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In Privatizing Liquor Operations, States Hope They Can Drink Down Deficits

Liquor Privatization

First Posted: 01/27/2012 12:57 pm Updated: 01/27/2012 7:40 pm

Proponents of liquor privatization in at least eight states hope they can drink their budget deficit pain away.

Privatization, which would do away with post-Prohibition regulations on the sale of distilled spirits, could herald a new era of easy access to liquor and perhaps cheaper prices. The move is being aggressively supported in some states by big box retailers like Costco, which are hoping to get a cut of the liquor market. But opponents say the onetime cash infusion that would come from selling off liquor licenses would sacrifice the revenue generated by state monopolies on liquor sales or distribution.

Ohio this week announced details of how it will transfer control of its state-owned monopoly on liquor distribution to a private non-profit. In nearby Pennsylvania, Gov. Tom Corbett (R) would like to privatize the state's control over liquor stores.

So far, opponents have managed to derail recent efforts at privatization in Virginia and North Carolina, while discussions are ongoing in Idaho, Oregon and Utah. Washington State is moving forward with a privatization plan approved by a voter initiative in November.

In some states, the liquor wars have created strange bedfellows, pitting privatization-friendly conservatives against Christian temperance groups, seeming relics of the early 20th century. Also opposed to privatization efforts are some public health officials, and unions worried about losing good-paying jobs.

"We have it. It's a valuable asset. It produces a lot of good, needed revenue and it controls a dangerous product," said Wendell Young, president of UFCW Local 1776, which has 2,100 members working in Pennsylvania state liquor stores. His rank-and-file, he said, "don't make any more or less money by selling to the wrong people at the wrong times -- minors."

Glen Whitman, an economics professor and author of "Strange Brew: Alcohol and Government Monopoly," argues that one of the most emotionally powerful arguments against privatization, that it might lead to underage drinking, excessive drinking or drunk driving, doesn't hold water. Or liquor.

"It's awfully suspicious when businesses whose main operations are concerned with purveying alcohol are so concerned with temperance," Whitman said, pointing out that privatization wouldn't cause states to stop enforcing liquor laws. "If you're really concerned about the externalities created by alcohol, you can have a tax -- a tax at the retail level that is therefore transparent."

Privatization backers like Corbett argue taxes on private sales could make up for revenues lost from state liquor stores, veritable cash cows that are among the few public enterprises capable of making a profit. Libertarians, meanwhile, say states simply shouldn't be in the business of liquor distribution or sales. They would like to see state governments get out of the game, whether or not it means they lose money.

"There's no way you can answer the question, is [selling liquor] some inherently governmental function?" argued Leonard Gilroy of the libertarian Reason Foundation. "Any time you get entrenched interests, upsetting the apple cart or changing the status quo is going to be difficult."

In the case of state monopolies on liquor, the apple cart -- or perhaps the apple brandy cart -- comes in many different forms. And so do those "entrenched interests": in various states, government officials, unions and wholesale distributors are all happy with the way things are.

In some of the 19 so-called "control" states, state agencies handle both distribution and retail sales of liquor. In others, ordinary consumers never witness the bureaucrats' handiwork firsthand, since the states only handle wholesale distribution. Utah’s Mormon heritage means that most to-go purchases of beer and wine there must be made at state stores.

To unravel what one expert described as a "patchwork quilt" of regulations across the states, Gilroy said, you have to go back in time. "When prohibition was repealed, states were in a position to decide, how are we going to do this going forward?" he said. Since then, he said, "the change is all in one direction" -- states have only made their liquor laws more permissive.

But they have done so too slowly for big box chains like Costco, which led a $22.7 million push in 2011 to have voters approve an initiative in Washington state privatizing liquor retail sales -- but, according to the initiative's text, "only for premises comprising at least ten thousand square feet." The referendum also let retailers buy directly from distilleries, skipping over the distributors who earn tidy profits acting as middlemen. It passed in November, and the state is now in the process of transitioning to private sales.

In nearby Oregon, Tom Burkleaux of the New Deal Distillery in Portland, which produces artisanal drinks like "Hot Monkey Vodka," is worried that the "Walmartification" of the liquor business could spill over into his state. The Oregon Liquor Control Commission, which has a monopoly on spirit distribution in the state, makes a conscious effort to ship local products.

"It helps everybody that you have to compete on product value and price, versus whether you can pay off the store to carry you," Burkleaux said.

Aside from all the other considerations -- jobs, public health, "Walmartification" -- one issue perhaps looms largest for state lawmakers: money.

In Virginia, a push toward privatization by Gov. Bob McDonnell (R) appears dead after the state's liquor stores announced that they saw a record profit of $121 million in the last fiscal year. McDonnell's privatization plan, which would only have raised $200 million by selling liquor licenses, was deemed "a small piece of change" by one state senator, according to the News & Advance of Lynchburg.

Likewise, in Pennsylvania, opponents have argued that the state's liquor distribution system is highly efficient. When privatization backers can only argue that liquor shouldn't be a government function, not that privatization will make states money, they have a losing argument, said Young. "When people have to resort to philosophy, they can't win in a fact-based conversation."

In Ohio, by contrast, Gov. John Kasich (R), who has made privatization of state assets a centerpiece of his administration, was able to sell the state legislature on outsourcing the state's liquor distribution business.

$500 million from that sale, to a private non-profit entity called JobsOhio that will now have the monopoly, will be used to balance the state's general budget. The state's own budget director described the move as an "exceedingly complex transaction that is unusual for state government." Critics have charged that it will deprive the state's general fund of a steady source of income in future years while handing over economic development power to an entity, JobsOhio, that has less transparency and public oversight.

"I don't think that paying interest to bondholders so that we can privatize economic development at a loss of revenue to taxpayers is a positive step," said Zach Schiller, research director at Policy Matters Ohio, a group that is critical of the effort.

The administration has argued that JobsOhio, which will be charged with using liquor profits to advance economic development in the state, will be more flexible than state agencies in attracting corporations to the state.

"JobsOhio will not only be amply transparent, it will be successful," said Kasich spokesman Robert Nichols.

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