Impacts of Liquor Privatization

Testimony of Nathan Benefield and Antony Davies to the Pennsylvania Senate Law and Justice Committee, Feb. 14, 2011


Pennsylvania Liquor Privatization Testimony

Remarks by Nathan Benefield, Director of Policy Research, Commonwealth Foundation

Good afternoon. I am Nathan Benefield, Director of Policy Research for the Commonwealth Foundation.  We are a nonprofit, independent public policy research and educational institute based in Harrisburg.  I am joined by Dr. Antony Davies, an associate professor of economics at Duquesne University who co-authored a study commissioned by Commonwealth Foundation on the social impacts of liquor control.

Before I turn it over to Dr. Davies to discuss his research, I'd like to address a few of the myths circulating about privatization of the state stores.

First, some have questioned the amount of the upfront windfall the state would receive from auctioning off licenses for wine and spirit sales by comparing the license prices in other states.  This is not an apt comparison.  For starters, Pennsylvania state stores control sales of both wine and spirits, or hard liquor; many other states that privatized only had control over spirits.  Further, Pennsylvania has far fewer retail stores than other states per capita, with just over 600 outlets.  While a proposal from Rep. Mike Turzai would auction of 750 retail licenses, Pennsylvania would need about 3,000 liquor stores just to be at the national average.  The number of liquor licenses to be offered will undoubtedly affect the price of the licenses, as well as the degree competition among stores and options for consumers—and therefore should be carefully considered by legislators debating privatization.

Privatization would also entail more than just licensing retail stores, but offer licensing for wholesale operations—that is, the distribution of wine and spirits to restaurants and bars.  The value of wholesale licenses could be equal to that of the retail stores.  Privatization would also involve selling off the entire inventory of the state liquor stores.

We will never know the true value of privatization until taking up competitive bids for licenses—and legislators should work to ensure that privatization involves an open and competitive bidding process—but we believe $1 to $2 billion in upfront fees is a reasonable expectation.

Second, there is the idea that state stores provide $500 million each year to the state.  However, most of this revenue (about $400 million) is from state alcohol taxes and state sales taxes.  The rest—considered "state stores profits"—is really just based on the markup on the price of liquor, or an implicit tax on consumers at the government-run stores.

This revenue would be replaced by taxes under a license scheme.  Lawmakers will set tax rates—either using the current liquor tax structure or replacing it with a different alcohol tax, such as a gallonage tax—and can set the rate to match current revenues from taxes and state store markup and still offer lower prices. 

Additionally, by relying on private vendors, the state will collect corporate income taxes and other business taxes from operators, that government stores don't pay.  And by improving service, selection, and reducing prices, Pennsylvania can recapture some of the revenue and economic activity lost to other states through "border bleed."

Finally, there is the idea that Pennsylvania's control system provides the best protection against underage drinking and alcohol abuse.  Yet data from the National Survey on Drug Use and Health rank Pennsylvania middle-of-the-pack, or worse, on rates of underage drinking and binge drinking.   According to Mothers Against Drunk Driving (MADD), Pennsylvania ranks 30th in DUI-related accidents per capita (1 being best, or fewest DUI-accidents).  In contrast, neighboring New Jersey, has three times the number of liquor stores (in a state two-thirds as populous and much more geographically concentrated than Pennsylvania) and only has about one-third the number of alcohol-related traffic fatalities.

In fact, the Pennsylvania Liquor Control Board's own 2009 report to the General Assembly (ordered by Act 86 of 2006) concluded that the state's college-age student drinking rates are near the national average, and high school drinking rates are higher than the U.S. average.   If state control of liquor sales were a driving factor in underage drinking, alcohol abuse, or drunk driving, Pennsylvania should be number one or two on every measure, but this is clearly not the case. 

The fact that the agency charged with regulating alcohol sales is also the primary seller of alcohol in the commonwealth is a clear conflict of interest.  As evidenced by the fact the Pennsylvania Liquor Control Board spent $90,000 per store in advertising last year, implemented an impractical "wine kiosk" program, began operating "wine boutiques," and spent hundreds of thousands to upgrade its website, the agency puts far more effort into pushing alcohol sales than in controlling the market.  Getting state government out of the sales business and allowing the PLCB to focus on enforcement of alcohol laws is not only a good economic and fiscal policy, but good social policy.

With that I will turn it over to Dr. Davies, who will discuss further the comparisons between control and license states, and the social effects of liquor privatization. 

Remarks by Antony Davies, Ph.D., Associate Professor of Economics, Duquesne University; Mercatus Affiliated Senior Scholar, George Mason University

I thank Chairman Pippy and the members of this committee for inviting me to present results of my research on the privatization of alcohol markets.

Good afternoon. I am Antony Davies, Associate Professor of Economics at Duquesne University and Mercatus Affiliated Senior Scholar at George Mason University. I conduct studies on public policy issues for the Commonwealth Foundation and for the Mercatus Center. My primary area of expertise, however, is in the field of econometrics - the statistical analysis of economic data. Specifically, I invented the methodology that has become the standard for analyzing the most complex data sets - what we call multi-dimensional panel data. My research has appeared in the Journal of Econometrics, considered one of the top academic journals in the field of econometrics, and in academic texts published by the Cambridge University Press and the Oxford University Press.

