Pennsylvania weighs pros, cons of liquor store privatization
As the crowd and the television cameras looked on, Gov. Dick Thornburgh
tacked up a “for sale” sign on the front of the state-owned liquor store at 7720 City Line Ave. in Philadelphia’s Overbrook Park neighborhood.
He was enjoying himself on that morning of Dec. 1, 1986. After years of
lobbying to get the state out of the liquor business, and as his second term neared an end, he finally had his chance. Thornburgh and his allies had complained that at the state stores, prices were high, good wine was scarce and the whole system was burdened by bureaucracy.
Just five days before Thornburgh’s visit to Philadelphia, a stalemated state legislature adjourned without renewing the existence of the Pennsylvania Liquor Control Board (PLCB). Although the Democrat-controlled House had passed a 10-year extension, the Republican-controlled Senate refused to act before the end of its session.
That gave Thornburgh a golden opportunity to do what he had been seeking since his second term began: auction off liquor licenses to privatize the sale of alcohol. And so, he recalled in a recent interview, he went to Overbrook Park “to do a publicity stunt with some undisguised glee.” But the Republican governor’s joy was shortlived.
In the weeks that followed, Senate Democrats, the PLCB and the unions representing state store employees filed lawsuits challenging his order to auction off liquor licenses.
The courts ultimately invalidated his plan, and his Democratic successor, Bob Casey, pushed legislation through the General Assembly to retain and reform the PLCB.
Today, Pennsylvania remains one of just two states—the other is Utah—that still has complete control of liquor sales.
Advocates of privatization are again pushing to get the state out of the liquor business. While price, availability of products and bureaucratic inefficiency remain key arguments of these advocates, there now are other factors: the state’s thirst for money in a cash-strapped economy and a national movement to minimize the role of government.
House Majority Leader Mike Turzai of Allegheny County, a Republican, introduced legislation in July to privatize the sale of wine and spirits in Pennsylvania by auctioning off 1,250 licenses to retail operations and selling licenses to wholesalers. Turzai’s office has estimated that these moves would net at least $1.7 billion in state revenues. Tarzai also projects that the state would continue to take in $400 million annually through taxes on alcohol and would make money each year as licenses are issued or transferred.
It would seem that the state’s liquor monopoly might finally end now, or in the next few years, because of a convergence of circumstances: a potential windfall for a state struggling in a bad economy; a Republican governor who favors privatization; and a Republican-dominated legislature.
Proponents argue that it is time to bring Pennsylvania into the 21st century. They say that competition among private businesses will drive down prices, increase selection and generally improve customer satisfaction. On top of that, Gov. Tom Corbett and Turzai take ideological issue with the state’s involvement in a business they say should be left to the free market.
But just as Thornburgh learned a quarter century ago, and Republican Gov. Tom Ridge learned in 1997, privatization won’t happen without a fight. Still opposing the idea is what Thornburgh calls “an odd kind of alliance” between Democrats in the legislature, who want to protect the jobs of unionized state store workers, and some Republicans who are influenced by constituents arguing that privatization will lead to more alcoholism and drinking-related crime.
What's best for consumers?
The primary issue driving the push to privatize is the potential consumer benefit, and at the top of the list are selection and convenience. And these are especially important for wine-lovers like Bob Richards.
Richards, the John and Ann Curley Professor of First Amendment Studies at Penn State, is a certified sommelier who enjoys collecting rare and small-production wines. But he has a hard time getting them here because Pennsylvania liquor laws prevent almost all direct-to-consumer shipping.
This also prevents state residents from joining any wine clubs, such as the popular New York Times Wine Club. These clubs ship featured wines directly to members.
“Honestly, that is the most frustrating thing because I travel to Napa and Sonoma often, and some events are only open to their club members,” he said. “So I can’t even fully participate when I travel because I’m not a wine club member. And I’m only not a wine club member because the state
won’t allow it.”
Luckily for Richards, he has found two wine clubs in California that are willing to ship illegally directly to him. He said the only other option he has is to buy those wines at the wineries and store them in luggage on the plane, something he never does because of concerns he has about how
luggage is handled.
