alcohol taxes

Post image for Washington’s Liquor Privatization Did Increase Prices, But Also Selection And Availability

Since selling off the state-owned liquor monopoly, many Washington State residents have noticed an unfortunate development; despite what proponents of privatization promised, the cost of buying liquor in the state did not go down and in fact jumped. The cause of the increase in prices wasn’t the free market or greedy businesses taking the place of the benevolent state-run stores. It was the massive increase in taxes and fees that forced privately run liquor stores to charge more. That said, some of the benefits promised by those supporting a free market for liquor have materialized.

As I and others have discussed in the wake of the passage of Initiative 1183, the proposal voters approved to allow the sell-off of state owned liquor operations included a bundle of new taxes and fees on retailers and distributors of liquor in Washington. As a result, the prices on many types of alcohol jumped in the wake of privatization, making some residents question what exactly it was they voted for.

According to Kirsten Johnson at the Puget Sound Business Journal, the average price of a liter of booze with taxes has increased about $2.50 since September 2011 (I-1833 went into effect in June 2011). Of course, some of that increase is due to the increase in fees, taxes, and tax revenue obligations written into the initiative, including a 17 percent tax on liquor sales that retailers pay to the state and the 10 percent tax on sales that distributors pay to the state. This is in addition to the taxes Washington already placed on liquor before I-1183, which, according to the Tax Foundation, “are some of the nation’s highest at $26.70 a gallon. The national average is $7.02 a gallon.”

And despite a lot of whining about how things shook out after privatization, all indications are pointing to positive changes for alcohol consumers. For one thing, there are now 10 times as many retailers selling spirits, including national retailers like BevMo and Total Wine — increasing selection for not just liquor drinkers, but beer and wine as well. Perhaps this increased availability and selection are responsible for increases in sales. According to the Puget Sound Business Journal report, spirit sales were up 2.9 percent by volume during the four months post-privatization compared with sales the previous year — and that’s despite the 11.6-percent price increase.

It’s hard to say what the market would look like had privatization occurred minus the new taxes and fees. However, we can look to the other effects of privatization — such as selection and availability, which were not as constrained by I-1883 as prices were — to see that the law privatizing sales could have been better. This doesn’t mean that Washington State residents should turn their backs on privatization, but rather seek to remove the artificial costs of selling liquor that are the true cause of higher prices post-privatization. This is also a cautionary tale for those in other states like Oregon, Idaho, and Pennsylvania as they consider if and how they should privatize their liquor sales.

Post image for Alcohol Myths Persist Beyond Prohibition

In a recent article for the Mackinac Center for Public Policy, I make the case that many elements of Prohibition did not fade away after the repeal of the 18th Amendment. In his October 13 opinion piece for The Detroit News, former police chief Jerry Oliver proves my point by digging up an old alcohol myth — one that was used to force Prohibition on the nation. In short, Mr. Oliver expresses the belief that producers of alcohol only seek to have customers consume as much alcohol as possible, thereby making it necessary for the government to intervene in the name of “moderation.”

Historically, it was unscrupulous alcohol producers selling directly to consumers or in cahoots with bars to sell only their products, sometimes at artificially low prices, that fostered an environment for abusive alcohol consumption. It was these excesses that helped trigger the Prohibition backlash.

…Today, most states require producers to sell to state-licensed distributors who in turn sell to local retailers. Exceptions abound where specific states allow direct-to-consumer shipments from wineries…

Critics of this time-tested approach argue the system is antiquated, citing its roots to the last days of Prohibition. That’s like arguing the Constitution is antiquated because it was written in the 1700s.

While Chief Jerry Oliver is correct that Prohibition was a backlash against Americans’ increasing alcohol use (or at least the perception of increasing use) there is no evidence that the system of direct sales or “unscrupulous” producers were the cause of increased consumption. His claim that “tied houses” (saloons owned or operated by alcohol producers) caused people to drink more is the same old myth used by the Temperance movement to push Prohibition on the country. However, we now have a large body of historical evidence that seems to debunk this presumption. Using cirrhosis of the liver as a proxy, historians have found that drinking sharply decreased in the decade preceding Prohibition — even though tied houses still abounded. While incidences of cirrhosis declined further at the start of Prohibition, they rose again toward its end.

