A Legislator's Guide to Liquor Privatization

LIQUOR

PRIVATIZATION

Three out of five Pennsylvanians agree that the government shouldn’t be in the business of selling alcohol.

a COSTLY CO ighty years ago, baseball was still segregated, Social Security was non-existent and it was illegal to buy alcohol in the United States. Times have changed, and Prohibition has since ended — except for a few holdout states that have failed to evolve their laws to coincide with changing national attitudes towards liquor.

Today, Pennsylvania remains one of only two states in the entire nation (the other Utah) where government wields complete control over all wholesale and retail sales of both wine and spirits. The current system yields a costly conflict of interest.

The Pennsylvania Liquor Control Board is allowed to advertise and encourage liquor consumption while simultaneously being the agency responsible for regulation and education against overdrinking. Not only is this a blatant conflict of interest but the agency has proved it is ineffective at both.

Removing government from selling wine and spirits will allow it to focus on enforcement and education — hopefully allowing it to get it right.

PLCB’s Monopoly Power Hurts Local Wineries

The PLCB created and heavily promoted the wine brand TableLeaf.

The agency spent $7-10 million of our tax dollars on copyrighting, branding, and marketing this single in-house brand. And they have at least seven other government brands featuring more than 30 different products.

Adding insult to injury, Table Leaf is a product of California—the PLCB promotes out-of-state grapes rather than Pennsylvania’s growing wine industry.

The PLCB unfairly competes against Pennsylvania wineries and other private businesses by using tax dollars and monopoly power to push its own in-house products.

Imagine being a local winery owner, knowing your taxes are being used to fund your own competition.

The violation of public trust has launched external and internal ethics investigations for numerous violations and disastrous decisions by executive staff that has cost taxpayers millions. n

Did you know that the heavily promoted wine brand TableLeaf was created by the PLCB?

ONFLICT of INTEREST Tasteless Ad Campaign Portrays Out of Touch PLCB he PLCB’s infamously graphic “She couldn’t say no” sobriety ad campaign—that implied intoxicated rape victims were partly to blame for their own rape— brought national and international attention, and met with shock and ridicule as far away as the UK Daily Mail.

The PLCB spent tax dollars for tone-deaf “dangers of drinking” ads, including one that seemingly blamed women who get raped for their own victimization, and this very same government entity designs and spends our money on advertising campaigns to encourage alcohol consumption. One PLCB Web site says binge drinking leads to impaired decisions and potential rape, the other has a recipe for a cocktail called “Wake-up Whipped,” featuring PLCB selected spirits.

There should be no doubt then that the PLCB enforcement of alcohol regulation and simultaneous promotion of its consumption is an inherent conflict of interest that prevents it from effectively protecting and serving the public.

The date rape scenario ad was pulled from the PLCB Web site after a massive outcry from women and men across the commonwealth, but the damage has already been done. Like the failed wine kiosk program, the inventory system fiasco, and the massive revenue lost

to border bleed—discussed further in this report—the PLCB has failed to understand the market in which

it operates, wasting millions of tax dollars in the process. n

CONSUMERS CH More than 60 percent of Pennsylvania residents support getting government out of the booze business.

HOWA RD DE A N

E D RE DN DE L L

he most comprehensive statewide liquor store privatization poll was conducted by FM3, a nationally-renown pollster whose previous clients include Gov. Ed Rendell and Howard Dean.

The poll found more than 3 out of 5 Pennsylvania voters support privatizing the 80-year-old state store system, with more than 41 percent strongly favoring the measure. Support transcended county borders, party lines, and other demographic factors.

The more often one uses the cur-

rent state store system, the more they support privatization. Poll results show that 77 percent of weekly

PLCB customers want government out of the booze business. n

Public Opinion of Liquor Privatization A strong majority of Pennsylvanians favor ending the government sale of wine and spirits according to a comprehensive poll conducted by Fairbank, Maslin, Maullin, Metz & Associates (FM3). From January 22-27, 2013, FM3 polled 800 randomly-selected Pennsylvania registered voters. The margin of error for statewide results is 3.5%.

Who Supports Privatization?

