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working paper BiNgE ThiNkiNg: A Look AT ThE SociAL impAcT of STATE Liquor coNTroLS

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BINGE THINKING: A LOOK AT THE SOCIAL IMPACT OF STATE
LIQUOR CONTROLS
By Antony Davies and John Pulito
No. 10-70
November 2010
The ideas presented in this research are the authors’ and do not represent official positions
of the Mercatus Center at George Mason University.
Binge Thinking: A Look at the Social Impact of State Liquor Controls
1) How does the government regulate alcohol?
Studies on the efficacy of alcohol controls have focused on four broad categories of
market intervention:
Demand Regulation: Laws aimed at reducing demand target those who purchase and
consume alcoholic beverages. These laws place the restrictive burden on the alcohol
buyer and include age and visibly intoxicated person (VIP) restrictions.
Supply Regulation: Laws aimed at reducing the supply of alcohol target those who
sell alcoholic beverages. These laws include government ownership of retail or
wholesale outlets, restrictions on outlet density, caps on the number of retail licenses,
and limits on hours of operation, all of which place the restrictive burden on the
alcohol seller.
Price Regulation: These laws principally take the form of taxes and, in some cases,
price controls.
Social Regulation: These laws target behavior that is deemed socially undesirable or a
public health threatfor example, regulation of public consumption, and laws related
to driving under the influence (DUI) or driving while intoxicated (DWI). The
restrictive burden is placed on the alcohol consumer (who may or may not be the
alcohol buyer).
2) What is a “Control” State?
―Control‖ is somewhat of a misnomer as all states have authority to exercise control over
alcohol sales. The National Alcohol Beverage Control Association (NABCA) defines a
control state as one in which the state has a monopoly on the wholesale and/or retail sale
of one or more classifications of alcohol (e.g. beer, wine, and/or spirits).1,2 A non-control,
or ―license, state is one in which the state does not have a monopoly, but limits the
distribution and sale of alcohol by licensing vendors.
1 This definition is inferred from the details provided by the NABCA. Specifically, the NABCA classifies a state as
a control state if a controlled distribution system substitutes the state for the private marketplace in the retail and/or
wholesale of alcohol (NABCA, 2010a).
2 This classification ignores variations in state control. For instance, while Pennsylvania has a state monopoly on the
retail and wholesale sale of liquor and wine, Virginia has a state monopoly on the retail and wholesale sale of liquor
only. Regardless of these variations, Pennsylvania and Virginia are control states.
3) How many Control States remain in the United States?
NABCA classifies nineteen states as control states. It important to note, however, that the
state of Maryland itself is not a control state though several counties within Maryland
operate as local control jurisdictions. For the purposes of this paper, Maryland will
neither be depicted nor discussed as a control state. Therefore only eighteen states will be
considered control states.
Figure 1 Control States according to the NABCA in 2010 (NABCA, 2010b). As illustrated below, Maryland is not a
control state. However, Montgomery, Somerset, Wicomico, and Worcester counties operate as local control jurisdictions
in accordance with state law (Gansler et al., 2009).
4) Do all states regulate alcohol in the same way?
All states regulate alcohol in some form, though the exact form of this control varies from
state to state. For instance, of the eighteen control states that have monopolies over the
wholesale sale of liquor, twelve of those states also control liquor sales at the retail level.
Figure two provides more detail on the current variations.
Figure 2 - Monopolization of alcohol sales by state, alcohol type, and market in 2010 (NABCA, 2010b). As illustrated
below, Maryland is not a control state. However, Montgomery, Somerset, Wicomico and Worcester Counties operate as
local control jurisdictions in accordance with state law (Gansler et al., 2009).
5) How does a control state privatize its state alcohol retail stores?
The following three examples demonstrate three methods in which a state can privatize
its alcohol retail stores.
Pennsylvania: Pennsylvania is considering privatizing its monopoly on the retail and
wholesale sale of liquor and wine by auctioning off 750 retail and 100 wholesale licenses
(Pennsylvania House Bill 2350, 2010).
Virginia: Virginia is currently considering privatizing its monopoly on the retail and
wholesale sale of liquor by auctioning off 1,000 off-premises distilled licenses
(McDonnell, 2010).