This myth of “unscrupulous” producers has been used to maintain the mandatory three-tier system that forces alcohol producers, like brewers, to rely on a middlemen — wholesalers — to get their products into bars, restaurants, and stores. The only real reason not to shift to a voluntary system is to protect the profits of middlemen, who wield considerable political power. A voluntary distribution system would allow small producers to skip the middleman and cut costs, resulting in lower prices for consumers.

Post image for Alcohol Regulation Roundup: October 7, 2011

National:

A Supreme Court decision is being heralded as potentially liberating the advertising market for tobacco and alcohol as it expands first amendment protections on all types of commercial speech. Eugene Volokh analyzed the Sorrell v. IMS Health Inc. decision and it’s implications on whether or not commercial advertising may be generally restricted on the grounds that it might persuade people to do something that the government thinks is bad.

Also in National news, the neo-prohibitionist group “Alcohol Justice,” (formerly known as the Marin Institute) is taking aim at Facebook. The group claims that Diageo, makers of popular drinks such as Guinness, have struck a “youth oriented” advertising campaign with the social media site and they are demanding that the Federal Communications Commission step in.

Georgia: One of the last few states to overturn its statewide ban on Sunday sales will soon give each district a chance to vote on whether to keep the ban or open up Sunday liquor sales.  Georgian towns will vote on the referendum on November 8.

Massachusetts:  In September, Attorney General Martha Coakley announced approval for proposed ballot questions in the 2012 election, including a proposal to end the ban on grocery store beer and wine sales. Also approved were questions about legalizing medical marijuana and repealing the state’s health care law.

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Privatizing Pennsylvania’s liquor stores has been a subject of debate for decades. Proposals in the past have been met with fear about the effects privatization would have on public safety and skepticism about the need for change. Most recently, Rep. Michael Turzai, Pennsylvania’s House majority leader, introduced a bill that would sell of state-owned liquor stores and provide more licenses for private businesses to retail liquor and wine and this time it looks like the proposal might have a chance.

The difference this time around is residents’ increasing frustration with the Pennsylvania Liquor Control Board’s draconian policies, and the growing body of evidence that privatized liquor sales would not adversely affect public safety. In fact, privatization would increase choices for residents and would actually bring more money into the state than the current government control system.

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Federal: A proposed bill, Brewer’s Employment and Excise Relief Act, would reduce the federal excise taxes for craft brewers in order to help them grow in the hope that they will provide jobs, revenue, and economic stimulus. This is a smart move since craft brewers have had a strong showing in the last five years. According to a recent report from the Brewer’s Association, craft brewers saw a 15% increase in production while big beers like Bud, AB-inBev and MillerCoors have suffered with the rest of the economy. The more government gets out of the way of these businesses the more likely they are to grow, and the bigger and more financially secure they are the more people they can afford to employ.

Alabama: A clear example of how deregulation equals stimulation is occurring in Alabama, a state with a grand total of 6 brewers. It’s not surprising there are so few. But a new law seems likely to encourage a few brewers to give Alabama a try. Thanks in particular to the efforts of grassroots beer-lovers, Free The Hops, which I detailed in an earlier post, Alabama legislators passed the Brewery Modernization Act in May. It was signed by the governor in June, and a few months later new breweries are reportedly making plans to open in the state. While Alabama still has really stupid laws regulating brewing, (like the one that limits brewpubs to historic buildings and counties where brewing occurred before prohibition) the new regulations allow brewers to offer tours, tastings, sell their beer on-premise whether or not they have a restaurant, and it allows brewpubs to sell their beer to wholesalers for retail sales where previously they were limited to selling on-premise.

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Post image for Alcohol Regulation Roundup: Independence Day Edition

Hopefully, this Independence Day weekend you liberated some nice libations from their containers. As Founding Father Ben Franklin said, “there can’t be good living where there is not good drinking.” If he’s right, then this week’s alcohol regulation roundup would probably bring a smile to old Ben’s mug — as the changes in most states’ alcohol laws mean that the quality of life in this country is clearly improving.

Alabama: At the end of May, the Alabama legislature approved the Craft Brewery Modernization Bill after much effort from the state-based beer rights group Free The Hops (FTH). Just last month, Governor Robert Bently signed the bill into law, allowing breweries to give visiting patrons a taste while they tour the brewery. Unfortunately, another bill that would have allowed residents to brew for at-home consumption without a license (illegal only in Alabama and Mississippi), failed to make it through the legislature.

