Liquor Store Privatization

Principles for Liquor Privatization

Jul 25, 2015

Key Points:

  • Government should permanently get out of the business of selling alcohol and end the system in which state-run liquor stores compete against private business.
  • Modernization fails to move Pennsylvania into the 21st century.
  • Only full privatization ends the conflict of interest inherent in having the PLCB both regulate and promote wine and liquor sales with tax dollars.
  • Pennsylvania is not safer or more sober because of government-sold alcohol.
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The PLCB: A Winner in a Race with No Competitors

In 2013, the Pennsylvania Liquor Control Board (PLCB) released its first annual report, emphasizing record sales and “profits.” Neither of these is impressive when analyzed in context, but the PLCB continues to tout them as accomplishments.

As we’ve pointed out repeatedly, the PLCB has—until the passage of Act 39—had a monopoly on wine and liquor sales. Bragging about sales and profits when shielded from competition is like running a victory lap after ‘winning’ a race with no competitors. Nevertheless, the latest report unwittingly makes the case for full privatization. 

By its own numbers, the agency is a liability rather than an asset for Pennsylvania. Here’s why:

  • The PLCB’s net income in 2015-16—although higher than the prior year—is still down 19 percent from fiscal year 2012-13. This despite reporting record sales of $2.43 billion.
  • The PLCB’s operating expenses continue to rise and were 22 percent higher in 2015-16 than in 2011-12. Higher expenses may be justified if the PLCB were operating more stores. It’s not. Store locations declined from 608 to 601 over the same time period.
  • Total liabilities increased by $105.4 million for the year, due largely to the agency’s pension obligations. Overall, its poor net financial position did not change significantly. It ended the year approximately $238.2 million in the red

Still, PLCB apologists remain steadfast in opposing privatization. They claim the agency makes money for the state and eliminating it would blow a hole in the budget. Yet, 77 percent of PLCB transfers to the General Fund come from taxes, which consumers and businesses would still pay under a private system. In fact, revenue would likely increase under a competitive system, which gives consumers more choices and fewer reasons to buy alcohol in other states—a problem known as “border bleed.”  

The case against the PLCB isn’t strictly financial. The agency has a long history of corruption and a string of shortcomings that are well documented. The latest was on display just before Thanksgiving, when the state stores’ credit card system overloaded and failed because it could not handle the sales volume. This statewide failure would not have been possible in a truly competitive market.

The good news is the legislature recognizes the futility of the PLCB’s market operations. Last year, lawmakers voted for the first time in state history to privatize the system. However, Gov. Wolf vetoed the bill for dubious reasons. This should not stop the legislature from putting another privatization bill on his desk.

With the Taxpayer Party set to increase its majorities in the General Assembly, Gov. Wolf may finally have to acknowledge a political reality: liquor privatization is popular inside and outside state government.

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posted by Bob Dick, Andrew Ryan | 03:50 PM

Hits and Misses from the 2015-16 Legislative Session

That's a wrap.

The 2015-16 legislative session is officially in the history books. Despite a $650 million tax hike, Pennsylvanians have a lot to celebrate from the past two years. From elimination of the Capital Stock and Franchise Tax to wine modernization, recent events signal Pennsylvania’s political leaders may be ready to start tackling the broken systems that are driving state spending far faster than Pennsylvania’s economy.

Here are the top seven taxpayer victories from the 2015-16 legislative session:

