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Washington State Enters New Era of Liquor Privatization

Leonard Gilroy
May 31, 2012, 10:42am

Friday will mark a historic first: Washington State will become the first of 18 liquor "control" states to fully privatize its state-run monopoly on the wholesale and retail trade in distilled spirits, assuming that the state's Supreme Court doesn't strike down the ballot initiative that mandated privatization when it issues a final ruling on a court challenge later this morning.

I detailed the Washington State initiative in Reason Foundation's recent Annual Privatization Report 2011 (full report here), and I've posted a standalone version of that article here for convenience.

This will be interesting to watch on many levels. One topic of particular interest will be the impact of privatization on liquor prices. Many observers expect prices to increase overall, which on the surface might seem counterintuitive when considering the establishment of a competitive market among private vendors where one previously did not exist. However, to secure enough political support for privatization, drafters of the ballot initiative made a strategic calculation that merely replacing revenues to the state (via new excise taxes to replace the previous state monopoly markup, or profit) would not be enough to secure voter approval.

As I detail in the article linked above, drafters opted to add new fees on top of an already high state tax burden on alcohol to generate higher net alcohol-related revenues to the state after privatization. At the state level, increased revenues are estimated to be $216 million to $253 million over the next six fiscal years, with a similar $186 million to $227 million increase in local government revenues expected over that same period.

So if prices increase overall, well…it would make sense, since you're tacking on new fees onto already high taxes. But we should be clear: if prices do rise, then it will be due to that particular policy decision, not a natural result of privatization. Observers in other states like Pennsylvania, where a policy debate over liquor privatization is ongoing in the legislature, should keep that context in mind as they consider how to design similar initiatives.

And in Washington State, policymakers always have the option of lowering the alcohol tax burden to drive prices down, though I don't suspect that many policymakers there will be rushing to do so given their interest in higher tax revenues.

At a larger level, it will be interesting to see how Washington's experience influences the liquor privatization discussion in the other 17 so-called "control" states, which retain post-Prohibition era wholesale and/or retail liquor monopolies. As I discussed at length in this February 2012 blog post, I see these government-run businesses as relics of a bygone era when there was a false belief (hubris?) in a minority of states that somehow you can only trust government to sell liquor (though it's perfectly fine to have private sales of beer and wine).

But that logic is severely flawed: if government being the direct monopoly wholesaler and retailer of potentially harmful substances is everything it’s supporters say it’s cracked up to be, then:

No one is seriously suggesting that these things happen, and it’s for a good reason: government’s proper role is in the regulation of these substances, not their direct sale and marketing.

Governments tend to be bad at running business enterprises because they're not actually business and it’s not a core expertise. By contrast, the private sector is in the business of business, and hence the proper place for that, with government responsible for enforcing regulation of the market. In fact, you have the same regulatory tools available in control and privatized states: those are controls on price and controls on availability. Open market states have control over excise tax rates, as well as the number and location of liquor licenses. It’s that regulatory function that is the critical aspect of “control”, not whether the clerk behind the counter is a public employee or not.

Check back here for more in the coming days and weeks on Washington State's privatization rollout.

UPDATE: Hot off the presses, the state Supreme Court has just issued a ruling upholding the constitutionality of Initiatve 1183, so the full conversion to private liquor sales in Washington State will take place at midnight.


Leonard Gilroy is Director of Government Reform


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