Kansas:* When it comes to selling alcohol to patrons, convenience and grocery stores in Missouri are restricted to 3.2 percent ABV beer and wine coolers. Liquor stores may sell liquor and wine, but are banned from selling groceries. However, efforts to change the outdated laws are underway. Republican Senator Tim Owens has been pushing a bill that, if passed, would abolish both prohibitions, allowing grocery stores to sell full-strength beer and liquor and permitting liquor stores to sell grocery food items.

Maryland: Good and bad news for Maryland’s drinkers, as laws passed earlier in the year went into effect last week. Liquor taxes went up by 50 percent, with projected revenue increases of $85 million. On the positive side, the state’s new laws allowing direct shipping for wine also went into effect.

Michigan: A bill that would eliminate a 1.85 percent sales tax on distilled spirits is making its way through the Michigan legislature.

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As alcohol regulations vary state-by-state and constantly shifting here is a quick roundup of booze news from around the states:

In federal news, following the FDA crackdown on alcoholic energy drinks, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued a statement clarifying its role in the regulation of such products.

In Pennsylvania, a state Supreme Court ruling upheld the right of Wegmans grocery store to sell beer at several of its locations throughout Pennsylvania, a notoriously strict alcohol-control state. The ruling found that the state liquor control board was in the right when it issues licenses to the grocery chain to sell beer so long as the store has a restaurant with seating for 30 or more, a food menu, and a minimum of 400 square feet. The Malt Beverage Distributors in the state are, predictably, unhappy with the ruling.

In other “dumb Pennsylvania liquor news” (I weep for my home state), the wine kiosk program gets some undesirable, but well-deserved derision from Wired magazine. Rather than allowing adults to purchase wine in grocery stores, the state has devised a “technological workaround” by placing kiosks in select stores that carry a limited variety of wines for purchase… if you can make past the “kafka-esque security measures”:

Each machine is connected to a state employee in Harrisburg, via video-camera. A customer chooses their wine, swipes their ID, puffs into a breathalyzer and faces the camera. The state employee checks that the ID matches the person and, if they’re not already intoxicated, the person is allowed to buy the wine.

Or you can just do your shopping in Delaware, New Jersey, Maryland, New York, West Virginia, or Ohio (whichever border state is closest).

In Texas, there’s talk of raising the excise taxes on beer: 19 cents to 35 cents per gallon of beer. Charles Hodges, CEO of Stop DWI, Inc., is pushing for the tax increase as he believes the additional $4 million a month from beer taxes would plug the holes in the state’s budget.

In Colorado, the newly elected governor, John Hickenlooper, gives those pushing for full-strength beer in grocery stores little hope. Despite the fact that Colorado’s zany liquor laws have resulted in bars and restaurants being banned from selling low-alcohol beer, Hickenlooper indicated he likes the status quo and doesn’t want to legislate “something that the small breweries think will put them at a disadvantage.” But grocery and convenience stores plan on trying again anyway, for a fourth time, to amend the state’s outdated laws and get full-strength beer on their shelves.

Ari and Lin Armstrong have a great piece in the Grand Junction Free Press on why it is finally time for a free beer market in Colorado.

In IllinoisCrain’s Chicago Business released their investigative report that shows big distributors of beer are employing illegal pay-to-play tactics and shutting out craft brews from the Chicago beverage market. In Chicago, like most cities in the U.S., brewers and bar/restaurant owners can’t deal with one another directly; they are forced by law to operate through a middleman called a distributor or wholesaler. The distributor takes on a portfolio of beers and then sells them to bars and restaurants. The revealing study shows why we should abolish the mandatory three-tier system, which requires the use of a distributor and establish the right for breweries, vineyards, and distilleries to directly ship their products.

In Tennessee, regulators are getting wise to the unintended consequence of their out-dated laws that limit the alcohol by volume of beer sold in grocery store to brew under 6.3 percent abv when border-state Georgia allows beer up to 14 percent abv.

In Maryland, wine and beer “enthusiasts” are set to introduce a proposal in several Maryland counties that would overturn a law that prevents patrons of restaurants with liquor licenses from bringing in their own wine. “Corkage,” as it is called, is the fee a customer pays to the restaurant for each bottle consumed by the diners that was not purchased at the restaurant. Corkage proponents want to make it so that even at non-BYOB establishments they can bring their own bottles to the table. The proposal may be considered by the Maryland General Assembly after January 12.

