Annual Privatization Report 2013

State Liquor Privatization Update

Subsection of Annual Privatization Report 2013: State Government Privatization

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On June 1, 2012, Washington State became the first state since the end of Prohibition in 1933 to dissolve its state-run monopoly on the distribution and sale of distilled spirits, the result of a ballot measure approved by voters in 2011—Initiative 1183 (I-1183)—that shifted the state’s wholesale and retail spirits enterprises from public to private sector operation (For more details on I-1183, see Reason Foundation’s Annual Privatization Report 2011.)

Under I-1183, the state divested its 328 retail outlets and issued licenses for spirits sales at approximately 1,500 stores statewide, primarily stores larger than 10,000 square feet that include grocery stores, drugstores, alcohol retail chains and more. Major retailers now selling spirits alongside beer and wine after privatization include Costco, Target, WalMart, BevMo!, Total Wine and More, Safeway and Albertsons.

The transition to privatized spirits sales has largely been smooth, but has come with an increased volatility in spirits prices attributed to new liquor taxes imposed by I-1183, creating an initial “sticker shock” among consumers. In December 2012, the Washington State Department of Revenue estimated that the average retail price per liter of spirits had risen by 11.6 percent after privatization, from $21.58 in September 2011 (prior to I-1183 implementation) to $24.09 in September 2012. The rise, which has leveled off since an initial spike with the onset of privatization in June, is attributed to tax increases contained in I-1183, which retained the state’s previous sales and per-liter taxes on spirits but added new fees—primarily a 17 percent fee on retail sales and a two-year, 10 percent fee on wholesalers—to replace the state’s previous 52 percent wholesale markup, which was eliminated under I-1183.

The ballot measure also authorized the state’s liquor control board to issue an additional, one-time fee on wholesalers in 2013 if the total revenues collected under the new 10 percent fee have not generated a total of $150 million by the end of March 2013, prompting some observers to speculate that spirits wholesalers have padded their prices to mitigate the potential risk of a one-time payout to the state. In 2014, the 10 percent wholesaler fee is set to drop to 5 percent, which, along with increasing market competition, is expected by state officials to yield lower spirits prices over time.

Despite media reports noting a spike in spirits sales in bordering counties in Oregon due to the higher prices in Washington State, in-state sales have not suffered in Washington under privatization. The Washington State Department of Revenue reported in December 2012 that spirits sales by volume were 3.1 percent higher during the first five months of privatization than they were the previous year, rising from 16.3 million liters sold from June through October 2011 to over 16.8 million liters sold those same months in 2012.1 Similarly, the total value of spirits sold in the state totaled $389 million over the first five months of privatization, up 16 percent from the same five-month period in 2011. The Department also reported higher than anticipated tax revenues after privatization; actual spirits taxes collected between July and December totaled $111.3 million, over $4 million higher than the agency’s original forecast and nearly 13 percent higher than the $98.6 million collected during the same period in 2011. Overall, the data suggest that Washington State consumers are looking beyond price and have embraced the newfound convenience of privatized spirits sales.

Beyond the economic impacts of privatization, it is too early to assess the social impacts of liquor privatization in Washington State, as comprehensive data on underage drinking, drunk driving and alcohol-related fatalities are not yet available. However, a November 2012 report in the West Seattle Herald examined crime data in two Seattle-area suburbs and found that while alcohol thefts have risen since privatization—likely due to the dramatic expansion in the number of retail spirits outlets and a local plastic bag ban that encourages customers to shop using their own bags—incidences of other alcohol-related crimes (e.g., DUIs, public drunkenness and underage drinking) had actually decreased between June and September 2012, relative to the same period in 2011.2

State officials will continue to suffer some growing pains in 2013 as they face two separate lawsuits related to I-1183, neither involving the substance of the law itself, but rather the state’s implementation of the law:

  • In June 2012, the coalition that backed I-1183—including Costco, the Washington Restaurant Association and the Northwest Grocers Association—filed a lawsuit against the Washington State Liquor Control Board over rules the board adopted earlier in the year to implement I-1183 that restrict retailer sales to restaurants to no more than 24 liters in a single day, as well as restrictions on delivery locations for spirits distributors, the imposition of unauthorized fees on certain spirits manufacturers, and rules discriminating against foreign spirit producers’ ability to market their products to retailers. According to the coalition, the Board’s actions run counter to the intent of I-1183 and have the effect of stifling, not facilitating, competition in the post-privatization marketplace.
  • In November 2012, the owners of 11 stores that had previously sold spirits under contracts with the Liquor Control Board prior to privatization sued the Board for losses of $7.5 million that the owners attribute to false promises made by the state in the transition to privatization. One major grievance involves the 17 percent fee charged to retailers for sales to bars and restaurants under the state’s interpretation of I-1183; such sales incurred lower fees prior to privatization, and store owners claim that they were originally told by the state that the new retail fee would not be charged on sales to bars and restaurants. According to the store owners, the decision to impose the 17 percent fee on retail sales to bars and restaurants puts former state-run stores at a disadvantage to wholesalers, who can sell spirits to bars and restaurants without the additional fee. Some owners of former state-contracted spirits stores have reported significant declines in sales in the wake of new-found—and growing—competition with large, national retailers, which are able to better leverage volume discounts with distillers, and in turn, offer them more ability to compete on price.

