Taking a Shot at WA’s New Liquor Privatisation Proposition

Had the pleasure to find this in my reader today: (here)

State and local governments stand to lose hundreds of millions of dollars if voters pass either of two initiatives on the November ballot putting Washington state out of the liquor business, according to analyses by the state’s Office of Financial Management (OFM).

The reports, released on Wednesday, paint a far different picture from most of the scenarios analyzed in a state auditor’s report earlier this year, which predicted revenue boosts if the liquor business were privatized.

The OFM reports also conclude that consumption of hard liquor would go up.

Initiative 1100, which is backed by Costco Wholesale and other large retailers, would reduce state and local revenues by up to $277 million over the next five years, OFM said.

Initiative 1105, which is funded by large distributors, would decrease revenues by as much as $730 million — a bigger bite because that proposal also would eliminate the state’s liquor tax.

Backers of both initiatives say the state Legislature could raise taxes to make up for any deficit. Initiative 1105 recommends a new, simplified liquor tax that — along with other aspects of the measure — it says would increase revenue by $100 million beyond what the liquor board now projects.

The OFM reports conclude both measures would increase liquor sales in Washington by 5 percent, based on sales growth experienced in Alberta, after the Canadian province privatized its liquor stores.

Liquor sales would increase partly because the number of sales outlets would multiply as grocery and convenience stores that currently sell only beer and wine put liquor on their shelves. Both the state auditor and the new OFM reports estimate that 3,357 outlets would sell liquor, compared to 315 liquor stores now.

Given my research on this,  I feel I must comment.

  • Eliminating taxes would be a bad idea, as liquor taxes can be a boon to state coffers helping to fund many state programs and alleviate damages caused by drinking.  The benefits outweigh the costs on this one.
  • The demand for liquor is inelastic, meaning the state has more flexibility in keeping taxes and revenues high.  Moreover, the tax burden would be placed more on the consumer.  Any drastic drops in the tax rates for liquor won’t increase liquor demand by much (I calculated around .5% drop in consumption for ever 1% drop in the price relative to the tax rate) and the same in reverse, increasing taxes won’t do much to decrease the amount of liquor bought.
  • The OFM is underestimating the increase in revenues that will happen when the number of outlets selling liquor will increase by 965%. One thing I found with my research is that liquor licenses have a very strong positive correlation with liquor consumption.  So, the increased availability will increase sales.  By how much? While it is still an inelastic change, (b=+.187) a 965% change in liquor outlets will actually yield an increase in consumption of 1.8%.  Alcohol sales in 2008 was $825 million.  A 1.80% increase in consumption would translate into an increase in sales by $14 million.  Combined with anticipated sales growth from recent trends, liquor sales would increase by $85 million dollars for 2009.
  • While the change in consumption is underestimated, it isn’t a large share for revenue.  With a 965% increase in licenses  to sell liquor, WA should auction them off.  It provided West Virgina with realized revenues of 38.7% of net sales in the auction as evidenced in this paper.
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