0.02 less than they were initially receiving.

Figure 15. Market Example 3, Initial Conditions

Price Supply

$2.50 Demand

500

Quantity

Figure 16. Market Example 3, After Tax Increase Supply (new)

Price Supply (old)

$2.50

Demand

Quantity

26

What these examples demonstrate is that the end result of an increase in the excise tax rate, in terms of total tax collections as well as tax incidence, depends critically upon the shape of the widget demand curve. Of course, this holds true in the beer market as well. The shape of the demand curve is dictated by the responsiveness of consumers to changes in the price of beer. If consumers are not at all responsive to price changes, then the appropriate model is that shown previously in Figure 13. On the other hand, if consumers are absolutely responsive to price, then the market depicted in Figure 15 is correct. Finally, there is a considerable range of middle-ground for which the first example of Figure 11 is more representative of the beer market.

The Price Elasticity of Demand for Beer The precise shape of the demand curve, therefore, is determined by the price responsiveness of demand the concept economics refers to as the price elasticity of demand. If consumers are not at all responsive to changes in the price of beer, then the demand for beer is perfectly price inelastic. If consumers would respond to a higher price by reducing the quantity demanded to zero, as in the case of a horizontal demand curve, then the demand for beer is perfectly price elastic. If instead there is some response between these two extremes, the demand for beer can be characterized as being either relatively elastic or relative inelastic. The implications of the alternative characterizations of the beer demand curve, in terms of total beer sales and total beer tax collections, are summarized in Table 7.3 This table only shows the alternatives for the more realistic case of a demand curve with some degree of downward slope, as opposed to the extreme cases of either perfectly elastic or perfectly inelastic demand.

This analysis assumes that the supply side of the beer market is such that sellers will be willing to provide a quantity supplied equal to the quantity demanded at the price currently being charged by sellers.

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Table 7. Relationship Between Price Elasticity of Demand and Impacts on Quantity and Tax Collections Following a Tax Hike Elasticity Quantity Impact Tax Collections Impact Characterization Extremely Elastic Major Decline Revenues Decline Revenues rise, but much Relatively Elastic Large Decline less than proportionately Revenues rise, but less than Relatively Inelastic Small Decline proportionately Revenues rise, just slightly Extremely Inelastic Minor Decline less than proportionately

The first result to note is that as long as there is any degree of downward slope to the demand curve, an increase in the beer excise tax rate will fail to generate a proportionate increase in beer tax collections. Now, depending on the precise degree of price elasticity, the higher tax rate could result in anything from an outright drop in tax collections to a less than proportional increase in revenues. The issue, then, is what is the elasticity of the demand for beer? Only by knowing this precisely can policymakers hope to know with any accuracy what will happen to tax collections when the excise tax rate is changed. The problem is that it is virtually impossible to know with great accuracy just how elastic or inelastic the demand for beer is. However, there is a substantial academic literature that takes up this very issue, providing various approximations to the real-world price elasticity of the demand for beer. Table 8 presents the reported estimated price elasticity of beer demand found in several published articles. The estimates themselves represent the percentage change in the quantity of beer demanded following a 1 percentage point increase in the price of beer. The results reported in this table suggest that a 1 percent increase in the price of beer will result in a roughly 1 percent decline in beer consumption.

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Table 8. Reported Price Elasticities of Beer Demand Elasticity Estimate Study Notes -0.8 Heien & Pompelli overall estimate -1.1 Atkinson, et. al overall estimate -0.8 Manning, et. al overall estimate -1.19 Manning, et. al estimate for the median drinker Sources: Heien, D & G. Pompelli (1989) The demand for alcoholic beverages: Economic and demographic effects, Southern Economic Journal, 55, 759-770. Atkinson, A., Gomulka, J. & N. Stern (1990) Spending on alcohol: Evidence from the family expenditure survey 1970-1983, Economic Journal, 100, 808-827. Manning, W., Blumber, L. & L. Moulton (1995) The demand for alcohol: The differential response to price, Journal of Health Economics, 14, 123-148.

