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Washington Privatizes Liquor Sales, Jacks Up Costs

Washington has become the first state in decades to privatize its state-run liquor stores. They’ve coupled this with onerous fees on private distributors.

Reuters (“Liquor sticker shock stirs up Washington state drinkers“):

Washington state has extricated itself from decades in the liquor business, a move that is likely to give drinkers a headache when they reach for bottled spirits on local store shelves.

Under a measure approved by voters in November, Washington on Friday became the first state since the repeal of Prohibition in 1933 to privatize a government-run liquor retail and distribution system dating to the 1930s. The measure also changed the state’s wine distribution laws, established new regulations for alcohol advertising, created new franchise protections for liquor distributors and allowed grocery stores, already permitted to sell beer and wine, to sell spirits.

The bad news for customers is that on average, per-bottle prices on liquor could rise between 10 percent and 30 percent, retailers say. The initiative imposed a new fee structure that raises those costs by 27 percent, which will likely be passed on to consumers, said Brian Smith, spokesman for the Washington State Liquor Control Board.

On Saturday there were indications prices were on the upswing. A bottle of Glenlivet 12-year single malt Scotch whisky sold for $54.63 at a Safeway in the Seattle suburb of Kirkland. That compares to $39.95 under state-mandated prices before the change went into effect, according to a database posted on the website of the Seattle Times newspaper.

The state’s markup on wholesale liquor had been nearly 52 percent. The new private-sector markup could be as high as 72 percent, including newly imposed state fees, Smith said. ”Prices have gone up because of the fees,” Smith said.

The liquor board on Saturday could not provide information on exactly how much prices have risen across the state.

The new law imposes two additional taxes, referred to as license fees, that businesses pay to the state for the privilege of selling liquor – 10 percent paid by wholesale distributors and 17 percent paid by retailers.

A state analysis of the new law predicted that those costs would be largely passed on to consumers in the form of markups.

Well, who the hell else are they going to pass them on to?

In Virginia, where I live, the state runs the liquor stores. Republican Governor Bob McDonnell has proposed privatizing liquor sales but has found no support in the state legislature. Oddly, the District of Columbia, where I work, has private liquor stores and, from a very cursory sampling, prices vary wildly depending on what part of town one shops.  Certainly, one can find deals in DC that beat the prices in the state stores in the Commonwealth.

A 52 percent markup on a monopoly product (leastwise, for those who don’t live near another state border) that’s in very high demand is a pretty sweet deal. I can understand why Washington politicians were reluctant to give up that racket. But replacing it with a 27 percent fee structure is outrageous.

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He has a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. Chad S says:

    So much for the wonder of the free market

    Like or Dislike: Thumb up 3 Thumb down 2

  2. DC Loser says:

    For my limited use of the liquor stores in the DC and VA areas (I mostly buy cognac), I notice that the Virginia ABC stores vastly overcharge for the same item found in DC stores. A bottle of Courvoisier VSOP 750 ml was $25 at DC’s Calvert Woodley, while the same thing at the VABC was about $35.

    Like or Dislike: Thumb up 0 Thumb down 2

  3. anjin-san says:

    Under a measure approved by voters in November

    Sounds like the voters there approved this. Why are you worried about what people 3000 miles away are paying for booze?

    Like or Dislike: Thumb up 1 Thumb down 2

  4. James Joyner says:

    @Chad S: I’m not sure how you’d call a 27% state surtax the operation of a free market.

    @anjin-san: It popped up on YahooNews and is interesting because, while only 8 states now have state-run stores, I live in one and have lived in others. From what I gather, the initiative was financed largely by Costco and the public debate was almost entirely on safety issues and the like. The 17% sales tax was put in as a way to fund various public education efforts; the second layer of taxation at the wholesale level seemed to escape awareness.

    Like or Dislike: Thumb up 3 Thumb down 0

  5. Neil Hudelson says:

    I travel often to Seattle on business. My friends out there were always complaining about the cost of liquor (only marginally higher for standard liquor, and actually cheaper for the high end stuff), and were celebrating the privatization.

    I don’t think they were aware of the full extent of how it was going to be privatized.

    Like or Dislike: Thumb up 1 Thumb down 0

  6. Dave Anderson says:

    @James Joyner: James — do you agree that there are social costs that are not internalized in the cost of a bottle of good whiskey? If so, then a free market requires that the externalities are internalized via user fees or per-bottle taxes. I don’t know if 27% is an economically efficient tax for internalization purposes, but ipso facto an excise tax/sin tax structure is not indicative of a non-free market.

    Like or Dislike: Thumb up 3 Thumb down 3

  7. In Virginia, where I live, the state runs the liquor stores.

    Could be worse, at least you can get wine and beer in grocery stores. In Pennsylvania we have to buy wine at the state stores and only recently got the ability to buy beer at a grocery store thanks to Wegman’s thinking up a rather creative loophole (basically, if you have a small restaurant on property that has a liquor license, you can claim the beer sales from the grocery store are “take out”).

