Liquor Privatization Findings Too Good to Be True

The privatization of Pennsylvania's wine and spirits shops will not do much for state revenues but will usher in alcohol-related social problems.

Those were the key takeaways offered by researchers working with the Keystone Research Center at hearings of the Pennsylvania House Liquor Control Committee this week in Philadelphia.

University of Michigan researcher Roland Zullo, who has worked with Keystone on privatization issues, presented the results of his analysis of a pro-privatization study commissioned by Governor Tom Corbett's Budget Office. As Zullo's written testimony shows, the study, performed by Public Finance Management (PFM), was very open about its assignment: show how privatization will maintain annual wine and spirits revenue for the state, while maximizing upfront fees from privatizing.

As Roland shows, this is an impossible assignment. Consequently, PFM was forced to make implausible and incompatible assumptions. To maintain revenue neutrality, PFM assumed very high taxes on wine and spirits, a high annual fee from franchisees, and low price markups by private wholesalers and retailers.

These same assumptions, however, would make wine and spirits franchises a dud as a business opportunity - companies would make low profits or lose money, and they sure won't give the state a big upfront check for the right to lose money. As Roland said, "I can't square this circle."

Keystone Labor Economist Mark Price reviewed the likely negative social impacts of privatization at the hearings this week.

He also showed that researchers for the Commonwealth Foundation left key variables out of their analysis of state differences in alcohol-related traffic fatalities, which they have used to argue that traffic fatalities are the same or lower in states with privatized alcohol distribution systems.

One of the missing variables was average miles traveled. Surprise! When people drive further they have a greater chance of an accident and a traffic fatality. Put the missing variables into the statistical analysis and you find that alcohol-related traffic fatalities are higher in privatized states than “heavy control” states such as Pennsylvania.

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