  1. Five tax hike proposals defeated in 2015. During his first year in office, Gov. Wolf proposed five different broad-based tax hike plans, including higher personal income, sales, and tobacco taxes; a natural gas severance tax; and more. The first proposal would have increased a family of four's tax burden by $1,450. Ultimately, the governor allowed a no-tax-hike 2015-16 budget to become law.
  2. Capital Stock and Franchise Tax elimination. Originally set to expire in 2011, this business tax, combined with the 2nd-highest corporate net income tax rate in the nation, discouraged job creation and contributed to PA’s poorly ranked business climate.
  3. No broad based tax hikes in 2016. The legislature refused to entertain sales or income tax increases. Unfortunately, lawmakers implemented $650 million in narrow-based tax hikes.
  4. Increased labor union accountability. Until last year, union leaders and members could legally stalk, harass, and threaten to use weapons of mass destruction when involved in a “labor dispute.” Act 59 of 2015 closed this loophole. In early 2016, Act 15 of 2016 gave taxpayers the ability to see the costs of government union contracts before they go into effect.
  5. Funding students, not systems. The 2016-17 budget increased the Educational Improvement Tax Credit by $25 million, giving more students the opportunity to escape violent and failing schools. The budget also includes a student-based funding formula, directing any funds above 2014-15 levels to schools based on current enrollment.
  6. Liquor modernization. In a small step forward, restaurants and grocery stores can now sell wine, and beer distributors gained additional freedoms, like the ability to sell six-packs.
  7. Honorary mention: Uber and Lyft legalization. Despite a contentious relationship with the Public Utility Commission, lawmakers finally made the ridesharing services Uber and Lyft permanently legal in Philadelphia and across the commonwealth.

The last two years also saw some missed opportunities:

  1. An unbalanced 2016-17 budget. Lawmakers passed—and Gov. Wolf let become law—a spending bill without revenue to pay for it. Despite $650 million in tax hikes, spending will still exceed revenue projections, according to the Independent Fiscal Office.
  2. Pension reform. In June 2015, lawmakers passed landmark legislation to place new state employees and public schoolteachers in a defined-contribution retirement plan, similar to a 401(k). Gov. Wolf vetoed the legislation.
  3. Liquor privatization. Both chambers passed complete liquor privatization, which Gov. Wolf promptly vetoed.  
  4. Paycheck protection. In October of 2015, the state Senate passed SB 501 to ban the use of public resources to collect political union dues and campaign contributions. The legislation stalled in the House.
  5. Medicaid expansion. Despite opposition from the legislature in 2014, Gov. Wolf rewrote a federal waiver to expand Medicaid under the Affordable Care Act with little opposition in 2015. At the time, officials predicted about 500,000 new enrollees and an infusion of federal cash that would stimulate the economy. To date, rolls have grown by more than 670,000, while the commonwealth spent $500 million last year and $240 million this fiscal year.
  6. Seniority reform. Gov. Wolf vetoed legislation to protect great teachers by ensuring that during furloughs, teachers are retained based on effectiveness, not simply seniority.
  7. Corporate welfare reductions. Pennsylvania spends more than $800 million per year on myriad tax credits, grants, and special loans to private corporations. Yet, we continually rank near the bottom in economic growth. While a few bills to reduce these loans made progress, the legislature has, by and large, failed to recognize these programs don't work.

The commonwealth's financial troubles are serious and systematic. In the new year, lawmakers will have another chance to tackle the broken systems that harm Pennsylvanians by pursuing true pension reform, welfare reform and expanded educational choice for families.

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posted by Elizabeth Stelle | 09:47 AM

PA's Liquor Monopoly is in Red Ink Again

The Failure of Government-run liquor stores

The Pennsylvania Liquor Control Board (PLCB) is boasting about record sales again. But as we've pointed out in the past, that’s not much of a feat when you have a monopoly over liquor sales. And the claim is even less impressive when you realize the agency is $238 million in debt.

Like a private business, the PLCB now has to include pension liabilities on its balance sheet. These liabilities are in excess of the agency's assets, putting the PLCB (officially) in the red for the second year in a row.

Despite the agency's financial position, it's generated positive attention recently by allowing grocery stores to sell wine, but this is only a small step in the right direction. The most effective way to serve Pennsylvanians is to fully privatize the system. This is important for two reasons.

First, it eliminates any potential future bailout of the PLCB. Approximately 85% of PLCB’s revenue comes from taxes. That means the state will still collect revenue with a privatized system, but the $238 million debt will only grow as the pension liabilities rise. We should take the initiative to privatize the system before it becomes a bigger burden on taxpayers.

Second, privatization would benefit consumers. It would give consumers more choices, convenience and competitive pricing.

It’s time Pennsylvania joins the 48 other states that enjoy more efficient government and consumer convenience.