Despite the early challenges, it is clear that a competitive marketplace is taking hold in Washington State after many decades under a state-run spirits monopoly. Robust competition is starting to take place among national retail chains, which tend to focus on offering few brands at more competitive prices (due to volume purchasing), while smaller specialty spirits retailers are emerging to offer competition through more variety in product mixes and greater attention to customer service and offering a high-quality retail experience.3 Perhaps more importantly, the fears promulgated by privatization opponents—primarily over the potential declines in state liquor revenues and significant negative effects on public health and safety—have not materialized.

With the implementation of I-1183, Washington State joined the 32 other states that have allowed private firms to distribute and sell distilled spirits since the repeal of Prohibition in 1933. Since that time, all major shifts in state alcohol systems have moved in a one-way direction toward privatization; no state has ever shifted from a private regime to a state-run liquor monopoly. Of the 17 remaining “control” states that retain a government-run monopoly on the sale and/or distribution of distilled spirits, Iowa and West Virginia privatized their spirits retail monopoly in recent decades (while retaining their in-house wholesale operation), and Maine has outsourced the operation of its wholesale monopoly to a private manager.

Though Washington State saw the first major liquor privatization effort in recent years, policymakers and stakeholders in several other states continue to explore the possibility of further privatization. Other noteworthy developments on liquor privatization in 2012 include:

  • Pennsylvania: The ongoing efforts by Governor Tom Corbett and House Speaker Mike Turzai to privatize the Pennsylvania Liquor Control Board (PLCB)—the state-run monopoly wholesaler and retailer of spirits and wine—will continue in 2013, after legislative action on a Turzai-sponsored privatization bill was suspended during the summer of 2012.

    Despite becoming the first liquor privatization bill to receive action in a Pennsylvania legislative chamber since the end of Prohibition in 1933, the House debate on Turzai’s House Bill 11 was cut short in June 2012 as legislators began considering over 250 proposed bill amendments. First introduced in September 2011, Turzai’s original bill would have privatized both the state’s wholesale and retail monopolies in the sale and distribution of wine and distilled spirits (for details, see discussion in Reason Foundation’s Annual Privatization Report 2011). But in December 2012, the House Liquor Control Committee gutted Turzai’s bill, replacing it with language that would maintain the state’s retail monopoly on spirits but allow private retail outlets that currently sell beer to apply for licenses to sell wine.

    Turzai responded by drafting an amendment that would revamp the bill to focus on privatizing the PLCB’s retail operations and replacing the state’s 18 percent “Johnstown Flood” tax (a 1930s-era tax on liquor originally enacted to aid flood victims) with a gallonage-based tax of $11–12 per gallon of spirits and $8–9 per gallon of wine, depending on alcohol content. The proposal would have shuttered the PLCB’s 620 state-run stores and issued licenses for spirits and wine sales at 1,600 retail outlets, with the 1,200 outlets currently selling beer getting a right of first refusal to purchase the new licenses. Those licenses not sold to beer retailers would then be sold at auction. Further, beer retailers—currently allowed only to sell beer in cases or kegs—would have been able to sell six-packs under the revamped bill language. Turzai estimated that the legislation would net the state at least $1 billion, which he proposed dedicating to statewide transportation improvements. It was during discussion over Turzai’s proposed amendment that the House debate was suspended, which Turzai attributed to a lack of sufficient votes to move forward and the need to focus on completing the state budget.

