Wednesday, September 5, 2012

Another Take on Washington Liquor Privatization

When I read Nick Frame's article yesterday on this site, I had a couple of immediate guesses as to why privatization of alcohol distribution would have failed in Washington.  My first guess was that the state had somehow substituted a state-enforced private monopoly for the public monopoly on liquor stores, thereby missing any opportunity to let market forces reign.  Such a mistake would not be surprising in the liquor business, as even states with supposedly free markets still enforce crony arrangements with large distributors that give them a virtual protected monopoly over wholesaling in the state.

However, when I clicked through to the article that Frame linked, I was surprised to find this:
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.
I understand that many folks are inherently skeptical about privatization, but we need to be a little fair here.  I think editing this out of the excerpt really changes the meaning of the report.

It seems a real stretch to try to blame a 17% rise in liquor prices on "privatization" when at the same time government fees on sellers went up by something like 22% of the final price of the liquor  (17% from the retail levy above plus half of the 10% wholesaler levy, assuming the final wholesale price is about half of retail).   Note that because these are excise taxes, they will affect price statistics and inflation rates (just as cigarette and gasoline taxes do as well).  And why should we be surprised that liquor is cheaper in neighboring states, when the article states pretty clearly that Washington has by far the highest built-in taxes in the country?

Here is what I think the more interesting issue is:  States that control alcohol sales are able to extract substantial monopoly rents from this activity.  The problem for them in privatization is that it may well be impossible to replace these rents going to government in a privatized market.  If I had to guess, Washington is trying to achieve two goals at the same time in its privatization program and it may be that it is impossible to do both simultaneously, a sort of have your cake and eat it too situation:

  • They want to retain the monopoly rents as a revenue source for the state
  • They want to provide consumers more shopping choices, better service, and lower prices through privatization
I think I can see exactly what they tried to do:  They privatized distribution, then slapped heavy taxes on the private companies to create a revenue stream to replace its old monopoly rents.  The result is a mess, because I don't think the state can do both, at least in the short term.  In the long term, the state may be able to reap equivalent revenues with a lower tax percentage of a larger and growing market, but that takes time to evolve.  

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