In West Virginia, legislators affirm that increasing alcohol taxes is not on their agenda. According to Delegate-elect Eric Householder, a Republican out of Jefferson County:

We’re back to the point of government taking care of everything for everybody … I have a litmus test … I’ve taken the Taxpayer Protection Pledge, I’ve put myself out there that I would not raise taxes. So I’m going to have a litmus test. Does this increase taxes? Does this increase government intervention? Is this an expansion of government? If I can answer yes to any one of those, obviously it’s legislation that I would not pass.

In Michigan, despite the un-banning of Sunday sales in the state (kind of), several counties intend to continue disallowing Sunday sales until noon or for the entire day.

Virginia’s Governor Bob McDonnell announced last Friday he would not be holding a special session in order to act upon his Virginia liquor store privatization plans. The reason he provided, in short, was that he didn’t believe he’d have the support among his colleagues:

“We will privatize Virginia’s ABC stores. The only question is one of timing,” he said in a statement. “As Governor, I will not call a Special Session to debate; only to act.”

Since revealing his proposals (there have been several versions) for privatization, McDonnell has faced opposition — not only among Democrats — but also within his own party. Much of the opposition’s arguments paid lip-service to protecting the people and the fear that privatization would result in increases of “social ills.” But as the debate continued and McDonnell amended the proposal with consideration to such fears, it became all too clear that the real fear was lost revenue.

McDonnell indicated earlier this month (through an aide) that he thought members of his party were being “spineless” in their opposition.

Despite his comments and the clear support of privatization from Virginia residents and businesses, lawmakers continue to oppose or lend only tepid support for privatization. They are worried about money. If the governor can’t convince them perhaps residents can. As I wrote in my letter to the Washington Post, the money taken from a booze monopoly is not guaranteed to the state; it is not their right. If they are worried about the general fund, they should cut wasteful spending.

While McDonnell has been bending over backwards in an attempt to make his plan revenue-neutral and to prove that the general fund will not shrink as a result, lawmakers need to understand that they have no right to the ill-gotten $47 million in revenue they generate by selling booze at inflated prices and keeping out competition.

The justification for government-run liquor stores was to “protect” the people. There is more than enough evidence indicating that state-run liquor stores provide no utility for the public and protect one thing — government funds. Not only do lawmakers not have a right to this revenue, but in light of the fact that the state monopoly was created and maintained under almost fraudulent claims, the argument could be made that, not only does the state have zero rights to the funds from liquor sales, but also that they ought to retroactively return the funds they appropriated from Virginians through greater tax breaks.

If the governor can’t make this fact clear to his colleagues, Virginians will continue to “vote with their dollars” by purchasing liquor from other states.

Yesterday, the Virginia Retail Federation (the advocacy arm of the Retail Alliance and the Retail Merchants Association) came out in support of privatizing liquor sales throughout the Commonwealth of Virginia. They did, however, have one condition for their support: make it easier for small and independent retailers to obtain licenses by increasing availability and reducing the minimum bids on the initial license auction.

As I have written in the past, Virginia is one of only 18 states to retain it’s monopoly on liquor sales after prohibition. The current proposal would shut down the state’s 332 liquor stores and auction off 1,000 licenses to businesses around the state (most of which already sell wine and beer) and use the money for Virginia’s transportation projects (the revenue generated from the initial sale of licenses and taxes is disputed, but it’s somewhere in the neighborhood of $400 million).

The current proposal for privatization of Virginia liquor sales:

1,000 Retail Licenses up for Auction

600 Tier 1 licenses (i.e. grocery stores) cost=  min. bid + $2,000/year

150 Tier 2 licenses (i.e. specialty stores) cost = min. bid + $1,000/year

250 Tier 3 licenses (i.e. convenience stores) cost = the min. bid + $500/year

Wholesaler Fees: Licensing fee= 2.5x profits of spirits lines to be distributed

Excise Tax: $17.50 per gallon

Some statistics about Virginia liquor sales versus the rest of the country:

Outlet Density in Virginia: Density of liquor store outlets in Virginia is 0.6 per 10,000 adults

Outlet Density in the U.S.: Density in the U.S. on average is 3.2 per 10,000 adults

Sales in Virginia: Liquor sales rate is 1.62 gallons per adult

Sales in the U.S.: 2.04 gallons per adult

Sales in D.C.: 4.46 gallons per adult

Excise Tax on Liquor in MD/D.C.: $1.570 per gallon

Excise Tax on Liquor in Virginia: $20.13 per gallon

Though there are concerns that selling the state’s profitable liquor sales “business” will result in an net revenue drop for Virginia, it is unlikely that this will be the case (considering the number of residents who will repatriate liquor stores, restaurants, and bars in Virginia). Regardless of the final numbers, the state needs to get out of the business of selling booze and back to its proper role of serving citizens. Even if the revenue generated from the sell-off of licenses is only enough to widen Route 1 it will still result in tangible benefits for residents, unlike the archaic state-controlled liquor sales that provide absolutely zero value and, in fact, hinder life and business in the Commonwealth of Virginia.