In the summer of 2009, my co-author, John Pulito, and I conducted a study for the Commonwealth Foundation on the relationship between the privatization of alcohol markets and alcohol-related social outcomes. Our review of the then existing literature revealed numerous studies that came to no clear consensus. For example, a 2003 study of alcohol outlet density and DUI fatalities in California over an eight year period found that increased outlet density was associated either with no change in DUI fatalities or a decrease in DUI fatalities, depending on how one defines "density".[1] A 2003 study of outlet density among students at eight public universities found a positive relationship between outlet density and self-reported drinking problems.[2] A 2005 study of alcohol privatization in Alberta over the period 1950 through 2000 found no relationship between privatization and DUI fatalities.[3] A 2006 study looking at privatization across all states for a single year found a positive relationship between privatization and DUI fatalities.[4] These and other studies detailed in the literature review I have submitted to the committee provide conflicting stories as to the relationship between privatization and social outcomes.[5], [6]

In response to this cacophony of disparate results, Pulito and I attempted to improve on the existing literature in two ways. First, rather than classifying states as either "control" or "license" as previous authors had done, we ranked states according to the degree of control the states exercised over alcohol markets. States that controlled alcohol sales at both the wholesale and retail levels and that controlled beer, wine, and spirits received the highest control rating. States that controlled sales only at the wholesale or the retail level, or that did not control all forms of alcohol received lower control ratings. Our goal was to extract more information from the data by examining the level of state control, not merely the presence or absence of control. Second, whereas previous studies looked at one state over time, or at several states at single point in time, we looked at all states over time. Our goal was to extract more information from the data by examining changes that occur over time and changes that occur across states. In econometrics, we call a data set like this a "panel data" set. Panel data sets are superior to traditional longitudinal or cross-sectional data sets not merely because they contain more data, but because they capture information and relationships that are impossible to capture in traditional data sets.

I mention all this to bring to the fore the fact that the two studies we wrote and which I have submitted to the committee, stand apart from the previous literature because they are the only studies to date that use the most advanced data sets and the most advanced analytic techniques that can be brought to bear.

In our first study, we looked at all states and compared the incidence of underage drinking and underage binge drinking across states with different degrees of alcohol control.[7] We found no relationship between alcohol control and underage drinking. For example, among the ten states with the highest rates of underage drinking, seven are license states (i.e., the lowest level of control). But, among the ten states with the lowest rates of underage drinking, six states are license states. We found no statistically significant change in the incidence of underage drinking among the four levels of control. Similarly, we found no difference in the incidence of underage binge drinking among the four levels of control. We also looked at all states over sixteen years and compared DUI fatality rates across states with different degrees of alcohol control. We found that states with the most stringent controls have DUI fatality rates that are significantly greater than in states with less stringent controls.

Our first study used a more comprehensive data set than has been used by previous studies, but employed the same sort of simple cross-state comparison employed in previous studies. In our second study, we looked at forty-nine states over twenty-one years and employed sophisticated panel data analytic techniques.[8] In this study, we looked only at DUI fatalities, but we controlled for differences (across states and across time) in the minimum drinking age, mandatory seat belt laws, BAC limits, zero tolerance laws, keg registration laws, preliminary breath test laws, open container laws, and dram shop laws. After filtering out the effects of these laws on DUI fatality rates, we found that states that controlled alcohol markets experienced higher alcohol-involved fatality rates among the legal age population and the same or higher alcohol-involved fatality rates among the underage population.

In more than twenty years of research, numerous studies have failed to reach a consensus as to what social benefits, if any, people derive from their states controlling alcohol markets. The results of our two studies indicate that state control of alcohol markets does not contribute to improved social outcomes and, disturbingly in the case of DUI fatalities, appears to contribute to reduced social outcomes.

[1] McCarthy, P., 2003. Alcohol-related crashes and alcohol availability in grass-roots communities. Applied Economics, 35: 1331-1338.

[2] Weitzman, E.R., A.Folkman, K.L. Folkman, and H. Wechsler, 2003. The relationship of alcohol outlet density to heavy and frequent drinking and drinking-related problems among college students at eight universities. Health and Place, 9: 1-6.

[3] Trolldal, B., 2005. An investigation of the effect of privatization of retail sales of alcohol on consumption and traffic accidents in Alberta, Canada. Addiction, 100: 662-671.

[4] Miller, T., C. Snowden, J. Brickmayer, and D. Hendrie, 2006. Retail alcohol monopolies, underage drinking, and youth impaired driving deaths. Accident Analysis and Prevention, 38: 1162-1167.

[5] Davies, A., 2010. Review of studies on liquor control and consumption. Commonwealth Foundation.

[6] Davies, A. and J. Pulito, 2010. Binge thinking: A look at the social impact of state liquor controls. Mercatus Center Working Paper, no. 10-70.

[7] Pulito, J. and A. Davies, 2009. Government-run alcohol stores: The social impact of privatization. Commonwealth Foundation Policy Brief, 21(3): 1-16.

[8] Pulito, J and A. Davies, 2010.  State control of alcohol sales as a means of reducing traffic fatalities: A panel analysis. Under review.

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