Liquor Store Privatization
“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.
Pop quiz! What year is this headline from?
E. All of the above.
If you answered E., you win! (And Pennsylvanians lose.)
Excellent reporting from Kari Andren of the Tribune-Review today revealed that the Pennsylvania Liquor Control Board (PLCB) and its employees are under investigation by a federal grand jury for potential "improper relationships with wine and spirits vendors doing business with the agency."
A significant pattern of wrongdoing or potential violations that cross state lines could prompt federal officials to look into the case, he [law professor John Burkoff] said. Earlier this year, the Ethics Commission found the former top-ranking LCB officials guilty of taking all-expense paid trips to Florida and California, golf outings across Pennsylvania, high-end merchandise and fancy meals, all on the dime of executives and sales people at national wine and spirits companies.
The rounds of golf, dinners and hospitality gave vendors direct, informal access to influential LCB employees who played a variety of roles in selecting what wines and spirits would line the shelves of more than 600 state-owned liquor stores across Pennsylvania.
When will these ethical scandals stop? When will taxpayers stop paying for the moral and monetary mismanagement of a state-run alcohol system that most Pennsylvanians don’t even want? A government booze monopoly will continue to breed corruption and mismanagement until, once and for all, we get government out of the business of selling alcohol.
Is it government's job to monopolize a service that private enterprise can easily provide? Matt Brouillette says no—and Pennsylvania's state-run liquor monopoly is a prime example of why government should stick to its core functions and allow free enterprise to flourish.
Matt points to a simple "yellow pages test"—if you can find a service in the yellow pages, government shouldn't be providing it.
Listen below to hear Matt on WSBA 910's The Gary Sutton Show as he justifies this stance and illustrates how government fails when it tries to assume the role of private businesses.
The Gary Sutton Show airs daily on WSBA 910AM in the York area.
Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.
Is it time to wave the white flag on liquor privatization? After all, the Pennsylvania Liquor Control Board (PLCB) reported record revenue and transfers to the state’s General Fund this past fiscal year. Why would lawmakers bother privatizing the state stores given their enormous success?
Okay, that question is admittedly tongue-in-cheek, and for those readers who have followed our work on liquor store privatization, you know the PLCB has been anything but successful. But does the PLCB deserve a little credit for its record year? Maybe, if it weren’t a monopoly.
The PLCB is the only game in town, which is the main reason for its "success." If you want to buy or sell wine and spirits in Pennsylvania, you must go through the PLCB. (Note: There are a few exceptions, such as limited wineries.) In fact, it’s against the law to bring booze from other states back to Pennsylvania, but that hasn’t stopped residents from seeking better deals in privately-owned stores. Imagine if the PLCB had to compete with private stores here in Pennsylvania. It's doubtful we would hear about record sales and revenue.
Unfortunately, this kind of private competition isn't an option in our state. And those that don’t live near a border state are stuck with the PLCB. So take the agency’s record year with a grain of salt. Their "success" is not the product of satisfying consumer demands, but rather the result of a government-granted privilege dating back to the Prohibition Era (or error, if you prefer).
Opponents of privatization claim that the state benefits from the revenue government-controlled liquor stores bring to the state. And it's true that the PLCB does transfer some of its “net income” or “profits” to the state, which was also a record high in 2013-2014. But the PLCB is about as profitable as the IRS. Its “profits” are nothing more than taxes paid by consumers in the form of higher wine and spirits prices. But even with its monopoly status, the PLCB is facing some financial challenges.
These challenges drew statewide media coverage last month when the agency floated the idea of increasing the price of its products as a way to make up for a projected 20% loss in its net income in future years. The agency is on track to transfer fewer dollars to state government due to its increasing costs, putting to rest the idea that the agency is an asset for the state.
The PLCB wants to tout their new record, but the only record Pennsylvania consumers care about is the record number of years that we continue to live and shop with complete government control of wine and liquor sales.