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posted by Andrew Becker | 02:30 PM

5 Reasons to Continue the Push for Liquor Privatization

Some lawmakers and the media have labeled the latest liquor reforms as "historic" and "sweeping." The Patriot-News described the reform as the "most substantial overhaul of Pennsylvania's liquor system since Prohibition became law."

We won't go quite that far, wine in select grocery stores is not exactly groundbreaking.

Is there more convenience? Sure. But it doesn't take much to improve on the incredibly inconvenient and corrupt Pennsylvania Liquor Control Board (PLCB).

Here are five reasons Pennsylvanians should view Act 39 as the first step toward full privatization.

1. Wine in select stores. Grocery and convenience stores currently allowed to sell beer will now be able to sell wine. But that's only an estimated 300 to 350 stores in the entire state. Moreover, you'll be limited to purchasing four bottles of wine at a time. And the wine must be purchased from the PLCB. In other words, bureaucrats will still control your wine selection.

2. Beer in gas stations. The law codifies a PLCB decision to allow gas stations with prepared foods to sell beer if they meet PLCB requirements. Just nine gas stations have been approved thus far. If you are lucky enough to be near one of these gas stations, you'll still need to purchase your beer and gas at separate counters.

3. Wine delivery. Finally Pennsylvanians will be able to order wine from other states and have it delivered directly to their door, instead of a PLCB store. Though, a licensee authorized to deliver wine will be limited in the amount they can ship.

4. Expanded PLCB store hours. The PLCB will have the power to keep state stores open longer on Sundays and holidays.

5. Variable pricing. The law allows state stores to arbitrarily increase (or decrease) prices on their best-selling products, thereby costing consumers even more.

These changes (excluding variable pricing) are positive, but they don't go far enough.

The government-run liquor system has led to product shortages, inconvenience for entrepreneurs, and outright neglect of their property. As long as government maintains its wholesale monopoly on wine and liquor, mismanagement and inconvenience will be the status quo.

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posted by Elizabeth Stelle | 04:17 PM

Liquor Liberty Loophole for DNC

As Pennsylvania residents and visitors know quite well, our state's liquor laws are outdated. Pennsylvania remains one of only two states where the government completely controls the sale of wine and spirits.

Good News: Pending legislation would allow some businesses to circumvent the state store system.

Bad News: The only people to benefit are those attending the Democratic National Convention.

That’s right, Pennsylvania liquor laws are so ridiculous, we need to suspend them when representatives of other states visit, so as to not embarrass ourselves.

The Philadelphia Inquirer provides some of the details:

A bill that passed a key Senate committee would allow those businesses to apply for a special permit to extend serving hours past the current 2 a.m. last call.

The legislation also would let them temporarily circumvent the strict and costly requirement that all wine and liquor be purchased from the State Stores, which slap products with an automatic markup and various taxes. (Much of the liquor at big events like political conventions is donated.)

This isn't a question of whether the Democratic Party should be allowed to, well, party. Rather, it's about the state denying residents the same benefits as convention attendees.

If suspending the liquor code for a few days in July makes Pennsylvania more attractive for big events, why not suspend these silly rules 365 days a year?

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posted by Nathan Benefield | 10:18 AM

The Consequences of Concentrated Power

We aren't the type of people to begrudge anyone a well-deserved raise. But when it's a $9,000 raise for an inessential position running a government booze monopoly...well, that raises some eyebrows.

The Pennsylvania Liquor Control Board (PLCB) recently gave its executive director John Metzger a 6.2 percent raise, bumping up his salary to $154,035 a year.

A PLCB position commanding a six-figure salary might appear to be essential to the functioning of a government agency. But is this position needed? Gov. Ed Rendell created the controversial position just 10 years ago for former state senator Joe Conti. The PLCB’s Chairman at the time, Jonathan Newman, resigned in protest because he thought the position was unnecessary.

Ignoring the controversy of the hiring, did Conti improve the management of PLCB? Not in the slightest, as this list of boondoggles makes abundantly clear. Additionally, Conti used the position to enrich himself at the expense of people stuck dealing with an inefficient yet powerful booze bureaucracy. And he continues to profit off the PLCB’s existence as a lobbyist for the local United Food and Commerical Workers union.

