Liquor Store Privatization
Is liquor privatization in Washington State a “failed experiment"? That's the bold assertion from opponents of unshackling Pennsylvania from the chains of a government liquor monopoly. It’s also wrong.
Washington State’s Office of Financial Management released a report back in January on the impact of liquor privatization. Their findings decimate the claims that privatization is a failed experiment. On the contrary, privatization led to a number of positive developments:
- Liquor sales increased by 13 percent.
- Revenue collections increased by 18 percent.
- The number of liquor stores increased by 327 percent.
- Liquor store employment increased by 91 percent. (The report states that some of this growth may have occurred absent privatization.)
- Per-liter prices increased by 8 percent on average. This increase can be attributed to additional fees included as part of the privatization conversion and the state’s $35.22 per gallon excise tax— the highest spirits excise tax rate in the country.
- The costs of running the liquor system fell by 77 percent.
If Pennsylvania turns over the sale of liquor to the private sector without increasing taxes and fees (and we’re one step closer!), expect more jobs, better convenience, and competitive pricing.
For more on liquor privatization, check out this one-stop shop.
On Thursday, the Pennsylvania House of Representatives passed liquor privatization legislation sponsored by Speaker of the House Mike Turzai. You can see how your legislator voted in this interactive graphic from PennLive.com.
Back in 2013, the House passed the first liquor privatization bill since the end of Prohibition more than 80 years ago. With yesterday's vote, the House has recommitted to expanding choice and convenience for consumers by getting government out of the booze business.
We applaud the House for acting in the best interests of taxpayers and consumers and again recognizing that the vast majority of Pennsylvanians—no matter their political leanings—want government out of the liquor business.
Even with this victory, the liquor privatization debate is only just heating up. As talks continue, it's critical that these principles of liquor privatization undergird any changes to the legislation:
- Government should permanently and unequivocally get out of the business of selling alcohol and end the system in which state-run liquor stores, with all their advantages and taxpayer subsidies, compete against private mom & pop businesses.
- Only full privatization ends the conflict of interest inherent in having the Pennsylvania Liquor Control Board both regulate and promote wine and liquor sales with tax dollars. Modernization would allow the PLCB to continue to produce government-brand wine and fiascos such as the failed wine kiosk program, undermining Pennsylvania wineries, consumers, and taxpayers alike.
- Modernization or other measures that maintain the current state store system fail to move Pennsylvania into the 21st century and deliver the choice and convenience Pennsylvanians want. Modernization is like offering consumers a "touch-tone" phone—it's better than a rotary phone, but is a far cry from the smart phones consumers really want in 2015.
- To promote competition, lower prices, selection and convenience, lawmakers should allow the market to decide the number of outlets that can sell wine and spirits. At the least, the number of licenses should be set to the national average of retail outlets based on population, to keep Pennsylvania competitive with the rest of the nation.
- While beer distributors cannot expect to retain their protected oligopoly, proposals should treat them fairly in consideration of how much time and money they have invested in their business, including minimizing the cost of upgraded licenses and guaranteeing loan financing for new licenses.
Opponents of consumer choice will continue to employ the same scare tactics about privatization, but their arguments ring hollow (brush up on your facts and responses here). At the end of the day, government booze doesn't make us safer or economically stronger.
It's time to end Pennsylvania's Prohibition era once and for all.
Practically three-quarters of Pennsylvania’s twelfth graders tried alcohol at least once in their lifetimes, according to a Pennsylvania Liquor Control Board (PLCB) report. This eye-opening statistic confirms the obvious: government control of liquor does not minimize underage drinking.
As a matter of fact, alcohol use among Pennsylvania students in the eighth, tenth, and twelfth grades ranks above the national average. These facts run counter to the narrative of liquor privatization opponents who tout government control as the solution to mitigate social problems, such as underage drinking and binge drinking.
According to the report, the rate of twelfth graders who admitted to binge drinking (defined as consuming five or more drinks in a row in the last two weeks) was slightly below the national average, but the percentage of Pennsylvania college students who admitted to binge drinking was above the national average.
If we're to believe that government control can prevent these social problems, shouldn’t the rate of binge drinking be well below the national average for both twelfth graders and college students? After all, Pennsylvania has one of the most tightly regulated liquor systems in the country, with government operating both the retail and wholesale side of liquor sales.
The answer, of course, is no. As Dr. Raymond Scalettar, the former chair of the American Medical Association pointed out, “Alcohol consumption habits tend to be culturally driven and macro-level control policies have little to do with drinking patterns." Dr. Scalettar’s claim is consistent with the findings in the PLCB report:
Youth who drink underage report they are most likely to get their alcohol for free (93.4 percent), with 44.8 percent reporting they got alcohol from family members or their home. And when they drink, they are consuming “more than 90 percent of their alcohol by binge drinking."