REPUBLICANS, DEMOCRATS AND INDEPENDENTS

UNION HOUSEHOLDS

PARTY

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

UNION HOUSEHOLDS

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

REPUBLICAN

69%

26%

5%

MEMBER

52%

43%

5%

INDEPENDENT

71%

25%

4%

HOUSEHOLD

58%

38%

4%

DEMOCRAT

52%

43%

4%

NON-HOUSEHOLD

61%

33%

5%

HOOSE CONVENIENCE PLCB CUSTOMERS

EVERY MEDIA MARKET

PURCHASE FREQUENCY

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

MEDIA MARKET

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

WEEKLY

77%

22%

1%

61%

33%

6%

MONTHLY

71%

24%

5%

HARRISBURG -YORK

FEW TIMES /YEARLY

66%

29%

4%

JOHNSTOWN -ALTOONA

70%

29%

1%

LESS OFTEN

52%

45%

3%

PHILADELPHIA

59%

35%

6%

NEVER

35%

58%

7%

PITTSBURGH

61%

35%

3%

WILKES-BARRE -SCRANTON

62%

37%

1%

LEHIGH VALLEY

53%

41%

6%

EDUCATED VOTERS

EDUCATION

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

HIGH SCHOOL OR LESS

56%

38%

6%

LIBERALS, MODERATES & CONSERVATIVES

EDUCATION

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

SOME COLLEGE

51%

44%

4%

COLLEGE GRAD.

70%

25%

5%

LIBERAL

60%

36%

4%

POST-GRAD

66%

30%

4%

MODERATE

61%

36%

3%

CONSERVATIVE

61%

33%

6%

Why do they support?

(Open-ended) • 33%: Less government regulation • 29%: Convenience/buy in supermarkets • 17%: Keep up with other states/works in other states • 15%: Competition/better prices/free market

What else did we learn?

• After all arguments pro & con were presented, support was higher than at the start.

• Most voters said arguments in favor of “modernization” (often presented as an alternative to privatization) were not convincing.

• Voters were somewhat more likely to vote for lawmakers who support privatization plan.

EVERYONE OUTSIDE OF PHILADELPHIA

REGION

TOTAL FAVOR

TOTAL OPPOSE

DON’T KNOW

ALLEGHENY

69%

28%

3%

SOUTHWEST

54%

42%

4%

PHILADELPHIA COUNTY

46%

50%

4%

OUTER PHILADELPHIA

66%

29%

5%

NORTHEAST

59%

35%

7%

THE T

62%

33%

4%

COMMO MYTH #1

Did You Know?

At least the PLCB makes money for the state. It’s reliable revenue for critical state and local needs.

A 2010 study commissioned by the Wine and Spirits Wholesalers of America found that 23.6 percent of the wine purchased by consumers in Pennsylvania comes from out of state, resulting in the loss of $17.3 million in excise taxes.

The PLCB wants you to believe that without them, revenue dries up. Truth is: more than 80 percent of the PLCB’s $500 million in “profits” is generated from taxes. Privately-owned liquor stores would produce the same revenue or more, as private companies pay additional taxes and licensing fees to the state.

The agency has been running deficits for years. The agency ended the 2012 fiscal year with negative $9.8 million in net assets. These losses are due in no small part to years of mismanagement, including wine kiosk failures, government-branded wine labels, and inventory systems that couldn’t count correctly.

While the PLCB does transfer around $500 million annually to the state treasury, more than 80 percent of that money comes from taxes, the same taxes privately owned liquor stores would collect. In fact, privatization could increase tax revenue by unleashing entrepreneurs’ creativity to improve sales and recapture the sales and taxes lost to border bleed. Plus, private business would pay the state corporate income tax, sales tax on their (taxable) purchases, and other taxes that the state stores don’t pay.

Pennsylvania loses tens of millions of dollars annually in liquor sales and tax revenue because residents willingly break the law and cross the border to buy alcohol in other states. Ending the government monopoly will generate more revenue in Pennsylvania by ending the need for residents to cross state lines to get the price and selection they want.

MYTH #2 Shoppers aren’t crossing the borders to buy their booze in other states.