The source of all these problems—arbitrary raises, unwarranted positions, mismanagement, and corruption—is the control the PLCB has over the sale of wine and liquor. The system consolidates power among a handful of people, giving rise to abuses that every Pennsylvanian should find unacceptable.

The liquor monopoly is hanging on by a thread. Last year, the legislature passed a privatization plan for the first time in 80+ years. Unfortunately, Gov. Wolf vetoed it. But this should not dissuade lawmakers from sending it to his desk again.

Only full privatization can end cronyism and offer the choice, convenience and, competitive pricing consumers and entrepreneurs deserve.

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posted by Bob Dick | 03:57 PM

A Governor's Resolution List for 2016

Last year, Gov. Tom Wolf promised he would take state government in a "different direction" and grow the middle class. He pledged to do this by making Pennsylvania a magnet for private sector entrepreneurs without giving massive tax breaks to special interests.

Throughout 2015, the governor has strayed from those promises by vetoing a budget that held the line on taxes, privatized liquor and made an effort to protect the state's credit ratings through pension reform.

Of course, a new year provides new opportunities…or should we say a fresh start. So with the new year in mind, here are five resolutions the governor can work toward to deliver on his promises to Pennsylvanians:

Resolution #1: Return to the campaign promise not to raise taxes on working people.

As a candidate, Tom Wolf promised to protect low and middle-income people from a tax increase, but in 2015, he broke that promise. Fortunately, the governor has an opportunity to stand on the side of an overtaxed working class, and prevent policies that will expedite the exodus of Pennsylvanians.

Resolution #2: Level the playing field and cut spending on corporate welfare programs. 

Unbelievably, government spending has increased in 44 of the last 45 budget years. Cutting down or eliminating nearly $700 million in corporate welfare is a great way to save tax dollars and level the playing field for all Pennsylvanians.

Resolution #3: Deliver property tax relief by signing real pension reform.

Over the past year, the governor highlighted the onerous property tax system in Pennsylvania and proposed a tax shift to help, but such a shift does not solve the real problem: school budgets squeezed by pension costs.

To provide relief to homeowners, we need comprehensive pension reform that stops adding new debt and provides a method to pay down existing debt. That means converting to a 401k-type system and finding additional revenue (either through spending cuts or non-tax revenue sources) to pay for the more than $53 billion in benefits promised to public employees.

Resolution #4: Make government work smarter by getting out of the booze business.

Selling wine and liquor is not a function of state government. Government booze control leads to higher prices, fewer choices, less convenience, an inefficient bureaucracy. Selling the state stores would be a windfall for both taxpayers and consumers alike.

Resolution #5: Create "government that works" by increasing transparency and ensuring taxpayer resources are not used for politics.

Government should not grant any private organization unfair political privileges. This includes using taxpayer resources for the collection of political money. A true “transparency governor” will end these favors and restore accountability to taxpayers.

To strengthen our state and give Pennsylvania a real fresh start, these are five resolutions worth keeping.

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posted by Bob Dick | 03:24 PM

With Details, Wolf Budget "Framework" Looks Even Worse

Now that the Pennsylvania Senate has begun passing legislation, taxpayers can finally see what’s in Gov. Wolf’s “framework” for a new budget. Based on the passage of SB 1073 and SB 1082 today in the Senate, here are five things we know about the budget framework:

1. Excessive Spending Growth. The $30.788 billion budget represents spending growth of 5.4 percent over last year’s budget. Even including items shifted off budget last year, this amounts to an increase of $500 million more than inflation and population growth.

2. WAMs are back. The budget passed by the Senate includes a $103 million increase (51 percent) in Community and Economic Development spending. This includes several line-items identified as WAMs and eliminated in previous budgets.

WAMs (or “walking around money”) are slush funds used for special projects, usually controlled by legislative leaders. In the past, they’ve been used to buy votes and have been the abused with rampant corruption.

3. Problematic pension reform. The revised pension bill included a side-by-side hybrid, with a smaller defined benefit pension and a defined contribution component. This reform is weaker than SB 1 (vetoed by the governor) and while a step in the right direction, doesn’t get the politics out of pensions.

Here’s the positive: For current employees, the legislation would alter the calculations for “lump sum withdrawals” (the money employees can take in one single payment when they retire, with a reduced pension) and the calculation of “average final salary.”