Government's inability to prevent social problems is just one more reason to privatize Pennsylvania’s dysfunctional liquor system.
It’s back! Liquor privatization is once again up for debate and has already cleared its first hurdle, as lawmakers voted yesterday to advance the bill out of a House committee. But not everyone is pleased.
Liquor privatization detractors have reemerged, and they are pushing the same stale arguments against liquor liberty that have been debunked many times over.
Because more misleading attacks are inevitable, we thought it would be helpful to provide some links to our research as a refresher in the fight to free our booze:
Will privatizing liquor sales diminish revenue to state government?
- Liquor privatization will increase revenue to the government.
- Liquor privatization reduces operating costs.
- The future of government booze is bleak.
Do government liquor systems provide more safety?
Has the PLCB served Pennsylvanians well?
- The PLCB is plagued by ethics scandals.
- The list of PLCB boondoogles is seemingly endless.
- The PLCB has a conflict of interest too big to ignore.
- Booze monopoly bad for business.
Is privatizing the PLCB ideological?
- Expanding alcohol competition is the correct liberal position.
- Left, Right, and Center all want liquor privatization.
Where else has privatization worked?
Lawmakers took action in committees today on both liquor privatization and paycheck protection. Here's what's happened in Harrisburg:
Liquor privatization: This morning, the House Liquor Control Committee advanced HB 466, which would end the government monopoly on wine and liquor sales (wholesale and retail). This bill is sponsored by Speaker of the House Mike Turzai.
Paycheck protection: The Senate State Government Committee met today to discuss and vote on paycheck protection (SB 500, a constitutional amendment sponsored by Sen. Scott Wagner, and SB 501, sponsored by Sen. John Eichelberger). Both would end the use of taxpayer resources to collect government union political money. SB 500 advanced from committee.
These are critical first steps for both reforms in 2015 and we praise the bold champions in the House and Senate for making taxpayers their priority.
Government unions are deploying their forces to keep their political privileges, so please join me now in voicing your support for the legislators standing up for taxpayers. Whether liquor privatization, paycheck protection, pension reform or spending limits—the time is now to set the agenda for 2015 and let Gov. Wolf know what taxpayers want the future of Pennsylvania to look like.
Click here to send your message on liquor privatization.
Then click here to send your message on paycheck protection.
Pennsylvania voters have consistently said they want more convenience and choice by privatizing liquor sales. Not only would privatizing the state-run liquor store monopoly grant voters their wish, but it would also improve the state's finances.
The good news for consumers and taxpayers? Pennsylvania House Majority Leader Dave Reed announced the House would vote on a liquor privatization plan before the end of February. The House previously passed a privatization proposal in March 2013.
Some critics of the plan have wondered how the state will replace the "profit" that the government monopoly liquor stores bring in. But here are some facts:
1) Almost 85 percent of the revenue the PLCB brings into the state each year is from taxes on alcohol. Those would remain.
2) Everything the PLCB takes in beyond its costs and taxes is in markup—essentially overcharging consumers. As a government monopoly, this isn't a profit so much as an implicit tax. And what supporters of "modernization" really want is for the PLCB to bring in more money by charging consumers higher prices with their monopoly.
3) Under privatization, the state would actually take in more net annual revenue through taxes and license fees, according to a PFM group analysis. This is in addition to $1 to $2 billion in upfront revenue from privatization. The chart below details the numbers.
|PLCB Annual Revenue and Expenditures (in thousands of dollars)|
|LCB Program Revenue||Current (2014)||Privatization|
|License Fees and Fines||$13,000||$138,250|
|Retail Regulatory Fee||$0||$20,000|
|Total Program Revenue||$572,000||$158,250|
|State Police Enforcement||$22,000||$27,000|
|Treatment and Prevention||$2,000||$3,520|
|General Fund Transfer||$80,000||$80,000|
|Johnstown Flood Tax||$323,000||$335,000|
|State Sales tax||$127,000||$132,000|
|Corporate Income Tax||$0||$1,900|
|Personal Income Tax (on S-Corps)||$0||$500|
|Total Revenue for General Fund, State Police, and Treatment||$584,000||$592,650|
|Liquor Modernization Analysis Based on Governor Corbett's 2013 Proposal, Pennsylvania Office of the Budget, Conducted by the PFM Group, January 2013, http://www.governor.state.pa.us/|
“I’ve got products in the pipeline that I can’t sell, because they didn’t get approved,” said Mike Gonze, president of Dreadnought Wines in a Pittsburgh Post-Gazette article that perfectly encapsulates why state government should not be in the booze business.