    Like or Dislike: Thumb up 1 Thumb down 0

  8. Chad S says:

    @James Joyner: Its chapter and verse that privately owned corps will have cheaper prices and better service then state run ones. Living in the DC area, everyone knows to buy in Montgomery county because the prices are cheaper at their county-run liquor stores. Even with a big tax/surtax, the “free market” should mean lower overall prices. 30% on a 15 buck bottle of booze is 19.50 in total. They can’t get the price down to lower then that? I thought that they’re supposed to be able to do that?

    Like or Dislike: Thumb up 0 Thumb down 0

  9. James Joyner says:

    @Dave Anderson: There are almost zero social costs on a bottle of expensive single malt Scotch. It’s just not an efficient way to get plastered on a regular basis. People buying cheap hooch–especially those who seem to buy them one drink at a time–are a different matter but, conversely, aren’t paying much in taxes. Nor is it clear that the money is actually going to pay the externalities, anyway.

    @Chad S: It depends on their buying power and other costs. Presumably, the 28% fees are on top of other government licensing fees that non-liquor stores have to pay, plus there are obviously other costs of doing business. I suspect Costco will manage to undersell the state’s 52% markup. Mom and pop stores might not–although I gather than only largish stores are even allowed to sell liquor in Washington.

    Like or Dislike: Thumb up 0 Thumb down 0

  10. al-Ameda says:

    I lived in Seattle for 5 years and for me State Liquor Stores were not an issue becuse I and most of the people I knew were beer and wine consumers, and you can buy that at grocery stores. I did not care what the cost of hard liquor was, I kept none in the house, and when I (or friends) wanted a bar drink I (we) went to a bar.

    Hard liquor is highly taxed everywhere, and it is still cheaper to buy a bottle of hard liquor, than it is to go to a bar and purchase a bottle’s worth of drinks.

    Like or Dislike: Thumb up 0 Thumb down 1

  11. Fiona says:

    From what I gather, the initiative was financed largely by Costco and the public debate was almost entirely on safety issues and the like.

    Exactly. Costco dumped a millions of dollars into supporting the initiative. It had supported similar failed initiatives on previous ballots. The measure was opposed by public safety groups that claimed passage of the law would make it easier for teens to get alcohol and lead to an increase in teen traffic deaths, but Washington already had a pretty high rate to begin with and it’s not like beer and wine weren’t readily available at the local grocery and convenience stores.

    We moved from Washington to Pennsylvania in November. This state has some of the most arcane liquor laws in the country. Wegman’s and Whole Foods have found a way around them and can sell beer. Whole Foods has even found a way to sell wine. I don’t think prices at the state-run stores are particularly high but still see no reason that state should be running liquor stores.

    Like or Dislike: Thumb up 1 Thumb down 0

  12. @Chad S:

    Don’t forget that a lot of states also have legally mandated minimum prices for things like alcohol and cigarettes, or require purchasing through wholesalers that add an extra layer of markup, and so forth. Again, it’s hard to blame free markets for the failure of a market that is usually extremely restricted.

    Like or Dislike: Thumb up 2 Thumb down 0

  13. c.red says:

    I feel more or less obligated to comment – living in the area – the privatization act had just been defeated when it got shoved back onto the ballot last November. It was basically going to keep coming up until it passed. It was sold to the public as a price cutting measure and that government interefence in the free market is bad, but there was never any illusion that the government wasn’t going to task the heck out of it. I significant portion of state income came from liquor sales. (WA is a no income tax state.)

    The bill itself was set up in such a way to cut small competitors out of the market and was never set up to be anything close to a free market. It is pure profit seizing; a few people predicted as much, but they were generally shouted down by the flood of corporate money in support of it and the government bad crowd. The only people that should be surprised to see prices going up are the ones that weren’t paying attention.

    Like or Dislike: Thumb up 7 Thumb down 0

  14. Ron Beasley says:

    Here in Oregon the state is in the wholesale business and sets the prices but the liquor stores are privately owned. The stores near the Washington border anticipate a big up tick in business.

    Like or Dislike: Thumb up 0 Thumb down 0

  15. PD Shaw says:

    @Stormy Dragon: Yeah, its hard to argue that there is a free market when the state requires a middle man:

    Most states have a three-tier system of alcohol distribution. Producers sell their products to wholesalers, who sell to retailers, who sell to consumers. Wholesalers take about 18 to 25 percent of the retail price.

    I’ve not heard of minimum pricing on booze, but if we were going to decide to tax the externalities of booze, the tax would not be on the sales price, but on alcohol content.

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  16. @PD Shaw:

    I’ve not heard of minimum pricing on booze

    It’s to prevent businesses from using booze or cigarettes as a loss leader.

    Like or Dislike: Thumb up 0 Thumb down 0

  17. Tallan1976 says:

    I lived in CA for 5 yeas. At Safeway a half gallon of Captain Mogan was between $21 & $25. Sometimes at Rite Aid or Walgreen it would go on sale for $19. I live in WA now and at the liquor store a half gallon was $43.99.

    Even with a 27% tax added if CA sells it for even $25 and we are to presume WA stores pay roughly the same for the booze as CA stores from distributors that should mean that a half gallon would be about $32 with t added tax. That is still $13 cheaper than the liquor stores.

