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Reason Foundation

Annual Privatization Report 2013

State Liquor Privatization Update

Subsection of Annual Privatization Report 2013: State Government Privatization

Leonard Gilroy
April 22, 2013

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On June 1, 2012, Washington State became the first state since the end of Prohibition in 1933 to dissolve its state-run monopoly on the distribution and sale of distilled spirits, the result of a ballot measure approved by voters in 2011—Initiative 1183 (I-1183)—that shifted the state’s wholesale and retail spirits enterprises from public to private sector operation (For more details on I-1183, see Reason Foundation’s Annual Privatization Report 2011.)

Under I-1183, the state divested its 328 retail outlets and issued licenses for spirits sales at approximately 1,500 stores statewide, primarily stores larger than 10,000 square feet that include grocery stores, drugstores, alcohol retail chains and more. Major retailers now selling spirits alongside beer and wine after privatization include Costco, Target, WalMart, BevMo!, Total Wine and More, Safeway and Albertsons.

The transition to privatized spirits sales has largely been smooth, but has come with an increased volatility in spirits prices attributed to new liquor taxes imposed by I-1183, creating an initial “sticker shock” among consumers. In December 2012, the Washington State Department of Revenue estimated that the average retail price per liter of spirits had risen by 11.6 percent after privatization, from $21.58 in September 2011 (prior to I-1183 implementation) to $24.09 in September 2012. The rise, which has leveled off since an initial spike with the onset of privatization in June, is attributed to tax increases contained in I-1183, which retained the state’s previous sales and per-liter taxes on spirits but added new fees—primarily a 17 percent fee on retail sales and a two-year, 10 percent fee on wholesalers—to replace the state’s previous 52 percent wholesale markup, which was eliminated under I-1183.

The ballot measure also authorized the state’s liquor control board to issue an additional, one-time fee on wholesalers in 2013 if the total revenues collected under the new 10 percent fee have not generated a total of $150 million by the end of March 2013, prompting some observers to speculate that spirits wholesalers have padded their prices to mitigate the potential risk of a one-time payout to the state. In 2014, the 10 percent wholesaler fee is set to drop to 5 percent, which, along with increasing market competition, is expected by state officials to yield lower spirits prices over time.

Despite media reports noting a spike in spirits sales in bordering counties in Oregon due to the higher prices in Washington State, in-state sales have not suffered in Washington under privatization. The Washington State Department of Revenue reported in December 2012 that spirits sales by volume were 3.1 percent higher during the first five months of privatization than they were the previous year, rising from 16.3 million liters sold from June through October 2011 to over 16.8 million liters sold those same months in 2012.1 Similarly, the total value of spirits sold in the state totaled $389 million over the first five months of privatization, up 16 percent from the same five-month period in 2011. The Department also reported higher than anticipated tax revenues after privatization; actual spirits taxes collected between July and December totaled $111.3 million, over $4 million higher than the agency’s original forecast and nearly 13 percent higher than the $98.6 million collected during the same period in 2011. Overall, the data suggest that Washington State consumers are looking beyond price and have embraced the newfound convenience of privatized spirits sales.

Beyond the economic impacts of privatization, it is too early to assess the social impacts of liquor privatization in Washington State, as comprehensive data on underage drinking, drunk driving and alcohol-related fatalities are not yet available. However, a November 2012 report in the West Seattle Herald examined crime data in two Seattle-area suburbs and found that while alcohol thefts have risen since privatization—likely due to the dramatic expansion in the number of retail spirits outlets and a local plastic bag ban that encourages customers to shop using their own bags—incidences of other alcohol-related crimes (e.g., DUIs, public drunkenness and underage drinking) had actually decreased between June and September 2012, relative to the same period in 2011.2

State officials will continue to suffer some growing pains in 2013 as they face two separate lawsuits related to I-1183, neither involving the substance of the law itself, but rather the state’s implementation of the law:

Despite the early challenges, it is clear that a competitive marketplace is taking hold in Washington State after many decades under a state-run spirits monopoly. Robust competition is starting to take place among national retail chains, which tend to focus on offering few brands at more competitive prices (due to volume purchasing), while smaller specialty spirits retailers are emerging to offer competition through more variety in product mixes and greater attention to customer service and offering a high-quality retail experience.3 Perhaps more importantly, the fears promulgated by privatization opponents—primarily over the potential declines in state liquor revenues and significant negative effects on public health and safety—have not materialized.

With the implementation of I-1183, Washington State joined the 32 other states that have allowed private firms to distribute and sell distilled spirits since the repeal of Prohibition in 1933. Since that time, all major shifts in state alcohol systems have moved in a one-way direction toward privatization; no state has ever shifted from a private regime to a state-run liquor monopoly. Of the 17 remaining “control” states that retain a government-run monopoly on the sale and/or distribution of distilled spirits, Iowa and West Virginia privatized their spirits retail monopoly in recent decades (while retaining their in-house wholesale operation), and Maine has outsourced the operation of its wholesale monopoly to a private manager.

Though Washington State saw the first major liquor privatization effort in recent years, policymakers and stakeholders in several other states continue to explore the possibility of further privatization. Other noteworthy developments on liquor privatization in 2012 include:

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Endnotes

1 The Washington State Department of Revenue provides data on monthly spirits taxes and sales on its website at http://www.dor.wa.gov/.

2 Ty Swenson, “Privatization and plastic bag ban factor into liquor theft spike,” West Seattle Herald, November 9, 2012.

3 Tom Sowa, “Booze competition likely to intensify,” The Spokesman-Review, December 23, 2012.

4 Kari Andren, “Despite vow, governor faces same battles on LCB privatization,” Pittsburgh Tribune-Review, December 6, 2012.

5 Angela Couloumbis, “Inquirer Poll finds wide backing for privatizing liquor sales,” Philadelphia Inquirer, November 1, 2012.

6 Carolyn Shapiro, “Total Wine opens new store, pushes for privatization,” The Virginian-Pilot, July 22, 2012.

7 Jeff Smith, “McCrory says privatizing liquor sales is not a priority,” WSOC TV, October 23, 2012.

8 Mary Sell, “Not as easy as ABC. Debate about state-run liquor stores returning,” Decatur Daily, October 14, 2012.

9 “New chief of Alabama Alcoholic Beverage Control Board opposes privatization of liquor sales,” Associated Press, February 16, 2011.

10 Harry Esteve, “Grocers tell Oregon lawmakers: Update liquor laws or face initiative,” The Oregonian, September 13, 2012.

11 Eric D. Dixon, “Supporters of liquor privatization look forward to 2013 legislative session,” Idaho Reporter, July 9, 2012.


Leonard Gilroy is Director of Government Reform


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