After privatization, here's who won and lost the liquor battle

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By Jim Davis

For The Bellingham Business Journal

People are buying more bottles of booze in Washington, and, in many cases, paying more for it four years after voters took the state out of the liquor business.

Washington consumers are buying 5 million more liters a year of vodka, gin and whiskey and other spirits since voters passed Initiative 1183, which ended the government monopoly on hard liquor.

Those same consumers are paying a couple of dollars more per liter post-privatization — up to $24.52 in 2014, compared with $22.28 in 2011, according to a report from the state Office of Financial Management. That’s a little more than a 10 percent increase per liter.

“Prices went up, so you’d expect consumption would go down, but consumption has gone up, too,” said John Guadnola, executive director of the Washington Beer & Wine Wholesalers Association, which fought the measure. “That tells me that the relative ease of availability has prompted people to buy more than they would have otherwise.”

And that has fueled a healthy increase in revenue for the state.

State and local governments received $316 million in net revenues from liquor taxes in fiscal year 2011, the last full year before privatization. In fiscal year 2015, the state made $366 million — a $50 million a year bump in revenue. That’s a 15 percent increase.

One of the reasons the state is seeing such an increase in tax revenue is because Washington taxes liquor more than any other state in the nation.

“We have the highest pricing and highest taxes by a mile,” said John McKay, an executive for Costco, which backed I-1183.

Consumers pay $35.22 in taxes for every gallon of spirits, according to a survey by Washington, D.C.-based Tax Foundation in 2013. The next-highest state tax rate is Oregon’s, at $22.73 a gallon. Most states charge $10 or less a gallon of liquor taxes; there are 3.78 liters in a gallon.

The bottom line for the state might be the most black-and-white way to measure whether the initiative was a positive for the state.

It’s harder to gauge the social costs of privatization, or the effect on employment. Even the cost to the consumer can be disputed.

McKay said Costco tracks multiple brands of liquor and is now offering lower prices than before privatization. A survey of some of their products bears that out.

So what retailers are charging could vary wildly. Even what people are buying could be different.

“It’s difficult to generalize what liquors are being bought and whether that’s changed,” McKay said. “We certainly offer a lot more high-end liquors than you would have seen in liquor stores — you know, Louis XIII cognac, for instance.”

Since Prohibition ended in 1933, Washington controlled a monopoly on liquor sales and consumers needed to go to state-controlled liquor stores to buy spirits.

The state set the hours of operation, the price of products and decided what could be sold in the state, and when restaurateurs could make purchases for their business. That changed when Costco poured millions of dollars into an effort to bust the state-run liquor businesses. The first measure in 2010 failed, but a second one, Initiative 1183, in 2011 passed, 59 percent to 41 percent.

Suddenly, Washington consumers went from only being able to buy hard alcohol at small liquor stores to being able to buy spirits at grocery stores and warehouse businesses like Costco and BevMo!

The number of places where someone could buy hard alcohol jumped almost overnight. Before privatization, there were about 330 state-run stores. After the initiative, there were more than 1,400 locations that sold hard liquor.

With more locations, more people are buying hard liquor. The report from the Office of Financial Management states that 26 million liters were sold in 2011, the last year before privatization. In 2013, the first full year post privatization, Washington consumer bought 31.6 million liters, or an increase of 21 percent. That number stayed about the same for 2014.

Oddly, while consumers are buying more alcohol now, they’re actually buying less hard alcohol at restaurants, bars and taverns, according to the report.

Before privatization, what are called “on-premise” locations sold 9.3 million liters of hard liquor in the state in 2011. That’s down to 8.7 million in 2014 even though there’s been an increase in establishments since the end of the recession, according to the Office of Financial Management report.

The consumption at restaurants doesn’t track with what the Washington Restaurant Association is seeing, said Anthony Anton, president and CEO of the group. He said that restaurant sales have been up the past three years and restaurant survival rates are also up. A big component of that is liquor sales in those establishments.

Either way, the state government is clearly benefiting from the private sector running the liquor industry. Before privatization, the state made money on liquor through a liter tax, sales tax and a calculated markup that paid for the costs of running the liquor stores and distribution. It also generated a tidy sum for state and local governments.

With I-1183, the state still collects a liter tax and sales tax but no longer collects a markup on the alcohol. Instead, the state charges a license fee to distributors. That fee was 10 percent on gross sales for the two years after the measure. It’s now dropped to 5 percent. Distributors also were forced to pay a one-time, $150 million fee for distribution.

In total revenue, the state collected more money before privatization. Since the state is no longer paying to run the liquor business, it’s actually seeing a net gain in revenue.

Supporters of I-1183 believe the measure was successful at allowing the marketplace to run the industry without hurting the state.

“I think it’s been good for the state, it’s been good for convenience and I think it’s been good for competitiveness,” Anton said. “All that being said, I don’t think it’s been fully implemented and it will be better.”

He said his association is fighting over sales taxes that restaurateurs are charged buying liquor at wholesalers like Costco. Normally, a restaurateur can present a reseller permit at wholesaler and won’t have to pay sales tax on an item.

But the state hasn’t allowed restaurateurs to use reseller permits when buying hard liquor.

The association is trying to change that by lobbying in Olympia and fighting it in the court system, Anton said.

Guadnola, of the Washington Beer & Wine Wholesalers Association, disagrees, saying that the initiative that voters approved clearly spelled out what taxes would be charged and that those taxes were meant to hold the state harmless. He said the I-1183 backers are trying to re-imagine the initiative.

“They should at least have the courage to say they wrote it to say X and they want to change it to say Y,” Guadnola said.

Does he believe the initiative has been good for the state?

“If you want to say did it benefit the state, it depends on how you define it,” Guadnola said. “If you’re talking about whether the state lost money, no it didn’t. But the people are probably paying more than they did otherwise.”

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