Washington: On November 2, 2010, two ballot initiatives were voted onInitiatives
1100 and 1105. Although neither ballot received enough votes to become law, each
attempted to privatize Washington’s monopoly on the retail and wholesale sale of liquor.
Initiative 1100 called for all state liquor stores to be closed and replaced by a new
licensing system (Washington Initiative Measure No. 1100, 2010). Initiative 1105 took
this one step further by also requiring changes in the current liquor sales tax laws. For
instance, under this initiative, the liquor control board would have been required to
present a report to the Legislature by January 1, 2011, recommending a rate of taxation
(paid by liquor distributors) that would generate the same amount of revenue as is
generated under the current system plus an additional $100 million dollars (Washington
Initiative Measure No. 1105, 2010).
6) Would a control state suffer financially from privatization?
Pennsylvania: Pennsylvania is considering privatizing its monopoly on the retail and
wholesale sale of liquor and wine. A bill introduced by Representative Mike Turzai
would allow Pennsylvania to auction 750 retail and 100 wholesale licenses (Pennsylvania
House Bill 2350, 2010) which could raise approximately $1.7 billion (Segal and
Underwood, 2007). While this would only represent a one-time cash flow, Nathan
Benefield of the Commonwealth Foundation estimates that Pennsylvania would continue
to generate an estimated $500 million annually from alcohol sales taxes (Benefield,
2010). In the last fiscal year, Pennsylvania incurred the largest budget deficit in the
state’s history—the bulk of which was closed by federal money. The money potentially
raised by privatizing the state liquor stores would have closed this budget deficit.
Virginia: Governor Bob McDonnell estimates that Virginia could raise approximately
$400500 million as a result of privatization. With expected changes to the tax, markup,
and fee structures, the governor also expects that the state would continue to receive an
additional $324.2 million annually in taxes and fees (McDonnell 2010).
Washington: According to a state government performance review, state auditor Brian
Sonntag examined six possible options for privatizing Washington’s monopoly on the
retail and wholesale sale of liquor. From the six possible outcomes, Brian concluded that
Washington could increase revenues by as much as $277 million over five years
(Sonntag, 2010).
7) What happens to employees currently working in state-run liquor stores?
Initially, privatization could result in the loss of jobs by employees working in the state-
run stores. If state-run stores are simply shut down, some employees will experience
temporary unemployment as they shift from working for state-run stores to working for
private stores or other jobs. If state-run stores are sold, workers may not experience
unemployment at all but simply find themselves working under new management.
Noteworthy is that many of the jobs will not disappear, but will merely shift from the
public to private sector.
8) Assuming privatization leads to an increase in retail liquor stores, will this lead to a
corresponding increase in alcohol consumption?
An increase in retail liquor stores does not necessarily imply an increase in alcohol
consumption. Studies that point to a possible relationship between retail store density and
alcohol consumption fail to address causality.3 For example, one would expect to observe
a higher rate of alcohol consumption and a higher density of alcohol retailers near college
campuses. It would be incorrect to conclude that the high density of retailers causes the
greater rate of alcohol consumption. In fact, it is more likely that the causality is
reversedi.e. the density of retailers is caused by the concentrated population of alcohol
consumers.
While there is a natural tendency to blame markets for people’s behaviors, markets are
merely the aggregation of people’s behaviors. In other words, markets do not cause
behavior; behavior causes markets. Liquor stores are more likely to choose to locate
where there are customers as opposed to customers choosing to live where liquor stores
are located. Finally, it is possible that, if the relationship between density and
consumption is causal, that the causality is bi-directional. It may be that increased density
causes increased consumption and increased consumption contributes to increased
density. For example, one might imagine college students choosing where to live based
on proximity to bars, whereas bar owners choose where to locate based on the proximity
to on- and off-campus student housing.
9) How will privatization affect alcohol consumption?
Although numerous studies have been conducted in this area, there is no clear evidence
that privatization of alcohol markets leads to either an increase or decrease in alcohol
consumption.4 Studies that show a positive relationship between privatization and alcohol
consumption are countered with studies, using the same data, which show no
relationship.
While over-consumption of alcohol clearly has deleterious consequences, alcohol
consumption, per se, is not bad. In addition to being an activity that many people find
enjoyable, research has shown that moderate alcohol consumption reduces the risk of
heart disease, stroke, gallstones, and diabetes (Mayo Clinic Staff, 2010).