On the negative side, the bill underfunds pensions. The proposal reduces collared contribution rates, which further underfunds the pension plan and adds an estimated $500 million to its unfunded liability.

Moreover, the bill suspends the provision that all pension bills have an actuarial note attached before being voted on. Actuarial notes summarize any changes that would occur and estimate the cost to taxpayers. This is a stunning lack of transparency.

4. No privatization in “liquor privatization.” The Senate liquor plan—which has been reported on but not yet passed—strips out many of the components of “privatization.” For starters, it would retain the government monopoly over the wholesale side—every retailer would still have to buy wine and spirits from the PLCB. Instead, there would be a “study” to recommend whether the state should privatize wholesale liquor sales.

This monopoly gives a few bureaucrats power to determine what can be sold in Pennsylvania, maintains the conflict of interest whereby the state sells and controls alcohol, and has led to numerous cases of corruption and bribes.

Restaurants and bars would be able to sell wine (and only wine) to-go, while beer distributors would also be able to sell wine and spirits. There would be no new liquor licenses for grocery stores or other private retailers. State stores would remain open in perpetuity.

5. Higher Taxes. We know there will be higher taxes. We know this will include some broad-based tax increase to generate the $600-$700 million needed to pay for the spending.

We don’t know what taxes will go up. There is no agreement on a tax plan; that is, the Senate passed a budget without the revenues to pay for it.

It’s unclear if there is support in the Senate to pass a tax hike, and very clear signs there isn’t support in the House for a tax hike of this magnitude.

To see how your senator voted, here is the roll call for SB 1073 and SB 1082.

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posted by Nathan Benefield | 05:48 PM

Prohibition Never Ended

Tomorrow marks 82 years since the official end of Prohibition. Yet, Pennsylvania is still dealing with its own version of Prohibition in the form of the Pennsylvania Liquor Control Board. The agency has complete control of both the wholesale and retail side of wine and liquor sales, and as you might expect, the results have been subpar.

Recognizing the liquor control board’s failures, the Republican-dominated General Assembly sent Governor Wolf legislation to privatize the government-run liquor system. The governor vetoed it, citing a number of weak excuses to justify an unpopular position. A couple of months later, Gov. Wolf offered his own “compromise” to break the budget impasse, which is now in month six.

But as my colleague Nate pointed out, the proposal was not true privatization. And it appears the governor has not moved from his anti-privatization stance since he vetoed the legislation back in July. Now there is talk of liquor ”modernization” as part of the deal to break the budget gridlock, but the ghosts of modernization’s past are well known. Modernization is still government-run booze. Voters should accept nothing less than real privatization as part of any budget deal.

For more on Pennsylvania’s risible liquor laws and why we need reform, have a listen to my interview with the Cato Institute’s Caleb Brown.

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posted by Bob Dick | 03:03 PM

10 Reasons to Banish the Booze Bureaucracy

Gov. Wolf is committed to protecting the government's monopoly on the sale of wine and liquor. When talking to reporters this past Monday, the governor’s spokesman said of Wolf “The [liquor privatization] bill he vetoed earlier this year is not something that he'd accept."

The governor’s position is head-scratching given the shortcomings of the state-run system. Perhaps the governor opposes liquor liberty because he isn’t privy to the liquor monopoly’s many failings. So, for the benefit of Gov. Wolf, and in the spirit of David Letterman, here are the top 10 reasons why state government should exit the booze business:

10.) It would end state government's conflict of interest.

9.) Privatization led to increased employment in Washington State and Canada.

8.) We don’t need a gatekeeper.

7.) The agency's “modernization” efforts have failed miserably. Remember the failed wine kiosks?

6.) Opening up the market to competition will lead to lower liquor prices.

5.) The government monopoly is driving border bleed, costing the state at least $180 million in sales.

4.) The PLCB makes life difficult for entrepreneurs trying to sell their products in Pennsylvania.

3.) The public overwhelming favors privatization.

2.) The liquor control board is more than $238 million in the red.

1.) The PLCB is a corrupt, scandal-plagued agency.

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posted by Bob Dick | 01:07 PM

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