Will States Toast Liquor Privatization in 2012?

Reviewing the landscape for divesting state alcohol monopolies

Despite the end of Prohibition many decades ago, taxpayers and consumers in over a dozen states today still rely on outdated state bureaucracies that retain monopoly control over the sale and/or distribution of distilled spirits (liquor). Not only is it difficult to justify government-run liquor enterprises as a core function of government—they clearly aren't, since most states don’t have them—but worse, these systems tend to act like the monopolies they are by limiting product choice and making liquor more expensive and less convenient for consumers. However, recent moves by Washington State and Ohio to privatize their liquor monopolies may be upsetting the apple cart and setting the stage for additional states to follow suit.

For context, at the end of Prohibition, 32 states opted to regulate liquor through the issuance of wholesale and retail licenses to private wholesalers and retailers, effectively creating a regulated, private liquor market. Meanwhile, 18 other states (and Montgomery County, MD) opted to place liquor wholesaling and/or retailing functions in the hands of government as a means to "control" spirits sales and distribution and encourage temperance and responsible consumption. [Click here for a map of control states prepared by the National Alcohol Beverage Control (ABC) Association].

Apparently not envisioned in the early post-Prohibition discussions were some inconvenient truths that have emerged:

  1. Nearly all “control” states have government control of distribution and/or retail sales of spirits, while beer and wine sales occur in private regulated markets. Well over half of the pure alcohol sold in the U.S. comes via beer and wine though, so how much so-called “control” do the control states really have if they’re only covering a slice of the total alcohol market? If beer and wine can be regulated by government but sold and shipped privately in those states, why not spirits?
  2. Having the state in both the position of alcohol regulator and alcohol distributor/retailer creates an inherent conflict of interest.
  3. Another obvious conflict of interest lies in the diametrically opposed goals of promoting temperance and moderation while at the same time trying to maximize revenues for the state from the sales of the products you’re supposedly trying to control.
  4. Taking aside the question of whether or not it is appropriate for government to try and promote temperance in the first place, it is laughable to argue that selling and distributing alcohol is a core function of government. Government doesn’t operate porn shops, tobacco stores, commercial pharmacies, or medical marijuana dispensaries, so what’s so special about liquor? Liquor distribution and sales are business enterprises best suited for businesses, with government in the role of oversight.

Accordingly, no state has shifted to government monopolization of alcohol wholesale and retail functions since Prohibition. Rather, the direction of change has moved entirely in one direction—towards privatization—albeit slowly. Up until 2011, there were only three major shifts in state control systems since Prohibition. Two states—Iowa and West Virginia—privatized their retail operations over two decades ago while retaining a spirits wholesale monopoly, and more recently Maine signed a 10-year contract with a private operator for its wholesale spirits monopoly. Beyond those major moves, a number of the “control” states—including Utah, Oregon, Vermont, Mississippi and Montana—already contract with private liquor stores operators instead of running them in-house, so paradoxically there’s already a lot of privatization going on under the surface of the “control” states.

The year 2011 brought further change, with major structural changes and privatization announced in two control states—Washington State and Ohio:

  • Washington State: In November 2011, Washington State voters approved the privatization of the state’s monopoly on the distribution and sale of distilled spirits, becoming the first state in the nation since Prohibition to fully shift both wholesale and retail functions from public to private sector operation. By an overwhelming 60-40 margin, Evergreen State voters approved Initiative 1183 (I-1183), a ballot measure sponsored by Costco and other major retailers that will fully privatize both wholesale distribution and retail sales of liquor, while removing obstacles to the wholesale distribution of wine. A revamped license fee structure outlined in I-1183—designed to generate more alcohol-related revenues to the state relative to monopoly operation—was key to passage, as it created a strong argument that state and local governments would see a financial benefit under privatization.