“It’ll end up getting tossed on the tarmac in Philadelphia,” he said, “and by the time you get it home, it’ll either be stolen or broken.”
The state does run a little-known program called license direct shipping in which customers may order out-of-state wines through the PLCB. When the wines arrive, the customers go to a state store to pick them up. Richards said this is inconvenient, especially in rural areas of the state where the nearest liquor store might be miles away. It’s also expensive, because the state adds taxes and administrative and shipping fees, he said.
Last month, the PLCB began a small trial program that would allow some specialty wines to be ordered online and sent directly to customers’ homes.
Roy Clariana, a visiting professor of education at Penn State who is originally from Denver, said it is simpler to buy alcohol in Colorado, where alcoholic beverages are sold in grocery stores. Colorado also has private liquor stores with more specialized selection, he said, adding that these stores also offer information and advice on selecting wines.
The information and education provided by private systems in other states is another benefit that privatization would provide to Pennsylvania consumers, Richards said. Many private stores in other states, he said, offer classes on how to pair wine with food or how to cook with it. Richards said state workers have no incentive to learn these skills and pass their knowledge on to consumers. In fact, before Gov. Casey’s reforms in the late 1980s, clerks weren’t even allowed to make recommendations.
“We used to actually joke that if we had a training session for the clerks, we would be happy with the results if by the end they were able to tell a red wine from a white wine,” Thornburgh said.
On the political side of things, there is another argument for privatization—an ideological one.
Turzai has argued that “the government shouldn’t be in the business” of selling alcohol, as he said at a press conference the day he unveiled his privatization bill. Turzai said there was an “inherent conflict of interest” when an institution in charge of law enforcement makes money by pushing alcohol sales.
Under Turzai’s bill, “the state’s job would be regulatory, licensing and education, which is the rightful role of government,” said Stephen Miskin, press secretary for Turzai.
A taxpayer who agrees with that position is Tracy Sampsell, a registered nurse from Coburn. “The further away the government gets from managing anything, the better it is for all of us,” she said. “There’s no room for competition this way. They decide what to carry.”
Where will the jobs go?
The opposition to privatization comes from a combination of unions and anti-alcohol watchdog groups.
About 4,000 liquor store clerks are represented by the United Food and Commercial Workers. About 700 managers are represented by the Independent State Store Union. All of those jobs would be lost if the state privatized.
Supporters of privatization have speculated that PLCB employees could get new jobs at private stores. In fact, Turzai’s legislation contains provisions giving tax credits to employers who hire PLCB employees. It also offers tuition assistance and hiring preference in other state jobs to those employees.
The unions counter that, while new private liquor stores would need to hire, grocery stores and other retail outlets would have less incentive to hire PLCB employees—they could just assign current employees to handle wine and liquor.
Wendell Young IV, president of the United Food and Commercial Workers Local 1776, made that point in testimony before the House Democratic Policy Committee in April.
“The experience in other states demonstrates that the licenses have gone to existing stores who use their existing employees to stock the shelves,” Young said.
The unions also fear that PLCB employees who are hired at the new private stores would likely take cuts in pay and benefits.
“There’s no question: They’re state employees now with state benefits, and my guess is they would not be able to get those kinds of jobs in these liquor stores in the private sector,” Pennsylvania Sen. Jake Corman said in an interview.
While job loss is a major concern for managers, Jeremy Phillips of the PLCB managers’ union said he is more worried about the potential impact on public health and safety.
Phillips, an Altoona resident who manages the liquor store at 2051 S. Atherton St. in State College, sides with groups like Mothers Against Drunk Driving and the Pennsylvania DUI Association. Like these organizations, he
said, the managers union expects that DUIs, fatalities and legal problems due to alcohol would all go up in a private system.
Young, of the PLCB clerks’ union, has also said he does not think the private sector can do as good a job of regulating alcohol sales as state employees do.
Proponents of privatization like Richards contend that private businesses—because they would fear losing their licenses—actually have more of an incentive not to sell to minors or visibly intoxicated patrons.
