Alcohol Privatization More Costly to Consumers and Comes with Greater Social Harm

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Alcohol PrivatizationThe Pennsylvania House of Representatives began debate Monday evening on a new plan to privatize state wine and spirits stores. To help inform that debate, the Keystone Research Center has a new Alcohol Privatization Issue Page summarizing our recent research and analysis on the issue. Much of our work has found that privatization is likely to have significant negative impacts on the state’s fiscal and public health.

Lawmakers are expected to resume debate today on the plan, sponsored by Representative Mike Turzai. It could get a vote in the House this week, although the Senate doesn't plan on taking up the issue before breaking for summer recess next month.

The plan would allocate 1,600 wine and spirits retail licenses and give the state's more than 1,000 beer distributors the initial option of buying licenses. The remaining licenses would be auctioned to the highest bidders.

During Monday's debate, Representative Turzai cited a liquor store privatization study conducted by Public Finance Management (PFM) for Governor Tom Corbett’s administration to make the case for his plan, even though PFM examined a different privatization proposal. Keystone also took a look at the PFM study and other aspects of alcohol privatization. Here's what we found:

  • Wine and spirits stores a moneymaker for the commonwealth. Pennsylvania’s wine and spirits stores provide a substantial and growing stream of revenue to the state. These funds pay for alcohol enforcement and treatment programs, as well as contributing to education and other state services. Privatization will terminate this funding source for future generations and force the state to cut services, raise taxes, or both.
  • Corbett-commissioned study seriously flawed. The PFM study conducted for the Corbett administration made unrealistic and inconsistent assumptions in order to show that the commonwealth could sell off its liquor stores without losing revenue. For example:
    • The study assumed that retailers would accept a mark-up on wine and liquor products that was far below industry standards. Low mark-ups, however, would not generate the profits needed to justify hefty upfront auction fees that the PFM projections count on.
    • The study assumed that private distributors would pay annual retail and wholesale license fees that were at least four times higher than in neighboring states. It also assumed a per gallon alcohol tax that is six to 21 times higher on wine and up to five times higher on spirits than those of neighboring states. High annual fees and taxes will raise prices and drive down sales, prompting more Pennsylvanians to cross state lines to shop. Again, these assumptions are incompatible with high upfront auction fees.
  • Revenue projected in Year 1 after privatization less than actual state store revenue. The PFM study projected in the 2010-11 fiscal year that the state would collect from a privatized liquor store system $113 million less than what the current system actually brought in that year.
  • Study overestimates what Pennsylvania would receive in license fees. Adjusted for population and alcohol consumption differences across the two states, the actual amount West Virginia received for auctioning off retail liquor licenses in 2010 was 41% below what the PFM study projected Pennsylvania would receive.
  • Higher prices and fewer choices. Privatization is likely to lead to an increase in wine and liquor prices and a reduction in selection for Pennsylvanians who live outside urban centers. The PFM study failed to address whether rural Pennsylvanians would have access to wine and spirits at reasonable prices under a privatized system.  
  • Public health experts recommend against further privatization. Alcohol privatization contributes to increases in alcohol consumption, creating a greater risk of alcohol abuse and its associated social costs, according to the Task Force on Community Preventive Services, a panel of 21 national public health experts. In April, the Task Force published its findings in the peer-reviewed American Journal of Preventive Medicine.
  • Fewer alcohol-related traffic deaths in alcohol control states. States like Pennsylvania that more tightly control the sale and distribution of alcohol have lower alcohol-related traffic deaths than states that take a more hands off approach. The Keystone Research Center estimates that Pennsylvania has 58 fewer alcohol-related traffic deaths among adults each year than it would have if the state had no controls over the distribution of alcohol.


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