    According to the state Office of Financial Management’s (OFM) fiscal impact statement for I-1183, the measure would increase revenues to the state by an estimated $216 million to $253 million over six fiscal years, with a similar $186 million to $227 million increase in local government revenues over that same period. Further, the OFM estimated a one-time net state revenue gain of $28.4 million from auctioning off the state liquor distribution center. OFM did not estimate proceeds from the sale of existing state-run liquor stores, so actual one-time revenues from divestiture are likely understated. The state is currently navigating the transition to privatization, which is set for completion by June.
  • Ohio: Ohio recently announced its own privatization overhaul. In February 2011, Gov. John Kasich signed House Bill 1, creating JobsOhio, a new private, nonprofit economic development organization created by privatizing functions of the Ohio Department of Development related to the state’s corporate recruitment and expansion, marketing and job retention efforts. To fund the new entity, Kasich advanced a plan to lease revenues from the state’s liquor monopoly to JobsOhio, which was finalized last week. Under the plan, finalized last week, JobsOhio will gain control of the liquor system’s annual net revenues for 25 years in return for a $1.4 billion upfront payment funded through the sale of revenue bonds backed by liquor system profits. Approximately $700 million of the proceeds will be used to defease existing liquor revenue-backed debt, while roughly $500 million will be deposited in the state’s general fund for short-to-near term uses and another $150 million will be dedicated to clean-energy projects formerly financed with alcohol revenues.

    Though described as privatization, Ohio’s initiative is perhaps better described as “quasi-privatization,” since it did not open up the state’s wholesale market to competition, but rather transferred the state’s wholesale monopoly to a private nonprofit corporation chartered by the state. Retail liquor sales in Ohio are already sold through private retail outlets, and the new initiative does not authorize an expansion of these outlets. Further, JobsOhio plans to contract with the existing state Department of Commerce to continue providing certain wholesale operations functions.

In addition to Washington State and Ohio, there are several other states where ABC privatization could potentially advance in 2012:

  • Utah: The Utah legislature appears poised to take on the issue of alcohol monopoly privatization in the 2012 legislative session, with State Rep. Ryan Wilcox planning to introduce legislation to privatize the state's liquor retail enterprise. The proposal comes amid widespread legislator frustration with recent management scandals at the Utah Department of Alcoholic Beverage Control (ABC) and recent state audits critical of the agency’s performance. A recent poll found that Utah voters support ABC retail privatization by a 58%-37% margin, with majorities of Republicans, Democrats and Independents in support. The privatization concept was endorsed last year by the state Privatization Policy Board, a legislative advisory body on privatization issues that issued a letter to Gov. Gary Herbert in May 2011 supporting retail privatization. Gov. Herbert has not taken a formal position but has publicly expressed openness to considering Wilcox’s privatization proposal.
  • Idaho: Last week, a local Republican party organization announced plans to file a ballot initiative to privatize Idaho’s retail ABC enterprise, for which it needs to collect over 47,000 signatures by late April. Separately, the Northwest Grocery Association announced plans to push for ABC privatization legislation in 2013; the grocers’ organization had previously considered pursuing its own privatization ballot measure this year. These moves follow on the heels of a January 2011 report commissioned by Idaho's Joint Legislative Oversight Committee that found that privatization of the state's liquor enterprise is feasible and outlined several potential approaches. Completely converting to a privatized wholesale and retail system and establishing a liquor tax to replace the current state markup could generate approximately the same amount of revenue as the state receives today. Alternatively, the state could retain the wholesale enterprise and convert all stores to private operation if it continued using a wholesale markup to maintain current revenues. Last, contracting out the operations of the 13 state-operated stores with the lowest sales was estimated to offer $700,000 in potential annual cost savings. The report was met with a cold reception by Gov. C.L. "Butch" Otter, however, who told the Associated Press that alcoholic beverage control and promoting temperance are proper functions of government under Idaho's Constitution.
  • Pennsylvania: Despite significant political support to privatize the Pennsylvania Liquor Control Board's (PLCB) monopoly on the wholesale and retail sale of wine and distilled spirits, action in 2012 is uncertain. Last September, House Majority Leader Mike Turzai introduced House Bill 11 (HB 11), a privatization bill that would have created a limited number of retail and wholesale liquor licenses and auctioned them to the highest bidders, and it would have replaced current alcohol taxes—including the 18% Johnstown Flood Tax, the state’s retail markup, and the per-bottle handling fee—with a gallonage tax of between $8-9 per gallon of wine and $11-12 per gallon of spirits, varying based on alcohol content. However, last month a House committee passed an amended version of the bill, gutting its original language and instead advancing a “privatization-lite” proposal to partially privatize wine sales and distribution but leave spirits untouched, effectively perpetuating the anachronistic state alcohol monopoly. The bill was advanced to the full House of Representatives where it faces an uncertain future.