    So if the prices end up more, that is because the stores are marking up the costs more than the state did…

    Like or Dislike: Thumb up 2 Thumb down 1

  18. Martin Bring says:

    Spirits Sales Tax (SST): This tax is based on the selling price of spirits in their original package.

    Spirits sales tax rate paid by the general public: 20.5% and a $3.77 per-liter tax. The new law imposes two additional taxes, referred to as license fees, that businesses pay to the state for the privilege of selling liquor – 10 % paid by wholesale distributors (will drop to 5% next year) and 17 % paid by retailers. Add to these fees the retailer’s markup and the lost bargaining power of the State with distributors, and we get much higher prices. For instance, a bottle of Heaven Hill’s Evan Williams Kentucky Bourbon was $12..62 in the State’s Liquor Stores. It sells for $23.03 at Fred Meyer..

    All the State did was get rid of its liquor stores. With the sin tax increased, prohibition of a sort remains strong as ever. The only beneficiaries are the distributors and large retailers like, duh, Costco..

    Like or Dislike: Thumb up 3 Thumb down 0

  19. anjin-san says:

    There are almost zero social costs on a bottle of expensive single malt Scotch.

    People who can afford single malt are just as likely to become alcoholics, to drive while drunk, to be abusive, to develop alcohol related health problems and so on as people who buy cheap blush wine in boxes.

    I was in the bar & nightclub business for 20+ years. I watched respectable, upscale folks would come in every night and wreck themselves with too many martinis.

    You are fooling yourself on this one.

    Like or Dislike: Thumb up 3 Thumb down 1

  20. James Joyner says:

    @anjin-san: I think “just as likely” is an overstatement, although there’s no doubt that there are alcoholics and irresponsible people with the taste and means to acquire cheap booze.

    Because of the luxuries and vagaries of my schedule, I usually make my liquor store run at odd times. Say, 10am on a Friday. I’m re-stocking the bar with middling grade rum, tequila, and the like and grabbing a decent single malt. Everyone else is buying either off-brand gin or vodka or those individual serving size bottles of cognac. I don’t think they’re waiting until the evening to open those.

    Like or Dislike: Thumb up 0 Thumb down 1

  21. grumpy realist says:

    Slightly off topic but at one of the local liquor stores there’s a nice selection of single malts that run from $29.99 up to the 30-year McClellan, which they’ve priced at $999.00. That is not a misprint. Almost a thousand dollars for a bottle of booze. The employees (several of whom are extremely knowledgable about the different scotches) keep wondering who will be crazy enough to plonk down that level of money. (They figure the only person who would possibly buy it is a young hotshot lawyer who will have just made partner in BigLaw. Anyone older will have more sense, and anyone else of the same age won’t have enough money.)

    Like or Dislike: Thumb up 0 Thumb down 0

  22. Just 'nutha ig'rant cracker says:

    @anjin-san: The even greater irony is that even with the information about the surcharges included in the information given to the voters, they still thought liquor would automatically be cheaper because “at the government ever does is gouge the taxpayer.” I was back in my hometown of Seattle at the time of the election and was stunned at what those knotheads were approving.

    Be careful what you wish for.

    Like or Dislike: Thumb up 1 Thumb down 0

  23. Just 'nutha ig'rant cracker says:

    @Just ‘nutha ig’rant cracker: Clearly, I don’t know how to take off the special effects. Hope is doesn’t make the message too difficult to read.

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  24. Herb says:

    Buying liquor at Safeway? State run liquor stores? Inconceivable.

    Of course, in my state, so was Sunday sales until recently.

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  25. Just 'nutha ig'rant cracker says:

    @James Joyner: It’s nice to know that you can tell the difference just by looking at what people buy when you are looking. I buy cheap off brand bourbon to put in my coffee and hot cocoa and buy a decent single malt to sip, but I don’t normally buy them on the same trip as I use 5 or 6 fifths of bourbon a year but only one of scotch. It’s really hard for me to tell though.

    Personally, I think you’re just trying to “one up” by engaging in the fantasy that “people who drink nice liquor can’t possibly become alcoholics.” Keep dreaming, though.

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  26. Just 'nutha ig'rant cracker says:

    @grumpy realist: The Christmas special at Lotte Department Store in Seoul this past winter was a limited to 200 bottles special 30-year old (I think) Glenlivet for only 1million 250 thousand won. At the current exchange rate, that’s still over a thousand dollars. But it is single malt…

    Like or Dislike: Thumb up 0 Thumb down 0

  27. anjin-san says:

    @James

    I think “just as likely” is an overstatement

    I have spent my entire life around well-to-do people. I mixed them more drinks than could possibly be counted. I think I have some expertise here. I know how many drunks there are in my respectable family, that’s for sure.

    I don’t think they’re waiting until the evening

    I know a lot of alcoholics who start their drinking with a classy cocktail in the evening in their million dollar homes. Alcohol is no respecter of persons. It can take down the high, the low, and everyone in between. Believe it.

    @ Just ‘nutha ig’rant cracker

    Sounds like Costco was selling a bill of goods and the suckers bought it.

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