In the article, Bill Toland details how the Pennsylvania Liquor Control Board (PLCB) had to place a moratorium on special liquor orders (SLOs) because they were short on staff. In this instance, short on staff means losing two of four data-entry employees in the PLCB's special liquor order processing unit.
If you're wondering how losing two employees could cause a backlog, and headaches for entrepreneurs, here's a look at how the PLCB handles SLOs:
The process works like this: A vendor finds a new wine or spirit and wants to distribute it to buyers in Pennsylvania. First, the vendor must ask the state to approve the new item. Once that item is approved—a process that used to take a few weeks but now is taking several months—an individual buyer or a restaurant can order it by calling the PLCB’s special purchases division, or by stopping by a state store to place the special liquor order in person.
After the order has been made—some vendors require a minimum order of six bottles—the vendor sells the product to the state, which applies its own price markup and re-sells the item to the end buyer and delivers it to a wine and spirits store for pickup.
It’s a complicated process, complicated further by the slowdown. Small vendors who don’t represent or import high-volume wines and spirits rely on the special liquor order process for much, if not all, of their sales traffic.
To state the obvious, our booze monopoly has limitations that consistently fail entrepreneurs and consumers. But the news isn't all bad.
After receiving some pressure from those affected by the decision, the PLCB decided to end its moratorium on new SLOs. Yet, this decision does not solve the underlying problem: the government’s inability to efficiently manage a business.
Losing two state employees should not have serious repercussions for numerous businesses and their patrons. Imagine if a private company told customers they had to put a hold on all orders. It wouldn’t be in business for very long. The same can't be said for the PLCB. Despite the Board's less than stellar operation, it remains with us today.
Naturally, many will tout "modernization" as a solution to the PLCB's innumerable problems. But recent modernization efforts have been both futile and expensive. A case in point is the wine kiosk program. A purportedly “free” initiative, the program now has a price tag of $300,000 due to legal costs, according to Kari Andren of the Tribune-Review.
The only way to avoid such expensive mistakes, and fix our outmoded system, is through full privatization. That means turning over the retail and wholesale side of liquor sales to the private sector, which would end the bureaucratic backlog hampering businesses.
Union leaders, copying from the same talking point memo, have repeated an identical falsehood about liquor store privatization.
In two recent letters to the editor, I correct the record of faulty claims by Wendell Young and David Fillman. They allege that a study of liquor privatization shows $1.4 billion in "transition costs".
But despite their claims, this is not an additional cost for transition. What the report actually suggest that the total cost of PLCB operations would be $1.4 billion during the five years it takes to transition to a private system.
The PLCB operations is currently around $500 million per year. Eliminating the state stores and wholesale operation, would not happen immediately, but during the transition period, annual operating costs would decline from that $500 million to less than $100 million per year (for enforcement and oversight).
That is, without any change, the PLCB's operating costs would be about $2.4 billion over the next five years. Privatization would save state taxpayers $1 billion in operating costs.
It is disappointing to see union leaders repeatedly distort facts. It is even more disappointing that they are using union dues—collected at taxpayer expense to spread that misinformation.
Policymakers made significant strides over the past legislative session to increase school choice, save taxpayers from waste and abuse in unemployment compensation, and protect students. While critical reforms remain, it's worth celebrating these policy victories from the past legislative session.
Six Policy Victories in the 2013-2014 Legislative Session
1. Banned the practice of "passing the trash." Act 168 of 2014 prevents teachers accused of abuse from quietly resigning and relocating to a new school without having to inform that new school of their alleged misconduct. The law also strengthens the background check process and prohibits school districts from entering into "confidentiality agreements" that suppress abuse allegations. Commonwealth Foundation supported ending this disturbing practice while government unions took a neutral position.
2. Reduced the state debt ceiling. In 2013, lawmakers reduced the total amount of debt allowed under RACP (Redevelopment Assistance Capital Program) by $600 million. Act 77 of 2013 also provides greater accountability, oversight and transparency regarding how RACP grants are awarded.
RACP uses borrowed money—paid back by taxpayers with interest—for "economic development" projects, or corporate welfare. We’ve regularly exposed the most controversial uses of RACP funds, such as the Arlen Specter Library, Tastykake's corporate headquarters, numerous sports stadiums, and a $3 million grant to the Second Mile, the charity founded by convicted child molester Jerry Sandusky. An effort to further reduce the RACP debt limit to $2.95 billion passed the state House in 2014, but stalled in the Senate.
