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August 26, 2011

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Privatization of State Liquor Sales

The Senate Democratic Appropriations Committee is proud to introduce its next round of Money Matters issues. The issues are intended to give the reader an informative and in-depth look at key policy and financial issues facing the commonwealth, while also providing a wide array of solutions that have been offered to address the matter at hand. In this issue of Money Matters, we look at the Pennsylvania Liquor Control Board (PLCB), the state’s Wine and Spirits Stores and the merits of moving to a private system of alcohol sales.

Governor Tom Corbett and House Majority Leader Mike Turzai want to abolish the current PLCB-run wine and spirits operation and “privatize” the system. They believe that alcohol sales are not a “core function” of government and should be left to the private sector. They argue that a private system would result in greater convenience, better selection, and lower prices for consumers. They also contend that the private set-up would generate the same or more revenues than the current system without increasing consumption or crime—including underage drinking or DUI offenses.

The Corbett/Turzai attempt to privatize wine and spirits sales in Pennsylvania is not new. Previous governors have tried and failed, most recently Governor Ridge in the 1990’s. With large Republican majorities in the House and Senate, the push for privatization has been identified as a top priority for Corbett and House Republican leadership.

 

 

The Pennsylvania Liquor Control Board

The PLCB has been charged with managing and regulating the sale of wine and spirits for over 75 years, balancing the interests in generating revenue against the necessity of strictly regulating alcohol sales. While the PLCB continues to evolve, it has been a steady, growing source of revenue contributing nearly $2.28 billion to the state treasury since 2005 alone. The PLCB model is also the source of thousands of family sustaining jobs for hardworking, dedicated Pennsylvanians.

Today, the PLCB operates in excess of 600 wine and spirit stores throughout Pennsylvania. These stores handle both retail sales to individual consumers and wholesale sales to licensed establishments where wine and spirits are sold. Gross sales in Fiscal Year (FY) 2009-10 totaled over $1.894 billion, an increase of 1.44% over 2008-09.

In FY 2009-10, the PLCB transferred over $383 million in tax revenue to the state. In FY 2010-11, that number increased to almost $398 million and the estimated tax revenue for FY 2011-12 is $409 million. Additionally, the PLCB transferred $105 million in profits in both FY 2009-10 and FY 2010-11 and will remit another $80 million in FY 11-12.

The Privatization Plan

House Majority Leader Mike Turzai (R-Allegheny) has introduced House Bill 11, which would “privatize” the sale of wine and spirits.

Under the bill, the Department of General Services will auction 1,250 retail licenses – 750 for what are described as “grocery stores and big box retail outlets” and 500 for “independent operators.” The licenses will be placed in zones established by the Department of General Services and the PLCB. Representative Turzai estimates that auctioning these licenses will net a return of between $1 and $2 billion.

The Turzai plan also calls for the elimination of the PLCB’s 30% markup and elimination of the 18% Johnstown Flood Tax. The bill would replace current taxes with a gallonage tax ranging between $8.25 and $12 per gallon depending on the type of liquor and alcohol content.

The proposed tax changes could significantly reduce annual tax payments from wine and spirits sales. While these changes may enhance the value of alcohol licenses, the tax swap would sacrifice a significant on-going revenue stream in exchange for a one-time revenue gain.

With respect to employment incentives, HB 11 provides a tax credit for private licensees that hire displaced PLCB workers, tuition assistance for displaced workers who want to further their education or re-train for a new career, and preference for PLCB workers for other Civil Service positions.

 

Privatization Questions

As the House of Representatives prepares to debate HB 11 this fall, numerous questions abound. For example:

 

Are the revenue estimates related to auctioning of licenses realistic?

Auctioning licenses is unlikely to yield the $1 to $2 billion financial windfall predicted by privatization proponents. More reasonable estimates project much lower receipts.

Will the consumer really see more convenience?

Moving to a private system actually may actually result in REDUCED access for consumers incertain areas of the state. The PLCB operates over 600 stores, not all of which are profitable due in large part to the area of the state in which they are located. In a private system, driven by profit motive, some of these locations (mostly rural in nature) may cease to exist and eliminate convenient access to wine and spirits by certain rural consumers.

In addition, it is important to note that HB 11 does NOT collapse wine and spirits sales and beer sales into one location. While it is conceivable that a beer distributor may seek a wine and spirits license, the big box retailers like Wal-mart and Wegman’s are still prohibited from obtaining a beer distributor’s license. HB 11 does not create the convenience of “one-stop shopping” for all beer and liquor needs that consumers would like. Consumers will still have to make two separate stops.

Will the adverse societal effects associated with alcohol potentially increase under a private system?

HB 11 would double the number of stores currently operating. Increased access will undoubtedly result in additional problems. Just as the number of stores in certain communities will decrease or cease to exist, the number of stores within certain other communities, particularly heavily populated urban areas, will increase. There will likely be saturation. And, unlike current PLCB employees, private employees may not have the proper training or the commitment to diligently enforce the Liquor Code. Consequently, many communities may see increases in crime, underage drinking, DUI, nuisance operations, etc. due to oversaturation within the community.

Will Pennsylvania continue to collect 100% of state tax revenues under a privately run system as it does under the current system?

It is estimated that up to 20% of tax revenue may “fall through the cracks” in a private system. When we are talking about current tax collections that exceed $400 million, it is conceivable that the state could lose as much as $80 million or more annually in a private system.

Are the employment incentives contained in HB 11 really incentives?

It is hard to argue that a $1,000 tax credit is a strong incentive for a big box store or an independent operator to hire a displaced PLCB employee. The fact is, box stores like Wal-mart are unlikely to hire anyone specifically to sell liquor. In addition, private liquor stores and small retail operations have no market incentive to hire workers with expertise in wine and spirits.

Consequently, all HB 11 really does is potentially add another 3,000 people to the unemployment rolls at a time when both the state and the nation are trying to dig out of a deep recession.

Summary

While the PLCB has been a reliable, growing source of revenue for the taxpayers, it still has more room to grow. Outdated provisions of the Liquor Code tie the hands of the PLCB in certain areas and limit its ability to maximize revenues.

The PLCB has proposed modifications to the Code to allow it to further modernize its operation. The modifications in the areas of personnel, pricing and procurement could increase the flexibility and efficiency of the PLCB’s operation without the uncertainty that accompanies privatization.

Senate Democrats plan to introduce a package of bills to implement the PLCB’s suggested changes in the near future. Simply modernizing the Liquor Code to remove the “handcuffs” on the LCB, as Senate President Pro Tempore Joe Scarnati (R-Jefferson) put it, will allow the PLCB to continue to provide quality selection and service to consumers and protect thousands of family-sustaining jobs.

Offices of State Senator Vincent Hughes

www.senatorhughes.com

 

DISTRICT OFFICE
4950 Parkside Avenue | Suite 300
Philadelphia, PA 19131
Phone: 215.879.7777
Fax: 215.879.7778

HARRISBURG OFFICE
Senate Box 203007
Harrisburg, PA 17120-3007
Phone: 717.787.7112
Fax: 717.772.0579
 
Senator Hughes reacts to the Republicans unveiling their budget on Monday, June 27. Senator Hughes talks to the press on Friday, June 24th about the growing budget surplus