10) How will privatization affect underage drinking, underage binge drinking, and DUI
fatalities?
Although numerous studies have been conducted in this area, there is no clear evidence
that privatization of alcohol markets leads to either an increase or a decrease in underage
drinking, underage binge drinking, or DUI fatalities. Studies showing a positive
3 Refer to Gruenewald et al. (1996), Douglas et al. (1997), and Presley et al. (2002).
4 Refer to MacDonald (1986), Holder and Wagenaar (1990), Wagenaar and Holder (1991), Mulford, Ledolter, and
Fitzgerald (1992), Wagenaar and Holder (1995), Weitzman et al. (2003), Trolldal (2005a, 2005b), Miller et al.
(2006), Pulito and Davies (2009), and Stockwell et al. (2009).
relationship (e.g., Stockwell et al., 2009, Weitzman et al., 2003, Wagenaar and Holder,
1995) are counterbalanced by others showing an absent or ambiguous relationship (Pulito
and Davies, 2009, Trolldal, 2005a, Trolldal, 2005b).
Some studies that show relationships may suffer from unaddressed statistical anomalies
that bias the results in favor of finding relationships where none exist. For example,
Wagenaar and Holder (1995) include wine cooler sales in their study despite the fact that
wine coolers were excluded from the change in alcohol laws and during the period of
time studied, there was a coincidental surge in the popularity of wine coolers. The
analysis done by Stockwell et al.’s (2009) suffers from unaddressed statistical
complications that render their results meaningless.
Studies that do show relationships also suffer from unaddressed causality, making the
results useless for guiding policy makers. Implicit in many studies is the assumption that
alcohol consumption causes, rather than is caused by (or related to), social ills. If in fact
the causality is reversed or absent, one would expect that reducing alcohol consumption
would have no effect on social ills.
11) What type of control minimizes underage drinking, underage binge drinking, and
DUI fatalities?
Pulito and Davies (2009) test for differences in the incidence of underage drinking,
underage binge drinking, per-capita alcohol consumption, and DUI fatalities among
privatized versus non-privatized states. Unlike previous research, this study looks at 48
states over a period of 16 years and classifies the states according to the degree of
privatization. They categorize the possible degrees of privatization versus control as:
full control (sales of beer, wine, and liquor are monopolized at the retail and
wholesale levels).
moderate control (sales of beer, wine, and liquor are monopolized at the wholesale
level, and sales of only one type of alcohol are monopolized at the retail level).
light control (sales of beer, wine, and liquor are monopolized at the wholesale level,
and sales of all three types are privatized at the retail level).
license (sales of beer, wine, and liquor are privatized at the wholesale and retail
levels; the state only monopolizes alcohol sales via the licensing of private firms).
They compare the degree of state ownership to per-capita alcohol consumption, the
incidence of underage drinking, the incidence of underage binge drinking, and alcohol-
related traffic fatalities and find that alcohol consumption is significantly greater in
license states versus light-control states.
States with full, moderate, and light control are statistically identical. They find no
significant difference in the incidence of underage drinking or the incidence of underage
binge drinking among the four control classifications, and no difference in the rate of
DUI arrests among the four control classifications. The number of alcohol-related traffic
fatalities per DUI arrest is the same for full control and license states, and significantly
lower for moderate and light control states.
Table 1 Pulito and Davies (2009) results (changes are as compared with no privatization)
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L.J. (1997). ―Results from the 1995 national college health risk behavior survey.‖ Journal
of American College Health. 46(2): 55-66.
Gansler, D.F., Darsie, J.L., and McDonald, R.N. (2009). ―Liquor control boards—whether liquor
control boards are subject to state or county ethic laws.‖ Letter to the State Ethics
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Gruenewald, P.J., Millar, A.B., and Roeper, P.J. (1996). ―Access to alcohol: Geography and
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consumption: Four case histories.‖ British Journal of Addiction. 81(3): 381-387.
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Underage
Drinking
Underage Binge
Drinking
Total Sales
Partial privatization of retail stores
No change
No change
No change
Full privatization of retail stores
No change
No change
Decrease
Full privatization of retail and
wholesale stores
No change
No change
Increase
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