ON HST drops taxes on liquor, but prices still going up.

Wine and liquor prices are expected to rise in July even though the business-friendly HST will actually lower tax rates on booze, the Star has learned.

Internal industry research reveals that while consumers will pay the equivalent of an 8 per cent provincial sales tax after July 1 -- instead of the existing 12 per cent on alcohol -- retail prices will not drop.

Nor will drinks necessarily be any cheaper in your favourite pub or bistro, despite the fact bar owners and restaurateurs will also effectively pay 8 per cent, down from the current 10 per cent tax for licensees.

While Premier Dalton McGuinty wants savings passed on to consumers, the LCBO has a policy of "social responsibility" which prevents them from bringing prices down to a level which would encourage alcohol abuse.

"It's counter-intuitive. Tax rates are decreasing because of the harmonization, but the prices on the shelf are actually going to be increased," warned one senior industry official, who spoke on condition of anonymity due to fear of retribution from the Liquor Control Board of Ontario.

"And that's going to surprise consumers. They should be expecting a reduction."

That's because the LCBO has quietly increased its mark-up by 7.5 per cent. On imported wines the mark-up has soared to 71.5 per cent from 64 per cent, and on domestic wines it has risen to 65.5 per cent from 58 per cent.

To keep prices the same, sources say the markup should at most increase just 6.5 per cent.