Finally some good news for booze consumers: the Pennsylvania Liquor Control Board (PLCB) has decided against increasing the markup added to each wine and spirits product, according to PLCB Chairman Joseph Brion.
The announcement came last week after an internal PLCB memo calling for a 16.6% increase in the PLCB’s markup received wide media attention, much of which was unfavorable. The proposal was being considered given the agency’s projection of a 20% reduction in their net income due to rising employee costs and government mandates. The memo itself quashed one of the anti-privatization movement's favorite talking points: that the PLCB is an unparalleled source of revenue for the state.
The PLCB’s decision to forgo the markup increase raises an important question, though: How will the agency make up the lost income, i.e., taxes it collects from consumers? Calls for "modernization" will undoubtedly be touted as a solution.
But instead of trying to mold the PLCB to work more like a private system, which is like pushing on a string, the state agency should be steered in a different direction, getting it out of the business of booze sales and ending its costly conflict of interest.
Union CEO Wendell Young issued a press release Wednesday claiming, "there's no nice way to put this but he [House Majority Leader Mike Turzai] is not telling the truth and he knows it."
This is what pscyhologists call projection— that is, attributing what you do (in this case, not telling the truth) to others.
Young, for instance, claims a state-commissioned report found "a transition to privatization would cost $1.4 billion over five years." Not true.
The report actually indicated that the total cost of running the PLCB would be $1.4 billion during the five years it takes to transition to a private system. But those annual operating costs would decline from $500 million to less than $100 million. Without privatization, the PLCB's operating costs would be about $2.4 billion over those same five years. That is, privatization would save state taxpayers $1 billion in operating costs.
We've pointed out Wendell's error on this point consistently, but he continues to repeat it.
But this is to be expected; Wendell has a long history of misrepenting the truth. He claims Rep. Turzai puts "politics above Pennsylvanians," yet:
- Wendell puts his personal politics above the well-documented majority of Pennsylvanians that want the state out of the liquor business.
- Wendell has misled the public, spending more than $1 million—from taxpayer collected union dues—on factually inaccurate ads.
- Wendell puts his personal politics above the interests of his own members and fee payers, by incorrectly disclosing how their dues and fees are spent.
- Wendell puts his personal politics above Pennsylvania law, by failing to register as a lobbyist, despite exceeding the law’s minimum requirements by significant sums.
The truth is, the liquor privatization plan put forth by House Majority Leader Mike Turzai last year, which passed in March of 2013, put Pennsylvania taxpayers and consumers first. Pennsylvanians on both sides of the aisle are tired of the state’s Prohibition-era liquor system, which has more government control than any state other than Utah.
Liquor privatization is only about politics within the Capitol, and that’s because Wendell Young spends millions of both workers’ dues and fair share fees to keep it that way. And as taxpayers, we continue to pay to collect the money that is used against this commonsense reform that would finally put Pennsylvanians – not politics – first.
Pennsylvania’s Prohibition-era liquor laws did nothing but provide headaches for two entrepreneurs, demonstrating yet again the absurdity of our state liquor code.
Stymied by a bureaucracy’s byzantine legal code, Knechel and Tracy attempted to acquire distilling and brewing licenses, but were repeatedly denied over the course of six months. The explanation? A simple “you don’t meet the current code” was given by the PLCB countless times, but both men persisted and continued to push for answers.
Knechel and Tracy were finally given a definitive answer: Pennsylvania law dictated that the PLCB could not issue two licenses to the same address. So to comply with the code, the men built an eight-foot wall, separating the property into two addresses.
This example of government inefficiency should not surprise those familiar with the PLCB. The antiquated system stunts the growth of local entrepreneurial projects, prevents innovation and denies choice, convenience and competitive pricing to those who demand it.
Pennsylvania needs a liquor system and code that works for both taxpayers and entrepreneurs, so we can finally leave the the relics of Prohibition behind.
posted by PAIGE HALPER | 09:22 AM | Comments
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