It is important, however, to note that these elasticity estimates are drawn from statistical models with varying degrees of precision. That is, there can be a relatively wide range of values around these estimates that lie within a reasonable confidence interval. Therefore, the estimates given in Table 8 should not be used to predict precisely what would happen to total beer tax collections following any given increase in the state excise tax rate. A particularly interesting study by Manning, Blumber & Moulton (1995) specifically considers the elasticity of demand across different types of consumers light, moderate, and problem drinkers. Not surprisingly, the evidence suggests that the demand curve for the heaviest drinkers is virtually price inelastic. Therefore, raising beer taxes to curb the social costs generated by problem drinking is unlikely to be an effective policy. Problem drinkers will not alter their behavior in the face of a higher price of beer. However, the typical consumer light and moderate drinkers does have a demand curve that is relatively more elastic. Therefore, the vast majority of consumers will indeed reduce their in-state purchases of beer, thereby dampening the revenue raising ability of the beer tax hike. Therefore, an increase in the beer excise tax would likely fail to induce less drinking among problem drinkers. However, it would reduce in-state purchases among the majority of light and moderate drinkers. Further, it would do so by an uncertain amount, rendering the revenue dampening effect unpredictable.

29

The most important result from the literature is that there is indeed some degree of responsiveness following an increase in the price of beer. That is, an excise rate increase that increases the purchase price will indeed reduce beer consumption resulting in a less than proportional increase in tax collections. The statistical imprecision associated with estimating the price elasticity implies that the resulting impact on beer tax collections from a given tax rate hike would be highly uncertain. Further, there is yet another angle that should be considered in terms of the impact on in-state beer purchases following a tax increase the possible impact of cross-border sales.

Cross-Border Beer Sales There is substantial variation across states in terms of beer excise tax rates. Excise tax rate differentials between neighboring states can result in cross-border shopping, especially in the case of large metropolitan areas that spillover into multiple states. One of the fastest growing counties in South Carolina is York County, part of the Charlotte-Rock Hill metropolitan area. South Carolinas beer excise tax rate is more than 45 percent higher than that in North Carolina. This tax differential may be sufficient to induce cross-border shopping that could be especially substantial in the Rock Hill area as well as other population centers along or near the North Carolina/South Carolina border. The Tax Foundation has estimated that South Carolina is indeed a net importer of beer. That is, the higher tax rate in South Carolina is resulting in the loss of in-state sales as South Carolina residents cross the border to purchase beer, especially in North Carolina which is estimated to be an overall net exporter of beer. The study further estimates that the magnitude of these lost sales amounts to roughly 2.5 percent of the sales made in South Carolina. The implication of these results is that any increase in South Carolinas excise tax rate relative to that in North Carolina will create further incentive for cross-border shopping resulting in a larger loss of in-state beer sales. This decline due to a larger tax differential will work to weigh down the revenue increase resulting from the higher tax rate. The extent to which a given excise tax hike would reduce in-state purchases is unknown and would be difficult or impossible to accurately forecast. In light of the discussion of the previous sections, this cross-border shopping effect would further add to the revenue unpredictability associated with increasing the states excise tax rate. Increased cross-border shopping would, however, clearly contribute to the earlier result that a given percentage increase in the excise tax rate would result in a less than proportional increase in tax collections, the precise level of which would be highly uncertain.

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5. Conclusion
The beer industry in South Carolina has substantial and far reaching economic impacts. The economic output, employment and earnings that are directly and indirectly supported by the activities of the beer industry spread into communities throughout the state. The impacts also affect every sector of the states economy. Economic activity ranging from manufacturing to services to real estate is to some degree supported by beer distribution and retailing in South Carolina. The beer industry also helps support the operations of state government by contributing tax revenue, whether directly via excise tax collections and sales taxes on beer, or more indirectly through taxes generated by household earnings and expenditures. The dominant theme of the second half of this report has been that the demand for beer is, to some degree, responsive to price. Therefore, an increase in the states excise tax rate for beer that results in higher beer prices will indeed reduce in-state purchases. Overall, there are two critical implications of this. First, a given percentage increase in the tax rate will fail to generate the same percentage increase in tax revenue. Second, the amount by which revenues do increase is highly uncertain. The ultimate effect on tax collections would depend on the precise degree of price elasticity of the demand for beer, as well as the resulting impacts on cross-border shopping.

