Why WA’s Liquor Store Expansions will Fail Budget Fix: Putting my research to the test!

During my undergraduate study, I embarked on a year’s worth of research composed of article and data compilation, database modeling, hypothesis testing and then presenting my findings.  My hypothesis happened to be this:

Generally, given an increase in the state regulation of alcohol, alcohol consumption would decrease.

My Results: It was found that, in general, decreases in alcohol consumption was statistically significant given an increase in state regulation, however, the size of the changes in consumption was insignificant, illustrating no economic significance.

During my presentations, I was asked if there was a general trend for all states to move out of monopolistic control regulation and move more towards a private license system.  I said that in general, during budget shortfalls, states may be tempted to loosen their liquor control laws in order to get more revenue from taxes.  More importantly, any new alcohol license that is available for purchase, in general, would yield large, one time sums of money.

So what did the state of Washington decide to do? Open 5 more state stores, sell 10 more licenses for new stores, open seasonal stores, allow stores to sell on Sunday and allow the offering of liquor store gift cards.  (here)  Armed with my findings, let’s asses this!

First, although I wish I compiled it, I didn’t have data for Sunday sales and gift cards (even though available) so I don’t know what impact they will have. (probably none)  Second, Liquor laws are very weird, and the ability to collect accurate and meaningful data, is even harder.  What I do have that can be meaningful, however, is number of liquor licenses.

What I found is that given a particular state, any 1% increase in liquor licenses will yield an inelastic change in consumption .13%.  That is a very small change.  Which makes sense given that liquor is a very inelastic commodity.  To keep it simple, the same could be said about wine as well.   So how much of an increase will there be for liquor licenses? By adding 15 stores you would increase licenses roughly by 5%.    Consumption will change 5 times that of a 1% increase which calculates to .65%.  In 2008, alcohol sales was $825 million.  Increase this by .65% thanks to new licenses and you end up with a $5.4 million increase in consumption making sales $830 million for the next year, assuming sales would remain the same.  If the current growth in alcohol sales continue, a simple trend analysis would yield an estimated $890 million in 2009.  The combination of the two would yield sales of over $895 million.  With a 42% markup,  the change from 2008 to 2009 would yield a profit of $29.4 million.  The change in licenses only gives a profit of $1.3 million.  That doesn’t even take into account their operating budget.     This would be an overestimate considering that the total alcohol sales is comprised of small percentages from beer and wine tax receipts.

So, the conclusion of this analysis? A paltry $1.3 million doesn’t even make a dent in the state’s projected budget deficit of $3.6 billion.   This doesn’t take into consideration the proceeds from new licenses and all the license fees. I should point out that license fees for 2008 was only $11.2 million. With that size, it would hardly make a difference.

The best way WA can put a dent in it’s budget shortfalls would be to shrink the liquor control board substantially (save operational costs) and auction their 350 state licenses off to private contractors.  My mentor, Dr. Andrew Buck, in addition to Dr. Simon Hakim, both Temple University professors, found evidence to support the privatization of Pennsylvania, modeled after West Virginia’s auction of licenses during privatization.

Even though labor is an important component in the politics of liquor control board privatization — and in this economic environment, a heady one — states can be tempted by the fruit that license sales could bare.

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2 responses to “Why WA’s Liquor Store Expansions will Fail Budget Fix: Putting my research to the test!

  1. Pingback: Rumors of several states looking to privatise liquor stores « Pushing Possibilities

  2. Pingback: Taking a Shot at WA’s New Liquor Privatisation Proposition | Pushing Possibilities

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