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Thursday, September 13, 2012

Regulating Liquor: Axing the Government Liquor Store

Part three in The Oregonian's series on Oregon's liquor laws comes just at the moment we learn a little more about what's happening in Washington state, which ended the practice of government-run liquor stores.  The effect?
Liquor sales in Washington are up – way up. That’s according to new figures out Monday on the period after the state’s new privatization law took effect. They show July’s retail sales increased 21 percent over the previous year. And that’s despite higher prices on spirits.
Graphic: Wall Street Journal.
What has been surprising is that, along with the spike in consumption (not surprising--the old "control" model was engineered to suppress availability) Washington has also seen a spike in prices.  That's because, along with privatizing liquor stores, the state also jacked up taxes:
Even before privatization, Washington had some of the nation's highest liquor taxes and fees, at $26.70 a gallon. The national average is $7.02 a gallon, said the Tax Foundation, a research group. Washington state's levies included government stores' 52% markup, a 21% liquor sales tax and a $3.77-per-liter excise tax.

And while those sales and excise taxes remain under privatization, new fees further raised prices: Liquor distributors must pay an additional 10% levy, and retailers another 17%. Distributors also are on the hook for any shortfall to the state if they don't generate $150 million from the 10% fee by April.  (Wall Street Journal)
Washington knew that increasing the points of sale from 328 to 1500 stores would increase sales.  Both to try to put a cap on how much booze people bought and to raise revenues, the state's new taxes will blunt demand (or, as that Wall Street Journal article documents, drive customers to Oregon).  There were other consequences, some intended, some not.

The interests who forwarded Washington's law were big-box retailers led by Costco.  Distributors were the big losers in Washington's law, which allows Costco and other retailers to buy directly from distillers.  But small retailers, who are barred from selling liquor (Costco wrote the law so only stores of 10,000 square feet could sell liquor) were also losers.  Small distillers and vintners may also be losers--big retailers can now use their might to drive volume discounts, which hurt smaller companies that have less pricing flexibility.  There may be other consequences, too, like a further shift away from bars to home consumption, which would make publicans losers as well.

In one jarring move, Washington dramatically shifted the business of booze in Washington.  Voters had a lot of assumptions about what the law would do: they thought it would make booze more accessible--but not too accessible; they thought it would be good for family wineries and restaurants, that it would lower liquor prices, improve crime prevention, and raise new revenues for public services.  The early record is mixed, but it's clear things aren't playing out exactly the way voters intended.

Oregon leads the nation in artisanal beer, wine, and spirits.  We have an archaic liquor control model that has a contradictory mission--selling booze on the one hand while trying to control it on the other.  And we also have lots of big players who stand to make--or lose--a lot of money based on how the laws are structured.  I'd like to see Oregon tune-up the OLCC and potentially get out of the business of selling booze.  On the other hand, it was from within the current environment that our artisanal culture emerged and flourished.  Looking north to Washington, I wonder how small distilleries and wineries will manage.  The key is balancing the interest of producers with retailers (big and little, grocery store and bar).  No wonder no one has managed a complete overhaul in 78 years--it's complex, confusing business.

Your thoughts?

3 comments:

Anonymous said...

Costco wrote the initiative, and wrote in the new distributor and retailer taxes. The state didn't raise taxes, the initiative did.
The initiative also put distributors on the hook for a $150 million fee after two years if the taxes don't bring in enough revenue, so the distributors are banking dollars to handle this potential liability.
Now Costco has sued the state wanting relaxed restrictions on retailer to retailer booze sales. Basically they want to act like a distributor w/o holding a distributor license and being potentially liable for this $150 million payment. Costco wants it all because they are Costco. It wasn't about convenience, it certainly isn't about choice, it's all about how can Costco gain the most?
WA state voters (I am one who voted No) were sold a bill of goods and they bought it.

Smart Consumer said...

It appears Oregon's State Controlled liquor philosophy is shared with some rather podunky states. Pretty sad that we have to share that embarrassment.

The excise-tax shows the states stranglehold to rake in cash from their easy cash cows.

How much longer shall we stand by and watch these atrocities? :-)

Anonymous said...

Beyond its financial support, I suspect that Costco's reputation played a significant role in getting support from Washington voters. James Sinegal, who co-founded Costco and was its CEO until the beginning of this year, maintained an unusual emphasis on consumer and employee satisfaction over shareholder satisfaction, something Wall Street was particularly critical of during the late 1990s/early 2000s. So to find out that prices have not fallen has got to disappoint Washington consumers. Assuming the recent change in leadership at Costco plans to follow in Sinegal's footsteps, I'd expect them to lead an effort to change the laws again to get a result more to the consumer's liking. It would be surprising to see a similar initiative on the Oregon ballot until the Washington law is amended.

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