Customers still paying ‘Johnstown Flood Tax’

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December 15, 2007

BY MIKE FAHER The Tribune-Democrat Sat Dec 15, 2007, 11:59 PM EST

On March 17, 1936, floodwaters fueled by heavy rains and melting snow surged through Johnstown.

The deluge took two dozen lives, destroyed 77 buildings and caused more than $40 million in damages.

And, in a sense, every modern-day consumer who buys liquor or wine in Pennsylvania still is footing the bill for that St. Patrick’s Day disaster 71 years ago.

The so-called “Johnstown Flood Tax,” an 18-percent surcharge on every bottle bought at a state liquor store, first was introduced a “temporary” tax to help Johnstown’s cleanup efforts in 1936.

And the levy, which is separate from the state’s 6-percent sales tax, lives on despite multiple attempts to kill it – and in spite of the fact that the tax’s proceeds have not flowed into Johnstown anytime in recent memory.

“Clearly, it has outlived its very meaningful original intent,” said Patrick Conway, Pennsylvania Restaurant Association chief executive officer.

The tax originally was set at 10 percent. But instead of repealing the levy when Johnstown’s cleanup was complete, state lawmakers actually raised it twice in the 1960s to the current level of 18 percent.

As Pennsylvania Liquor Control Board’s retail sales have reached record-high levels, so have flood-tax revenues. Proceeds from the levy topped $200 million in fiscal year 2004-05 and rose to $239.4 million in fiscal 2006-07.

And it is not clear where that cash eventually ends up, since it simply is sent directly to the state treasury.

State Rep. Bob Freeman, a Northampton County Democrat, recently introduced a bill aimed at using the flood-tax revenue to support struggling cities. Freeman’s plan would send state money to communities that have a high percentage of tax-exempt properties – towns such as Johnstown.

“Now, we’re trying to rebuild a bunch of communities in Pennsylvania,” Freeman said.

Since the tax was implemented in the 1930s, collections have totaled nearly $5.4 billion.

PLCB spokesman Nick Hays said it is not up to his agency to justify the tax’s continued existence.

“That is a decision that the legislature makes,” Hays said.

“We don’t set the policy – we implement it.”

Various legislative attempts to eliminate or change the flood tax – including a 2003 proposal that would have substituted a per-drink sales tax in bars, restaurants and other establishments – have made headlines but have not become law.

State Rep. Robert Donatucci, a Philadelphia-area Democrat who chairs the House Liquor Control Committee, said he supports any effort to reduce the flood tax.

He argues that, if the tax was eliminated or decreased, fewer Pennsylvanians would cross state lines in search of better liquor prices, thus boosting PLCB sales.

“We’re going to pick up revenues that we’re losing,” Donatucci said.

Meanwhile, the flood-tax battle lives on for organizations such as the state restaurant association. Conway argues that the levy puts Pennsylvania eateries, which have no choice but to buy their liquor from the PLCB, at a big disadvantage.

He notes that restaurant operators’ PLCB purchases already are subject to several layers of markups before the flood tax is factored in. And licensees receive only a 10-percent wholesale discount.

“I do think there is a growing recognition in the legislature that this tax is hard to defend,” Conway said. “It makes restaurants less competitive with restaurants in neighboring states.”

Still, he noted, “it’s always hard to repeal taxes.”

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