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Appendix A. Estimating South Carolina Beer Sales

This Appendix details the methodology used to estimate the value of total beer sales in South Carolina by type of outlet. As discussed in the text of the report, these outlet-specific beer sales figures represent the direct impact of the beer industry at the retail level. The basic approach involves applying national statistics on the percentage of total sales attributable to beer sales for different types of retail outlets to South Carolina specific data on total sales at these same types of outlets. The data are all from the 1997 Economic Census conducted by the U.S. Census Bureau. The Census Bureau conducts an economic census every 5 years. It provides detailed information on the value of specific merchandise line sales by every industry selling that merchandise. This extremely detailed data is available only at the U.S. level. At the state-level, the census provides data on total sales for each type of industry (but not a breakdown of the composition of total sales as it does at the national level). Table A.1. U.S. Data on Beer Sales by Type of Establishment Type of Establishment Grocery Stores Convenience Stores Liquor Stores Gas Stations Accommodations Full-service Restaurants Limited-service Restaurants Drinking Places Number of Total Sales of Beer Sales of Beer Sales as Establishments Establishments Establishments a Percentage Carrying Beer ($thousands) ($thousands) of Total Sales 32,298 $220,534,483 $5,622,454 2.5% 17,988 23,387 57,096 7,647 106,292 15,812 51,510 $11,148,953 $17,604,392 $93,887,051 $56,538,075 $77,350,903 $7,965,376 $11,936,282 $1,603,716 $6,216,493 $5,665,884 $1,006,458 $6,006,345 $490,892 $5,668,484 14.4% 35.3% 6% 1.8% 7.8% 6.2% 47.5%

Notes: Source: 1997 Economic Census, U.S. Census Bureau. Number of establishments and total sales represent only those establishments that sell beer.

Table A.1 presents the relevant set of national level statistics used as the first step in estimating beer sales in South Carolina. This table shows, for each type of establishment, the number of establishments, total sales, beer sales, and beer sales as a

32

percentage of total sales. In every case, the figures represent the number of establishments and total sales for only those carrying beer. For example, the census reported a total of 69,461 grocery stores nationwide, while Table A.1 indicates that 32,298 of those sold beer. Therefore, the interpretation of the percentage in the final column is that of all grocery stores that sell beer, beer sales account for 2.5 percent of total sales. Table A.2 provides the number of establishments and the value of total sales for each of these types of establishments in South Carolina. Table A.2. South Carolina Data on Number and Sales of Establishment Types Type of Establishment Grocery Stores Convenience Stores Liquor Stores Gas Stations Accommodations Full-service Restaurants Limited-service Restaurants Drinking Places Number of Establishments 1,116 368 388 2,537 1,071 3,062 2,921 422 Total Sales ($thousands) $5,081,356 $168,206 $247,751 $3,442,939 $1,208,394 $1,687,036 $1,637,588 $121,715

Notes: Source: 1997 Economic Census, U.S. Census Bureau.

With these two types of data available, the final step is to calculate the percentage of total establishment sales in South Carolina (from Table A.2) that are attributable to beer sales using the national percentages in Table A.1. This approach assumes, therefore, that the pattern of beer sales in South Carolina is the same as the pattern of beer sales across the nation. Recall, this assumption appears reasonable because the national statistics are based only on establishments that sell beer. The results of these calculations are given in Table A.3. This approach yields a total of $757,972,988 in beer sales in South Carolina during 1997. As reported in the text, this figure in 1997 dollars equates to about $852.6 million in 2002 dollars. As a check on this estimate, consider the following facts. During fiscal year 2001-2002, total beer excise tax collections in South Carolina were $79.4 million. At a tax rate of $0.072 per bottle of beer, the $79.4 million implies the equivalent of roughly 1.1 billion bottles of beer was sold during the year. This Appendix has estimated total spending of $852.6 million per year. Together, these statistics imply an average per