Stephen Erni, executive director of the Pennsylvania DUI Association, said states with privatized liquor sales have rates up to 15 percent higher in drinking among 16-to-20-year-olds and underage binge drinking.
Statistics gathered by independent sources, however, are inconclusive.
According to drinkinganddriving.org, a citizen-run organization dedicated to education and prevention of drunk driving, Pennsylvania’s average yearly number of DUI arrests per 10,000 people is 38. Of the states bordering on Pennsylvania, three have higher arrest rates and three have lower: 68 in Maryland; 44 in West Virginia and New York; 30 in New Jersey; 27 in Ohio; and 4 in Delaware.
Utah, with the nation’s only other completely state-run liquor industry, averages 50.
A 2003-2004 study by the U.S. Department of Health and Human Services showed that Utah had the lowest estimated underage drinking rate at 18.63 percent and the second lowest underage binge drinking rate at 14.5 percent,
behind Tennessee.
New Jersey had lower rates of underage (28.08 percent) and underage binge drinking (17.47 percent) than Pennsylvania. The rates for Pennsylvania were 30.77 percent for underage drinking and 21.61 percent for underage binge drinking.
Erni said those numbers can be misleading. “You may find one or two categories where they may be doing better than Pennsylvania,” he said, “but overall their numbers are worse.”
Erni said other statistics indirectly related to alcohol tend to increase as well, such as suicide rates, high school dropout rates and instances of domestic violence.
Richards still doesn’t believe those studies prove anything. Correlation does not equal causation, he said.
Erni, however, insists that these studies show insights into the effects of privatization on public health and safety. At very least, the state should set up more DUI courts and programs for getting offenders the help they need with substance abuse, he said. Once privatization passes, it will be
almost impossible to go back to a public system, he said.
“If it is going to pass, at least raise taxes on beer and liquor to go toward regulation and education,” he said. “Because five years from now, we’ll be looking back and saying, ‘Well these numbers have all gone up.’ ”
Keeping liquor sales in Pennsylvania
From a consumer standpoint, most alcoholic beverages in Pennsylvania currently cost more than in neighboring states. According to a study by the Commonwealth Foundation, an organization that promotes a free market, liquor in the standard price category costs anywhere from 5 percent less in Ohio to 22 percent less in Maryland.
The report also cited a study by Todd Nesbit of the College of Charleston and Kerry King-Adzima of Penn State Erie finding that Pennsylvania loses about $3.5 million annually to residents crossing into West Virginia to buy cheaper alcohol.
Another study, by the Neiman Group, a Philadelphia-based marketing firm, found that 45 percent of residents in Philadelphia and its surrounding counties purchase alcohol in another state. Respondents reported buying about 23 percent of their wine and liquor in another state, and the researchers estimated that Pennsylvania lost about $40 million in revenue to this illegal practice in 2010. However, if House Bill 11 were to pass as currently written, prices wouldn’t necessarily decrease across the board. Based on the gallonage tax, a set fee per gallon of alcohol, State College liquor store manager Jeremy Phillips said the prices on common, lower-shelf items would increase while high-end products would become a little cheaper. Some cheap box wines could almost double in price, he said.
When Iowa privatized the retail portion of the liquor business in 1986, prices increased 6.1 percent the first year, according to a study by J.L. Fitzgerald and H.A. Mulford that was published in the Journal of Studies on Alcohol in 1993.
But the study also noted that consumers had a similar increase in income that year. There was a downward trend in alcohol consumption in the state at that time, and it was not affected by privatization.
Unlike Tarzai’s proposal in Pennsylvania, Iowa sold only retail liquor licenses while continuing state control of wholesale alcohol sales.
“I think initially there were very mixed opinions,” said Tonya Dusold, a spokesperson for the Iowa Alcoholic Beverages Division. Because the state maintained wholesale control, the selection of products was not impacted, she said.
Another key difference between the Iowa system and Turzai’s plan is in the way taxes were handled. Instead of implementing a per-gallon tax, as is contemplated by Tarzai, Iowa marked up the price of all alcoholic beverages
50 percent from the market value. Dusold said that in more than a decade there had been no pushes to privatize further. “There were a few years in the ’90s where we leased out the warehouse and delivery, the actual distribution, but we do that all in-house now,” she said.
