Washington State Enters New Era of Liquor Privatization

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:

  • Why not have state governments expropriate and take over operation of all Walgreens, CVS’s and the myriad other pharmacies out there that dispense potentially dangerous and addictive pharmaceuticals? Or ban private sales of tobacco products and establish state-run tobacco store systems?
  • Why didn’t any of the dozen-plus states that have legalized medical marijuana in recent years opted to pursue direct state control of sale and distribution, despite over 75 years of experience with the state spirits monopolies in the “control” states.

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 Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.