33

bottle sales value of $0.77. Because this would appear to understate the average price of a bottle of beer, the estimate total beer sales figure also appears to be underestimated. This would occur because of some divergence in the pattern of beer sales by establishment between the U.S. and South Carolina. However, because the estimated sales figure does appear to be underestimated, this figure will be used throughout the report and should be treated as a relatively conservative estimate of total beer sales in South Carolina. Table A.3. Estimated South Carolina Beer Sales by Type of Establishment Type of Establishment Grocery Stores Convenience Stores Liquor Stores Gas Stations Accommodations Full-service Restaurants Limited-service Restaurants Drinking Places TOTAL National South Carolina Percentage of Sales Total Sales Attributable to ($thousands) Beer $5,081,356 2.5% $168,206 14.4% $247,751 35.3% $3,442,939 6% $1,208,394 1.8% $1,687,036 $1,637,588 $121,715 $13,594,985 7.8% 6.2% 47.5% 5.6% (weighted average) South Carolina Beer Sales ($value) $127,033,900 $24,221,664 $87,456,103 $206,576,340 $21,751,092 $131,588,808 $101,530,456 $57,814,625 $757,972,988

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Appendix B. Input-Output Modeling

Input-output (I-O) analysis is the basis for economic impact models. Input-output country tables are found throughout the world. Variants of the U.S. input-output table are available for all counties in the United States. They are constructed with data on detailed inter-industry flows throughout the local economy, and information on demand and total output. One of the major virtues of I-O is that industry, or sectoral impacts can be calculated. The employment and income multipliers that derive from input-output analysis are the basis for most economic impact analysis. But multiplier analysis is often misused or misunderstood in cost-benefit studies. The basis for multiplier analysis is the input-output table. An I-O table is an accounting relationship, with each industry represented as both a column and a row in a matrix. In simple terms, it is a set of recipes for production in a given economy. The table provides data on industry demands from all other industries (the backward linkages are depicted in the columns of the table for each industry) and suppliers to all other industries (depicted across the rows of the table for each industry). The table also includes final demands and total output for the economy. To measure the total impact of a new project in an economy, changes in all demands from other industries (the upstream linkages) must be determined. For example, a $10 million construction project provides an initial impact of $10 million on the local economy. This is an example of a direct impact. Clearly, the construction of the project will require concrete, steel, construction workers, and so forth. The money spent on these materials and services comprises the indirect expenditures, or the indirect impacts. The mechanism used to measure total indirect expenditures is the (I-O) table. Table B.1 gives a simplified, two-vector version of an input-output table, where Zij is the interindustry flow from sector I to sector j, Fi is the final demand of industry I, and Xi is the total output of industry i. Table B.1. Two-Sector Input-Output Table Construction Manufacturing Final Demand Total Output Construction Z11 Z12 F1 X1 Manufacturing Z21 Z22 F2 X2

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Most input-output tables would have dozens, if not hundreds, of sectors, but in this simplified economy, the only two sectors are construction and manufacturing. Table B.2 adds hypothetical values to the simple I-O table. In this example, the manufacturing sector delivers to final demand $1,100 worth of goods. Final demand is the finished product that is used by a consumer. The interindustry flows are interpreted in the following manner: Manufacturing provides $400 worth of goods to the construction sector and $500 to itself. From the column of manufacturing data, we can see that to produce the $1100 of final goods, the manufacturing sector used $500 worth of its own output and $100 of output from the construction sector. These demands are termed intermediate demands, goods to be used in the production of other goods delivered to final demand. The total output of manufacturing is the row total, or $2000. The row entries are the inputs to the column sector. Table B.2. Two-Sector Input-Output Table with Hypothetical Data Construction Manufacturing Final Demand Total Output Construction 200 100 700 1,000 Manufacturing 400 500 1,100 2,000

Dividing the interindustry flows by the total output (from Table B.1) produces the technical coefficients matrix A (Table B.3). For the current example, the values of the coefficients matrix are as in Table B.4. This is the set of recipes for production. An illustrative interpretation of these technical coefficients shows that it takes $.20 worth of construction output and $.40 worth of manufacturing output to produce $1.00 worth of construction output. Table B.3. Two-Sector Technical Coefficients Matrix Construction Manufacturing Construction a11 = Z11/X1 a12 = Z12/X1 Manufacturing a21 = Z21/X2 a22 = Z22/X2