When Virginia’s governor Bob McDonnell’s unveiled his plans for privatizing the state-run liquor sales system nobody was terribly thrilled. The plan’s basic outline (as I have written about before) is that the state’s 332 state-owned stores and auction off 1,000 licenses. The plan included some new fees on wholesalers, restaurants, distributors, and slightly reduced the per gallon excise tax on spirits.

The Proposed Privatization Plan:

1,000 Retail Licenses Up for Auction

600 Tier 1 licenses (i.e. grocery stores) cost=  min. bid + $2000/year

150 Tier 2 licenses (i.e. specialty stores) cost = min. bid + $1000/year

250 Tier 3 licenses (i.e. convenience stores) cost = the min. bid + $500/year

Wholesaler Fees: Licensing fee= 2.5x profits of spirits lines to be distributed

Excise tax: $17.50 per gallon

Previously, the plan had included a 2.5 percent tax on restaurants’ sales of liquor. This “fee” would give restaurants the privilege of buying liquor at wholesale prices and have the goods delivered to their business; this was one of the gripes smaller businesses had with plan, saying that it would negatively impact “Mom & Pop” businesses. Their complaints were apparently taken into account by the McDonnell team which announced changes to the plan on Thursday, including the deletion of this 2.5 percent tax.  They also eliminated the 1 percent annual tax on wholesalers’ gross receipts.

As this article in The Washington Post notes, the changes are likely to garner support from businesses as well as fiscally conservative legislators, but it will only increase the displeasure of those skeptical about the financial implications of privatization.

…the revision will probably deepen concerns of lawmakers who think privatization will be a bad deal for the state over time. McDonnell’s projections show that with the modifications, his plan would result in $47 million less each year to fund such state services as schools and police.

The revisions highlight a central conundrum McDonnell faces as he attempts to sell his complex proposal: Changes he might make to satisfy the concerns of some lawmakers are likely to cost the support of others.

While politicians are understandably concerned about the financial state of the Commonwealth, loss of tax revenue is no justification for doing away with a government service that they have admitted does no good for the people of Virginia and in fact impedes sales of and access to liquor. Additionally, legislators do not seem to understand that once liquor is widely available in Virginia and comparably priced to other states, the sales of other types of alcohol will also increase. About 70 percent of wine drinkers also drink spirits, and research by DISCUS (the Distilled Spirits Council of the United States) shows that in Washington, D.C., there is a ratio of about 3 cases of wine for every 1 case of spirits sold. Their research clearly shows that Virginia residents are primarily purchasing their liquor in the District.

On that note, here is a sample of statistics about the current sad state of liquor sales in Virginia as compared to the U.S. on average and neighboring states:

Outlet Density in Virginia: Density of liquor store outlets in Virginia is 0.6 per 10,000 adults

Outlet Density in the U.S.: Density in the U.S. on average is 3.2 per 10,000 adults

Sales in Virginia: Liquor sales rate is 1.62 gallons per adult

Sales in the U.S.: 2.04 gallons per adult

Sales in D.C.: 4.46 gallons per adult

Excise Tax on Liquor in MD/D.C.: $1.570 per gallon

Excise Tax on Liquor in Virginia: $20.13 per gallon

It is time to set aside fears and get government out of the business of selling liquor. Loss of general fund revenue is a bogus reason to oppose the plan: government shouldn’t be griping about losing money it had no right to it in the first place. They have admitted that the government monopoly on sales provides zero benefit for Virginians, so it’s time to get rid of it and find money somewhere else (maybe cutting programs?). The fear that privatization will result in 1,000 new liquor stores is unfounded as most of the licenses will be sold to stores already selling wine and beer, actually decreasing liquor stores. Finally, fears about crime and traffic fatalities are unfounded, as case studies of other states that have undergone privatization show no rise in these ills.

Though the privatization plan may not be perfect, if it gets the government out of the sale of liquor, it is a step in the right direction.