A survey conducted for the PLCB showed that 45 percent of residents in Philadelphia and its surrounding counties purchase some or all of their alcohol outside of

Pennsylvania. The PLCB’s own numbers showed that consumers purchased approximately a quarter of their wine and spirits in other states. This border bleed equals more than $180 million in lost sales, and more than $40 million in lost state tax revenue annually from just a handful of counties.

And the PLCB isn’t the only group admitting that border bleed exists in Pennsylvania. The Public Financial Management (PFM) report highlights other similar findings: • A 2010 study commissioned by the Wine and Spirits Wholesalers of America found that 23.6 percent of the wine purchased by consumers in Pennsylvania comes from out of state, resulting in the loss of $17.3 million in excise taxes.

• A 2011 analysis by the Distilled Spirits Council of the United States (DISCUS) estimated that cross bor-

ON LIQUOR MYTHS Did You Know?

A 2004 study prepared for the Pennsylvania Food Merchants Association determined that 29.4 percent of the Commonwealth’s consumption of wine comes from cross border sales, as well as 20.8 percent of distilled spirits. der purchases by Pennsylvania residents total over 900,000 cases of spirits and over two million cases of wine, about 16.5 percent of total sales representing approximately $313 million in retail revenue.

• A 2004 study prepared for the Pennsylvania Food Merchants Association determined that 29.4 percent of the Commonwealth’s consumption of wine comes from cross border sales, as well as 20.8 percent of distilled spirits.

MYTH #3 Privatization failed in other states. Washington State consumers pay significantly higher prices with less selection.

Prices in Washington increased because of new taxes, not privatization. Intending to raise state revenue, the ballot measure created a new 17 percent retail license fee for all spirit sales revenue with an annual retail license renewal fee of $166, plus a new distributor license fee of 10 percent of yearly revenue (which would drop after three years) with a yearly renewal fee of $1,320 per distributor license. And if these taxes and fees do not generate enough revenue for the government in 2013, distributors would have to pay another one-time fee.

These new taxes and fees are being passed on to consumers in the form of higher prices, which only proves the point that businesses don’t pay taxes, only people pay taxes. The liquor privatization bill passed by the Pennsylvania House kept liquor taxes unchanged to re-

main revenue neutral.

Washington’s liquor tax revenue increased after privatization. The state collected more than $185 million in spirit taxes so far this fiscal year (through March 10), an increase of 12 percent over the prior year total when the state government still controlled liquor stores.

For the year to date, revenue totals exceeded expectations by nearly 5 percent.

MYTH #4 Washington State residents flock to border states for their liquor after privatization.

Liquor sales are up in Washington. According to the Clark County Columbian, “In the first four months of private liquor sales, Washington consumers bought 7.9 percent more booze for total sales of $263 million, up 23 percent from $214 million during the same period last year.” And that trend has continued. Liters of liquor sold through January 2013 are 4 percent higher than at this point in 2012. Despite the higher taxes, consumers are realizing the benefits of competition and convenience.

The West Seattle Herald compared crime statistics in two areas before and after privatization. It may be too early to draw conclusions, but they found that alcoholrelated crimes were down after privatization.

MYTH #5 Privatizing the state stores will eliminate thousands of family-sustaining jobs.

Ending the state-run monopoly will create thousands of additional jobs across the state and unleash millions of dollars in new business investment. The plan allows beer distributors to expand their already safe and reliable businesses, creates hundreds of new wine and liquor outlets, and enables grocery stores to expand to sell wine and beer to meet the needs of consumers. The current proposal to get government out of the booze business also provides benefits for current PLCB employees such as training and education grants, tax credits for businesses to hire displaced workers, and a civil service hiring preference.

MYTH #6 A state-run system keeps Pennsylvania safer.

State government’s liquor monopoly does not make citizens more sober or safer. Despite the highest level of government control in the nation, Pennsylvania ranks higher than the national average in rates of underage drinking, underage binge drinking and overall binge drinking. The commonwealth also ranks higher than most bordering states in alcoholrelated traffic fatalities and total alcohol-related deaths per capita.

Often the Center for Disease Control’s independent “Task Force” study is used as a red herring against privatization. But let’s

Did You Know?