Table B.4. Two-Sector Technical Coefficients Matrix with Hypothetical Data Construction Manufacturing Construction 0.2 0.05 Manufacturing 0.4 0.25

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The process follows a general matrix algebra notation often used in multiplier analysis. The total output from each sector is the sum of the intermediate demands and the final demands, or X1 = Z11 + Z12 + F1 X2 = Z21 + Z22 + F2, which can be put into a matrix form as X = Z + F. The direct coefficients table is used to calculate the multipliers for each industry. The multipliers are derived from the (Leontief) inverse of the direct coefficients in Table B.4. Since total output equals the sum of the inter-industry flows and the final demand, one can derive the following equation: X = Z + F , where Z = AX. This may be solved as X = (I - A)-1 F. The term (I-A)-1, called the Leontief inverse, provides a powerful tool in quantifying economic effects. The Leontief inverse for the current example is given in Table B.5. Table B.5. Hypothetical Leontief Inverse Construction Manufacturing Construction 1.2931 0.0862 Manufacturing 0.6897 1.3793

To understand these numbers, consider what will happen to this economy should the demand for construction increase by $100. Obviously, to meet this demand, the construction sector will have to produce an extra $100 of output. Additionally, from the I-O table one can see that construction uses construction services in its own production process. From the A matrix, we see that to produce $1 worth of output, it takes $.20 worth of construction production as an input. Thus, $20 worth of construction will be needed as an input to increase output by $100 and, to produce that $20 worth, an additional amount given by (.2 X $20) will be used as an input. Further, construction will demand (0.4 X $100) from the manufacturing sector. The Leontief inverse is an effective tool for calculating the result of this roundby-round process. From the example in B.5, we see that a $100 increase in the demand for construction output requires a total increase of about $129 in construction output and an increase of $69 in manufacturing output. Thus the (I-A)-1 matrix contains all of the

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direct and indirect effects of a change in final demand. The total economic impact is given by the column sums of the Leontief inverse. In our example, we find that the total economic impact of a $1 change in construction demand is $1.98; that is, the $1 gets multiplied by $1.98. The multiplier derived from this example of the I-O model incorporates both the direct and indirect impacts. By adding to this simple model a row for payments to labor by the firm (wages) and a column of expenditure patterns (the marginal propensity to consume each type of product), the multipliers derived from the Leontief inverse will incorporate the direct, indirect, and induced impacts. The induced impacts are additional expenditures resulting from increased earnings by local residents as a result of the increase in final demand. By slight modifications of the above simple model, multipliers may be determined to analyze the total output impact, earnings impact, and jobs impact. Typically in impact analysis the analyst need only refer to an existing I-O table to determine the impact of any incremental change in final demand in an economy. The data from an I-O table also provide quantitative measures of upstream and downstream linkages. The terms upstream and downstream become intuitive when one looks at the I-O table. A change in output by the construction sector requires increased production by all of its suppliers. This is upstream linkage. On the other hand, increased output in the construction sector also means additional amounts of this product that are available to be used as inputs in other sectors. This is the downstream linkage. The output multiplier described above is a measure of the downstream linkage. The downstream linkage is usually measured by transposing the standard I-O table into a supply-side I-O table and then calculating the Leontief inverse. The upstream linkage measures the strength of the supplier relationship while the downstream linkage measures the strength of the market for selling the product as an input. Often the downstream linkage also includes the concept of marketing directly to the consumer in addition to sales to other firms as an input. In the United States, as in many countries, the federal government produces a detailed I-O table. Multipliers, as described above, are calculated from this table by IMPLAN so that it is fairly straightforward to estimate the impact of any change in final demand in the United States. IMPLAN modeling software contains all the necessary information on sectoral linkages to estimate the total economic impact of a specified change in the final demand for the output of any given industry. This detailed information on the linkages between sectors is available at the national, state, and county levels. Overall, these data fully

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describe the relationships between 528 disaggregated sectors, covering manufacturing, services, retail trade, and so on. Therefore, IMPLAN provides models that are well-suited to estimating the economic impacts of, in this case, the beer industry in South Carolina. Primary information on beer sales is used in conjunction with the South Carolina-specific economic model provided by IMPLAN to estimate the ongoing employment, income, and output impacts of the beer industry.

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