A history tied to Prohibition
The PLCB and the state stores are products of the nation’s Prohibition era. The 18th Amendment, which took effect in 1920, prohibited the manufacture, transportation or sale of alcoholic beverages throughout the country. Even after the 21st Amendment repealed Prohibition in 1933, an anti-alcohol sentiment continued to resonate. Many states banned alcohol by law and others, including Pennsylvania, sought to limit consumption by controlling how alcoholic beverages were sold.
In establishing the PLCB in 1933, Gov. Gifford Pinchot was often quoted as stating that its purpose was to “discourage the purchase of alcoholic beverages by making it as inconvenient and expensive as possible.”
More than half a century after the PLCB was established, Thornburgh’s campaign in 1986 represented the first attempt to dismantle the state-store system.
At the time, certain state agencies, such as the PLCB, had to be reconstituted periodically by the legislature. After the Democratic-controlled House passed a resolution to extend the PLCB’s existence 10 years, the Republican-controlled Senate refused to put the resolution on its agenda before the end of its final session in 1986. That triggered a
six-month phase-out to begin Jan.1, 1987. Thornburgh wrote an executive order calling for the auction of liquor store licenses, to which the state store employees’ unions, Senate Democrats and the PLCB responded with their ultimately successful court challenge. When Gov. Casey came into office, he pushed legislation through the General Assembly reinstating the PLCB.
Thornburgh said recently that his effort was not entirely wasted. Casey initiated a number of reforms; there were more selections, and there was an effort to make shopping more pleasant for customers.
Before Casey’s changes, customers were not allowed to walk around the aisles to look for what they wanted. Instead, they had to know what they wanted before they arrived, and ask the clerk at the counter to retrieve it. Casey also allowed customers to pay with credit and allowed clerks to make recommendations.
Eleven years later, in 1997, Gov. Tom Ridge tried to sell off the retail operation. Under his plan, the state would have maintained control over the wholesale operation while selling 757 retail licenses, a number based on the “historical high” number of state stores in Pennsylvania.
The chairman of the PLCB at the time was John Jones, now a federal judge for the Middle District of Pennsylvania. He said he took the job on the PLCB knowing that privatization was on Ridge’s agenda. At the time, Jones said, the state was trying to help fund new sports stadiums in Philadelphia and Pittsburgh, and many legislators saw the sale of liquor licenses as a necessary source of revenue for the stadiums.
Ridge’s proposal eventually failed, but not without leading to further reforms.
“One of the more significant initiatives we took on was to relocate stores from low-traffic areas where licenses were sort of given on a
sweetheart basis and the stores weren’t really profitable,” Jones said. “So we moved them to high-traffic areas, like strip malls and more commercial areas.”
The PLCB also created what were known at the time as “superstores,” which offered wider selections and higher quantities. These were
the precursors to the premium outlets it operates today, which provide access to rare and specialty wines and liquors.
The sale of beer in Pennsylvania has always been private, but is influenced in part by a powerful trade association, the Malt Beverage Distributors Association of Pennsylvania. The state also has a complex set of laws regulating how much beer customers can buy and where.
For example, at beer distributors, customers must buy beer by the case. At bars or restaurants, they can buy six-packs and 12-packs, but no more than two at a time.
Two classes of licenses
The 1,250 retail licenses that Turzai’s bill would sell is more than twice the number of liquor stores currently operated by the PLCB. Those licenses would be divided into two categories.
The 750 Class A licenses would be reserved for establishments with at least 15,000 square feet of retail space and 7,600 linear feet of shelf space. They would be reserved for “big-box-type stores” and supermarkets, such as
Costco,Wegman’s and Giant, according to Miskin, Turzai’s press secretary. The remaining 500 Class B licenses would be sold to small outlets such as niche stores, Turzai said when he introduced the bill in July.
If the bill is passed, the first year would be devoted to selling the wholesale operation. In the second year the retail licenses would be auctioned.