    Both Turzai and Gov. Corbett—who made privatizing Pennsylvania’s liquor monopoly a priority in his 2010 campaign—have stated their intentions to continue pushing for privatization in 2013. “I don’t give up. I keep coming back,” Corbett told the Pittsburgh Tribune-Review in December. “If I don’t get it this year, I’ll keep going next year. If I don’t get it next year, if I have a second term, we’ll keep going.”4 Public opinion continues to swing in favor of privatization, with a November 2012 Philadelphia Inquirer poll finding that 55 percent of likely voters supported privatization of the state wine and spirits monopoly (28 percent were opposed) and a 61 percent majority supporting the sale of wine and spirits in grocery stores.5

    Still, legislation to privatize the PLCB is sure to face a number of headwinds, particularly via continued opposition of the United Food and Commercial Workers Local 1776, the union representing approximately 2,500 state store clerks. The union claims that its new collective bargaining contract with the state would require any buyer of a privatized state store to retain former PLCB employees at the same pay and benefit levels until the contract expires in June 2015, making any such transaction less appealing for potential private buyers. However, the Corbett administration disputes this claim, noting that a private entity would not be bound to the terms of a contract it was not party to, having been established solely between the union and the state.

    Other challenges include alternate legislative proposals introduced in the Senate to “modernize” the PLCB by loosening restrictions on it without actually privatizing it (ironically, proposed by the PLCB leadership as a way to help the agency act more like a private business) or to allow restaurants and retail outlets to sell bottles of spirits and wine while leaving the state store system intact.
  • Virginia: Having failed in its two previous attempts to privatize Virginia’s spirits monopoly, the administration of Governor Bob McDonnell did not pursue privatization legislation in 2012. However, Total Wine co-owner David Trone told The Virginian-Pilot in July that his company planned another lobbying push for privatization in the 2013 General Assembly session, noting "the pure common sense of privatizing spirits" and that "[e]ventually, what's in the consumer's best interest and what is logical will prevail."6
  • North Carolina: Despite offering previous statements of support for the concept of privatizing North Carolina’s state-run liquor monopoly prior to his gubernatorial campaign, incoming Governor Pat McCrory told media on the campaign trail that privatizing the system would not be a focus in his administration. "It's not [one] of my priorities at this point in time," McCrory told WSOC in October 2012. “I still support privatization, but I have a broken government to fix."7
  • Alabama: In October 2012, State Senator Arthur Orr, who chairs the legislature’s Joint Fiscal Committee, told the Decatur Daily that he intends to introduce a bill to privatize Alabama’s 172 state-run liquor stores, a move he estimates could save the state approximately $45 million per year.8 The proposal would leave the state’s regulatory system and wholesale monopoly on spirits distribution intact, and it would establish a new commission to determine how many retail licenses would be issued and where they would be authorized. The bill’s prospects are uncertain, however, as Governor Robert Bentley has not endorsed the concept, and the director he appointed to lead the Alabama Alcoholic Beverage Control Board, Mac Gipson, has made public statements opposing privatization, despite supporting the concept previously as a state legislator.9
  • Oregon and Idaho: The Northwest Grocers Association has told legislators in both Oregon and Idaho that it plans to sponsor Washington-style ballot initiatives in 2014 to privatize those states’ wholesale and retail monopolies on distilled spirits if legislatures fail to enact liquor privatization laws on their own in 2013. Among the changes sought are allowing spirits sales in grocery stores and volume discounts on bulk purchases.10 Two separate groups in Idaho attempted to place privatization measures on Idaho’s ballot in early 2012, but both failed to gather enough signatures.11

» Return to Annual Privatization Report 2013: State Government Privatization
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Endnotes

1 The Washington State Department of Revenue provides data on monthly spirits taxes and sales on its website at http://www.dor.wa.gov/.

2 Ty Swenson, “Privatization and plastic bag ban factor into liquor theft spike,” West Seattle Herald, November 9, 2012.

3 Tom Sowa, “Booze competition likely to intensify,” The Spokesman-Review, December 23, 2012.

4 Kari Andren, “Despite vow, governor faces same battles on LCB privatization,” Pittsburgh Tribune-Review, December 6, 2012.

5 Angela Couloumbis, “Inquirer Poll finds wide backing for privatizing liquor sales,” Philadelphia Inquirer, November 1, 2012.

6 Carolyn Shapiro, “Total Wine opens new store, pushes for privatization,” The Virginian-Pilot, July 22, 2012.

7 Jeff Smith, “McCrory says privatizing liquor sales is not a priority,” WSOC TV, October 23, 2012.

8 Mary Sell, “Not as easy as ABC. Debate about state-run liquor stores returning,” Decatur Daily, October 14, 2012.

9 “New chief of Alabama Alcoholic Beverage Control Board opposes privatization of liquor sales,” Associated Press, February 16, 2011.

10 Harry Esteve, “Grocers tell Oregon lawmakers: Update liquor laws or face initiative,” The Oregonian, September 13, 2012.

11 Eric D. Dixon, “Supporters of liquor privatization look forward to 2013 legislative session,” Idaho Reporter, July 9, 2012.

Leonard Gilroy is Director of Government Reform





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