    Gov. Tom Corbett remains supportive of privatization, however. Corbett announced his support for privatizing the state's alcohol monopoly during his 2010 campaign, and upon taking office in 2011, his administration hired the consulting firm Public Financial Management (PFM) to conduct a valuation study for the state’s alcohol monopoly. The PFM analysis identified two viable privatization approaches, with the most likely being a full wholesale and retail privatization, with limits around the number or types of both licenses. Under this scenario, PFM estimated a valuation of retail licenses in the range of $730 million and a valuation of wholesale licenses in the range of $575 million, for a total estimated valuation of between $1.1 billion to $1.6 billion. Regardless of the fate of HB 11, Gov. Corbett’s new privatization advisory commission plans to consider PLCB privatization this year as part of its broad review of state services, so the issue figures to remain in the public discourse for some time. Numerous opinion polls demonstrate strong public support for privatization among Commonwealth residents. For example, a September 2011 Quinnipiac University poll found that Pennsylvania voters support privatizing liquor stores by a 62%-31% margin, with support among all demographic groups.
  • Virginia: Virginia is another state with an ongoing policy discussion on privatizing the state’s spirits monopoly. Privatization of the Commonwealth’s liquor retail and wholesale operations was a central pillar of Gov. Bob McDonnell’s larger fiscal agenda upon entering office in January 2010, but his first privatization proposal that year—which would have privatized wholesale and retail functions to generate approximately $400-500 million for the state to invest in transportation infrastructure—failed to garner enough legislative support to advance, largely due to concerns that privatization would slightly reduce alcohol-related revenues to the state.

    The McDonnell administration made a second attempt in 2011, offering a more limited proposal that would have privatized retail operations—closing the 332 state-run liquor stores and authorizing the issuance of 1,000 private retail licenses—while leaving wholesale functions under state operation. The McDonnell administration hired PFM to analyze the privatization proposal, and the consultant’s January 2011 report found that retail license auctions would net the state an estimated $200-400 million (which McDonnell proposed to invest in transportation) and an additional $13 million in alcohol-related revenues on an annual basis, even with the proposed reduction in the state’s markup from 69% to 50%. Despite a proposal that addressed lawmakers’ previous concerns over ongoing revenues, the administration’s accompanying legislation never received a legislative committee hearing and failed to advance.

    Though McDonnell continues to express support for privatization, it currently appears doubtful that his administration will make a third privatization attempt in 2012.
  • North Carolina: Early last year, North Carolina Gov. Beverly Perdue announced that her administration would not pursue privatization of the state's alcohol monopoly. Like Pennsylvania and Virginia, the state hired PFM to conduct a privatization analysis, which found that the state could reap approximately $300 million upfront from retail license auctions and divestiture of the wholesale operation. However, this estimate was based on issuing the same number of retail licenses to match the current number of state-run stores; PFM estimated that one-time revenues could exceed $500 million if additional retail licenses and other systemic changes were approved. In announcing her opposition to privatization, Perdue noted her belief that the current system works well and that she was unwilling to loosen current restrictions on the number and type of retail outlets, operating hours and marketing. However, Gov. Perdue recently announced that she would not be seeking reelection this fall, and several state legislators announced that they remain interested in exploring privatization as part of a larger government streamlining push.

Time will tell whether all, some or none of the above states will follow in Washington State and Ohio’s lead. Nonetheless, advocates of limited government nationwide should toast the national liquor privatization push as a hopeful sign that well-entrenched, anachronistic government enterprises and activities can indeed be dismantled and privatized with strong public support.

Leonard Gilroy is the director of government reform at Reason Foundation.

Leonard Gilroy is Director of Government Reform





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