The bill limits the number of licenses any single company can hold and how much of a market share it can have in each county.
Licensing would still be handled by the PLCB and would still be allocated based on population densities and demand. The gallonage tax, a flat rate on a per-gallon basis, would range from $8.25 to $12 per gallon depending on alcohol content and type of liquor. It would be indexed to inflation after the first five years.
“Our goal is to eliminate the Johnstown Flood Tax, the 30 percent markup, and the $1.50 handling fee,” Miskin said.
The 18 percent Johnstown Flood Tax was added to liquor in 1936 as a way to raise money for victims of the Johnstown flood that year. The tax was meant to be temporary.
Today it goes directly into the general fund.
While gallonage tax would continue to go into the general fund under Turzai’s bill, the upfront profits from the sale of licenses would likely go toward transportation and infrastructure, like improving roads and bridges, Miskin said. Corbett has also said he wants to use that money for infrastructure.
Regardless of which projects are funded by the expected $1.7 billion in revenue that would come from auctioning licenses, Miskin said it is time for a change. “Any business that has to go to a state legislature for the simplest of business actions, for example, extending hours—that’s a failed business,” he said.
Miskin also pointed to the failed wine kiosk initiative from earlier this year as evidence that the state is not qualified to run the liquor business. The program allowed citizens to buy wine in grocery stores from vending machines with built-in breathalyzers and ID readers to prevent sales to intoxicated or underage patrons. The program ran for a year before it was ended in September because of problems with the machines and low sales. Miskin called the project “silly” and “a failure right from the start.”
He also said the board’s 2009 decision to spend about $3.7 million to change the names of its stores was further evidence that the state should not be running liquor sales.
“You have an agency that spends millions of dollars on a marketing campaign to change its name from ‘Wine & Spirits’ to ‘FineWines and Good Spirits,’ ” he said. “That’s just ludicrous, some would even say stupid.”
Whether the bill will find enough traction in the legislature to pass is also up for debate. Republican Sen. Corman of Centre County said it will take a “big push” just to get the bill through the House. The Senate currently has no liquor privatization bills.
“Just from political dynamics, my guess is that just about every Democrat in the General Assembly will be against it because of the union issue,” Corman said. “So you’re already almost 50 percent against it, and you haven’t even gotten into the details of the rest of the bill. So I have no assumptions that this is going to happen any time soon.”
However, he said that if Turzai does manage to get the bill passed, then Senate Republicans might get behind it.
In March, at a Senate Appropriations Committee hearing, the PLCB asked for more freedom in setting prices and hiring workers. Near the end of the hearing Corman asked the PLCB representatives why it wouldn’t be better simply to privatize at this point.
But in a recent interview he explained that privatization isn’t a major priority for him.
“Quite frankly, I don’t have a lot of people calling me saying they want to privatize the liquor stores,” he said. “Now, I think if I did a poll, my guess is the poll would be, ‘Yeah, I want to privatize it,’ but it’s not really gotten to where it’s a passionate issue.”
According to a September poll from the Quinnipiac University Polling Institute, 62 percent of Pennsylvania residents support privatization. Fifty-eight percent of union households also support it.
Thornburgh says that means privatization is bound to happen sooner or later. Even though his own privatization attempt failed, he remains hopeful.
Quoting President Woodrow Wilson, he said: “I would rather fail in a cause that will ultimately triumph than triumph in a cause that will ultimately fail.”
Corbett is also behind privatization. The governor’s office commissioned Public Financial Management, Inc., a financial and investment advisory service, to analyze current PLCB operations and possible approaches to privatization.
The study recommended full privatization of both the wholesale and retail operations. On the wholesale side, it recommended that the state charge an initial franchise fee and ongoing license fees to support the cost of regulation.
On the retail side, it recommended either a highly structured auction system or a free-market license system.
Although the governor has not come out in favor of any particular privatization plan, the governor’s office is cautiously optimistic that some form of privatization will come soon.
“Once things get to the legislature, anything can happen,” Eric Shirk, a spokesman for Corbett’s office said. “But the governor is optimistic and thinks this can get done.”
