Pair of Bills Would Modernize North Carolina’s Alcohol Laws
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Commentary

Pair of Bills Would Modernize North Carolina’s Alcohol Laws

Most southern states have abandoned their initial post-Prohibition regulatory regimes.

A pair of bills aim to modernize North Carolina’s late-1930s spirits control regimes and myriad rules that stifle alcoholic beverage commerce in the state. While most southern states have abandoned their initial post-Prohibition regulatory regimes, North Carolina still regulates liquor as a “control” state, mandating a government monopoly on the distribution and/or retail sale of alcohol. State law has mandated government-owned wholesale and retail monopolies since Prohibition’s repeal, which includes government price-fixing of all products, and total control over distilled spirits products offered for sale. Unique to North Carolina is a provision requiring county-level Alcohol Beverage Control (ABC) Boards own and operate all liquor stores, whereas liquor stores in other states that control retail sales are operated by state-level control agencies (or, in a few cases, by private entities under contract with the state control agencies).

Other odd and antiquated North Carolina alcoholic beverage restrictions provisions prohibit direct sales of liquor to out-of-state consumers and limit liquor purchases at in-state distilleries for off-premises consumption to five (750 mL) bottles per year, each affixed with “a sticker that bears the words ‘North Carolina Distillery Tour Commemorative Spirit’ in addition to any other labeling requirements set by law.” Establishments that serve “mixed drinks” (any beverage containing liquor) cannot purchase liquor with any form of electronic payment, while establishments under common ownership cannot transfer alcoholic beverages of any kind to each other to account for overstocks and shortages. Local ABC stores are not allowed to provide customers product samples, with beer and wine retailers operating under similar restraints. Also, customers consuming alcoholic beverages on the premises of any licensed establishment are limited to one drink per order.

House Bill 971 (“Modern Licensure Model for Alcohol Control”), introduced late last month by a bipartisan group of seven legislators, would modernize North Carolina’s liquor control by eliminating the state’s retail and wholesale spirits monopolies, introducing a private licensure regime where private entities will operate all distilled spirits wholesale and retail functions. Local governments would receive a one-time windfall from the sale of existing government-run stores, while current and new retail establishments that sell other types of alcoholic beverages for off-premises consumption (e.g., beer and wine shops, grocery stores) would be allowed to apply for licenses to sell liquor.

While the state ABC Board would still approve all products for sale, retail license holders would get to decide what gets offered for sale to customers. Economies of scale and retail competition would lead to more diverse product offerings, as retailers operating in multiple counties could make larger purchases than small local ABC boards would find difficult to justify, even with monopoly protection. Startup distilleries today have trouble selling to individual local boards, while under modernization, larger retail establishments operating across what previously were multiple liquor retail jurisdictions could make bulk purchases to help new distilleries reach new customers.

One unfortunate change concerns the state’s excise tax on liquor. The state’s monopoly regime has successfully squeezed tax revenue out of residents, and lawmakers unsurprisingly do not want to disrupt its revenue streams. At $36.79, North Carolina’s tax revenue per gallon of liquor sold tops all southeastern states, with non-control “licensee” states in the Southeast all falling below half NC’s rate (Kentucky’s $16.77 being the highest), according to 2015 figures provided by the state legislature.

However, since the current local ABC Boards’ profits all become state and local government revenues, one must account for the revenue reduction that would result from retailers retaining profits under a licensee system created by HB 971, even after accounting for smaller margins consistent with a competitive retail market: According to Sageworks’ list of least profitable industries, beer, wine, and liquor stores average around a 2.4% profit margin nationwide, while North Carolina’s local ABC Boards overwhelmingly enjoy higher margins, averaging 11.2% system-wide (though some still manage to lose money), as the John Locke Foundation’s Jon Sanders pointed out recently.

Although HB 971 simplifies liquor taxation by replacing a clunky combination of bailment and bottle surcharges, a 30% excise tax, and local government mandated markups with a flat excise tax, the new excise rate will nearly double the rate per gallon of all the previous taxes and markups. An analysis of Distilled Spirits Council data performed last year by the Tax Foundation ranked North Carolina’s liquor taxes as the nation’s sixth highest, at the equivalent of $14.63 per gallon. HB 979 would nearly double that, to $28.00 per gallon, which still falls short of the state’s high revenue per gallon figure of $36.79 figure, and reflects not just excise taxes, but the bailments, markups, and surcharges.

Even still, HB 971’s excise tax increase would make North Carolina the second-highest taxed state for liquor, behind only Washington State, which recently went through its own privatization that included higher replacement taxes and resulted in slight rises in prices. North Carolinians should not expect different outcomes if HB 971 were passed as-is.

Another alcohol reform bill, House Bill 536, liberalizes a host of liquor and other alcoholic beverage regulations. While it would not reform any liquor monopolies, the bill, short-titled “ABC Omnibus Regulatory Reform”:

  • Allows North Carolina distilleries to sell directly to customers in other states
  • Allows ABC stores to conduct on-site tastings
  • Allows local ABC boards to accept electronic payment from “mixed beverages” permit holders
  • Allows establishments under common ownership would be allowed to transfer “malt beverages” (alcoholic beverages that are not wine, nor distilled spirits) up to four times per year
  • Allows state colleges and universities to decide whether to allow beer and wine sales at sporting events
  • Allows beer and wine sales on trains and ferries
  • Increases drink purchase limit for customers at on-premises retail establishments from one to four drinks at a time
  • Increases discount limit retailers may provide customers for bulk beer and wine purchases, from 25% of retail price to 35% of retail price
  • Removes five bottles per year customer purchase restriction from distilleries and the “North Carolina Distillery Tour Commemorative Spirit” sticker requirement

By ending government wholesale and retail monopolies on liquor, as well as myriad other alcoholic beverage provisions that have burdened customers and establishments since the wake of Prohibition’s repeal, House Bills 971 and 536 would modernize liquor and other alcoholic beverage operations in North Carolina. The state quickly became a craft beer destination after successfully removing alcohol limits on beer, and the state continues to support craft beer growth with the recent passage of HB 363, which allows small breweries limited self-distribution. While HB 971’s tax increase likely means that liquor prices will not see a significant drop (or possibly, a small rise), the bill’s provisions, along with HB 536, would work to give residents greater variety and access to products by giving alcoholic beverage retailers and producers greater flexibility to serve customers.

Austill Stuart is a policy analyst at Reason Foundation, a non-profit think tank advancing free minds and free markets.