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.

Rumors of several states looking to privatise liquor stores

From Stateline.org:

Eyeing the potential for saving money, officials in North Carolina, Virginia and Washington are considering eliminating state-run liquor stores, turning over the sale of booze to the private sector. Nineteen states control their liquor sales.

Republican Robert McDonnell, who will be sworn in as Virginia’s governor on Saturday (Jan. 16), made privatization of the state’s 300 liquor stores a central theme of his winning campaign last fall. He said it would raise about $500 million in one-time money for transportation, but critics say it will never pass the General Assembly because the state would have to give up about $100 million a year in revenue that helps pay for public schools, human services, prisons and other services.

Washington lawmakers held a hearing Thursday (Jan. 14) on a bipartisan bill privatizing liquor sales. Scrapping the current system would cost the state $322 million a year, but the money would be recouped through taxes collected from the privately-run liquor stores. “Is it a core function of the state to be selling alcohol? I don’t think so,” Washington state auditor Brian Sonntag told KING 5 news. Sonntag issued a report in December saying Washington could increase revenue from liquor sales by up to $350 million over five years with a privately operated system.

In North Carolina, privatization is as much a matter of accountability as it is a fiscal issue. Gov. Beverly Perdue (D) named a budget reform panel to examine the state-run liquor system after ordering North Carolina’s 163 local Alcoholic Beverage Control boards to go along with a ban on gifts and other ethics rules she imposed on other state agencies, according to the Charlotte Observer. Of the 19 states that control their liquor sales, North Carolina is the only one with local boards instead of a single state board.

Pennsylvania lawmakers considered privatizing the 619 state-owned liquor stores in 2008, but the legislation never came up for a vote.

It is silly to chase rumors, but it would be a great step in the right direction if more states decided to sell off liquor licenses. Without going into detail, I have made comments before about this particular topic and on what WA should do. (here) It is interesting to see that WA before only wanted to increase licenses as a budget fix and now they are contending full blown privatization.  I hope I had something to do with that.

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.