PLCB’s wholesale monopoly can’t serve current, much less expanded, retail outlets. The PLCB has continually proven itself inadequate to the task of meeting the retail needs of restaurants and taverns. examine the facts. First, the Task Force does not represent the CDC’s official position. Second, the Task Force reviewed 21 studies with more than 30 year old sales data, some of which found increased consumption following privatization; others found no change or decreases. Finally, the Task Force’s synopsis ignores the fact that none of the studies show liquor store privatization has an effect on underage drinking or DUI fatalities.

Government statistics show no difference between states with government-run alcohol monopolies and those licensing private retailers. See for yourself! Using government data, the site below allows you to compare social outcomes for states that control their alcohol sales to states that don’t.

The Commonwealth Foundation uses the Center for Disease Control’s alcohol-attributable deaths statistics, which can be found on the CDC’s Alcohol-Related Disease Impact portal. Proponents of Pennsylvania’s government-run liquor stores use alcohol-induced deaths, which is a narrower and less comprehensive look at the statistics.

• Pennsylvania ranks higher than 5 of 6 border states, and near the U.S. average, in alcohol-attributable

deaths per 100,000 residents.

• The commonwealth has more alcohol-related traffic fatalities per 100,000 residents than 4 of 6 border states (slightly higher than the U.S. average).

• Pennsylvania ranks higher than 5 of 6 border states in the percentage of traffic fatalities related to alcohol use, at 33 percent, slightly higher than the U.S. average.

• Mothers Against Drunk Driving ranks Pennsylvania 35th in DUI safety, worse than all bordering states but Delaware.

• A survey by the U.S. Department of Health and Human Services ranks Pennsylvania higher than the national average in underage drinking, binge drinking, and underage binge drinking.

Did you know that the Pennsylvania State Police do not perform sting operations in PLCB stores as they do in privately owned bars and restaurants?

The state allows the PLCB to monitor its own businesses— an inspection exemption that couldn’t happen in a free market.

MYTH #7 Getting the government out of the wholesale business is unnecessary.

Wholesale competition is needed to deliver better selection and lower prices. Getting government out of the wholesale business is foundational to any real privatization plan. Maintaining the PLCB’s monopoly of the whole-sale function of selling wine and spirits will limit

the selections and competitive pricing available to purveyors and consumers. Creating a competitive wholesale system—whereby restaurants, bars, taverns, and other retail outlets have competitive wine and spirits choices—is critical for a functioning retail marketplace.

PLCB’s wholesale monopoly can’t serve current, much less expanded, retail outlets. The PLCB has continually proven itself inadequate to the task of meeting the retail needs of restaurants and taverns. As Rep. Kurt Masser explained the PLCB’s ordering process: “I get my meat delivered to my restaurant. I get my produce delivered to my restaurant. I get my beer delivered to my restaurant. I have to go pick up my liquor order. I can’t get it delivered.

And if the liquor order is wrong, I have to take it back to the store and redo it.” A competitive wholesale system will better serve Pennsylvania’s small businesses.

Wholesale privatization shifts the risk off taxpayers and consumers.

When the PLCB makes a mistake, such as the $66 million “state of the art” inventory system—which failed to allocate adequate product levels, causing widespread shortages, massive hoarding by store managers and, later, to over-ordering—it is the taxpayers and retailers who have to pay. If a private wholesaler makes such a mistake, those losses cannot be shifted to either consumers or taxpayers because a competitive wholesale system will not allow it. This forces the wholesaler to pay for his own blunder.

Moreover, the wholesale monopoly has allowed bureaucrats to jetset on taxpayers’ dime. From 20072011, 14 PLCB employees visited exotic destinations such as Paris, Dubai, New Zealand, Catalonia, Barcelona, Lisbon and Argentina, often at taxpayer cost. The rest was paid by foreign governments and corporations hoping to have their

products sold to a captive audience. The PLCB outfitted a $35,000 wine tasting room, dubbed “the wine shrine,” complete with leather chairs, sofas and big-screen TVs to “educate palates” of Pennsylvania consumers.