3. Strengthened school choice for children and their parents. Lawmakers consolidated the Education Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC) into one statute, while simplifying and streamlining the application process. This also allows unused credits to be shifted from one scholarship program to another. Thanks to Act 194 of 2014, more credits will be utilized and thousands more scholarships can serve as a lifeline to students trapped in failing schools. Commonwealth Foundation has consistently pushed for greater school choice options, including the creation of the OSTC.
4. Reformed taxes for small businesses and more. Lawmakers enacted some tax reform last session with Act 52 of 2013. Lawmakers increased the Net Operating Loss (NOL) Cap, created a new deduction for small start-up businesses, and exempted family-owned businesses from the inheritance tax. While Commonwealth Foundation has advocated for broad-based tax reform, these measures are a step in the right direction towards lessening the tax burden on job creators.
5. Protected jobs for Pennsylvanians in the energy field. New EPA regulations require expensive, unproven technologies that would kill jobs and bankrupt companies. Commonwealth Foundation has documented how destructive these new regulations are to existing PA jobs. Act 175 of 2014 preserves state control of the energy industry by allowing the state legislature to publicly reject a state carbon emissions plan.
6. Ended "triple-dipping" for government employees. Act 75 of 2013 stops former state employees from receiving both retirement and unemployment benefits. The law ends "triple-dipping," where an individual retires and collects a public pension or private retirement benefit and then temporarily returns to work, only to collect unemployment compensation when leaving the job. This one change will reap an estimated million dollars in savings this fiscal year.
Milestones of Note
Liquor Privatization Progress. Three Pennsylvania governors have attempted to privatize the liquor store system. In 2013, for the first time in state history, the PA House passed a bill that would end the government liquor store monopoly. Commonwealth Foundation has pushed for full liquor privatization by exposing the contradictory mission and gross carelessness of the PLCB. Lawmakers can build upon this historic accomplishment in the new session.
Awareness and Advocacy for Paycheck Protection. In 2014, thanks to lawmakers and teachers speaking out through CF's Free to Teach project, a version of paycheck protection passed committees in both the House and Senate. In the new session, lawmakers have a golden opportunity to finish what they started and pass paycheck protection, now known as Mary’s law.
Pension Reform Progress. Legislation to put new state employees and school teachers into a defined-contribution retirement plan (like a 401k) passed committees in both the state House and Senate. Government union leaders, defending the status quo, prevented these bills from coming up for a vote. For years the Commonwealth Foundation touted the merits of defined contribution retirement plans and warned about the impending crisis in public pensions—that crisis is now reality.
Last year, my colleague Dawn did us all a favor by providing a summary of the Pennsylvania Liquor Control Board’s (PLCB) annual report. This year, I drew the short straw.
Similar to last year the PLCB is once again touting record sales, but the agency is a monopoly. If the government granted one company the exclusive right to sell shoes, and the company reported record sales, would you be impressed?
Aside from a monopoly posting record sales, there are a number of red flags to note.
The first, and most important fact, is the PLCB’s fiscal health. The agency’s net income declined from $128.4 million in 2012-2013 to $123.7 million in 2013-2014. Back in September, the PLCB said the drop in net income should be attributed to a credit from 2012-2013, which inflated the net income figure. However, mention of this credit was conspicuously absent when the PLCB reported a 24 percent increase in net income for 2012-2013. In fact, the PLCB credited the growth in net income to “strong sales and expense control.”
While the PLCB’s net income is technically at an all-time high, its fiscal future looks bleak. If you remember, back in August, the PLCB floated the idea of increasing the mark-up price for its products due to growing operating costs. This past fiscal year, operating costs, driven by pension contributions, increased by more than $20 million or 5.24 percent. According to the Tribune Review, the increase in operating costs for this fiscal year (2014-2015) will result in a net income drop of more than 20 percent.
One argument consistently used against privatization is that the government-run liquor stores are an asset for Pennsylvania and privatization would reduce revenue to the state. Yet, taxes comprise nearly 85 percent of the PLCB’s transfers to Pennsylvania’s Treasury. If the system were privatized, the revenue derived from the current tax structure would continue to flow to state coffers.
Our government-run liquor system is both a promoter of liquor consumption and discourages alcohol abuse. In the last year, the PLCB monopoly spent $5.1 million advertising its products. At the very same time the PLCB spent other tax dollars to encourage responsible alcohol use through education and regulation. It appears there’s a slight conflict-of-interest here.
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