Government-Run Liquor Stores: The Social Impact of Privatization

Executive Summary

A proposal that has circulated in Harrisburg for years is divesting, selling, or privatizing Pennsylvania’s state-owned liquor stores.  This discussion is particularly relevant today given the recent drop in Pennsylvania tax collections and long-term taxpayer obligations. Geoffrey Segal and Geoffrey Underwood of the Reason Foundation estimate that Pennsylvania could raise $1.7 billion from the sale of its wholesale and retail liquor stores. While such a sale would represent only a one-time cash inflow, Nathan Benefield of the Commonwealth Foundation estimates that Pennsylvania would continue to take in close to $350 million annually in alcohol sales tax.

What gives many pause is the social impact of privatization. Myriad comparisons of privatized markets to state-controlled markets suggest that there are unquestionable advantages to privatization. Of concern are the possible disadvantages. Liquor control proponents maintain that, because the state can directly limit the times and locations at which alcohol can be purchased, and because state stores are not profit driven like private firms, privatization would result in increased alcohol consumption and problems associated with alcohol consumption, such as impaired driving.

A comparison of states with varying degrees of privatization in the retail and wholesale markets for alcohol over the period 1970 through 2006 suggests that privatization is associated neither with increased alcohol consumption nor increased traffic fatalities involving impaired drivers.

• States that recently privatized their liquor industries experienced a significant decline in per-capita alcohol consumption.
• While not conclusive, we find evidence that is consistent with the existence of a cross-border effect wherein liquor control encourages Pennsylvanians to purchase in neighboring privatized states.
• While states that have liquor controls experience somewhat lower consumption of alcohol, we find no evidence that the degree of control matters. Among privatized (license) states and states with varying degrees of control, states with controls on wholesale markets only had the lowest consumption rates.
• States that have liquor controls experience significantly higher DUI-related fatality rates than states without controls.
• Adjusting for DUI enforcement, states with the highest degree of liquor control exhibited the same alcohol-related driving deaths as did license states. States with lesser controls exhibited significantly fewer DUI-adjusted deaths.
• Evidence shows there is no significant reduction in underage drinking among control states versus license states. Pennsylvania (a full control state) ranks 22^nd among the 48 states in the sample for incidence of underage drinking.

Examples at the state and federal levels demonstrate that government is not good at running industries. Repeatedly, the private sector shows that it can provide higher quality goods and services at lower costs. However, arguments might be made for state control as a means of achieving some desired social outcome. In Pennsylvania’s case, advocates claim that the social goals of reducing alcohol consumption, underage drinking, and alcohol-related traffic deaths justify controlling wholesale and retail alcohol markets.

Evidence from 48 states over time shows no link between market controls and these social goals.  Divestiture of Pennsylvania’s state liquor stores would represent a financial windfall to the state, while posing no threat to public safety, as it would not result in the social ills many opponents of privatization fear.

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Mr. John Pulito is a Commonwealth Foundation Research Fellow at the Department of Economics and Quantitative Science at Duquesne University. Dr. Antony Davies ([email protected]) is Associate Professor of Economics at Duquesne University and adjunct scholar with the Commonwealth Foundation.

The Commonwealth Foundation(www.CommonwealthFoundation.org) is an independent, non-profit research and educational institute based in Harrisburg, PA.