Wholesale privatization would end the PLCB’s conflict of interest: The PLCB is like an arsonist teaching fire prevention. On the one hand, the PLCB is marketing and advertising to increase alcohol consumption, while on the other hand it is tasked with regulating and policing it. Getting the government out of the booze business— and focused solely on the regulation of the industry—is critical for ending the conflict of interest inherent in the PLCB’s current role as both the purveyor and regulator of alcohol.

MYTH #8 The PLCB is already modernizing to meet consumers’ needs.

Monopolies can’t provide the true convenience that’s derived from a fair and competitive market. Take, for example, the infamous wine kiosk program, begun in 2009. It offered the opportunity to buy wine out of vending machines placed in grocery stores. Purchasers were required to blow into a public Breathalyzer and stare into a camera to verify their sobriety and identity.

Not recognizing this as convenience, Pennsylvanians chose not to participate.

After horrid sales, customer complaints and frequent breakdowns that sparked an Auditor General investigation, grocery giants Wegmans and Wal-Mart pulled the plug.

The kiosk debacle should never have happened. The PLCB ig-

nored advisors who warned that the kiosks were “deficient,” not “user-friendly” and the company that made them lacked a “coherent business plan.” Of course, the Board approved the program anyway, granting the contract to a company with no proven track record.

That company then defaulted on a $1 million payment to the state in 2011—an issue still being litigated in 2013.

MYTH #9 Cronyism is a remnant of the past.

From creating high-paid positions (CEO Joe Conti made $156,000 annually, more than a senator’s salary), to awarding an “employee charm school” contract of more than $173,000 to the husband of a high-ranking PLCB official, the PLCB embodies government cronyism.

Why was the failed kiosk contract granted anyway? Editorial boards across the state have wondered if the $400,000 donated to former Gov. Ed Rendell’s campaign by kiosk company investors may have tipped the scales.

Accepting gifts and favors from vendors as a PLCB official is considered unethical (if not criminal) behavior. State inspectors say CEO Joe Conti and at least two others accepted free wine (no surprise) and sporting event tickets. Thankfully, Joe Conti retired earlier this year, right?

Not quite! Joe Conti is back on an “emergency” basis at the bargain price of $80 an hour. And he is eligible to collect pension payments at the same time!

Getting government out of the

MORE THAN OF PENNSYLVANIANS SUPPORT LIQUOR PRIVATIZATION

WAS DONATED TO FORMER GOVERNOR ED RENDELL’S CAMPAIGN BY THE COMPANY BEHIND THE FAILED ALCOHOL KIOSK FIASCO. booze business would eliminate conflicts of interest, stop government from freezing out Pennsylvania wineries, reduce opportunities for cronyism, eliminate taxpayerfunded boondoggles and allow the

PLCB to focus on its mission as a regulatory agency. Privatization means ending the government monopoly over both wholesale and retail operations and returning to a free market. n

PRIVATIZATION PRINCIPLES ore than 60% of Pennsylvania voters support a liquor store privatization plan similar to Gov. Corbett’s proposal, according to recent statewide polling.

Despite vigorous opposition from the United Food and Commercial Workers union, a majority of union members favor selling the system to private owners. In fact, the more consumers use the state stores the more they want to do away with it.

While the proposal will change throughout the legislative process,

end the system in which state-run liquor stores, with all their advantages and taxpayer subsidies, compete against private mom & pop businesses.

ization 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 2013.

• 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 fias-

• 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 popu-

privatization efforts should not be diluted into “modernization,” which preserves the inefficient and wasteful Prohibition-era liquor system. Here are five principles that should help guide the discussion.

coes such as the failed wine kiosk program, undermining Pennsylvania wineries, consumers, and taxpayers alike.

lation, 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. n

• Government should permanently and unequivocally get out of the business of selling alcohol and

• 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. Modern-

For more on Liquor Privatization, visit www.BoozeFacts.com The Commonwealth Foundation crafts free-market policies, convinces Pennsylvanians of their benefits, and counters attacks on liberty.

COMMONWEALTH FOUNDATION for PUBLIC POLICY ALTERNATIVES 225 State Street, Suite 302 | Harrisburg, PA 17101 | Phone: 717.671.1901 | Fax: 717.671.1905 Info@CommonwealthFoundation.org | CommonwealthFoundation.org