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Tuesday, August 10, 2010

Utah liquor store privatization? Probably not

Utah cocktailians probably read with interest Robert Gehrke’s excellent article in Saturday’s Salt Lake Tribune “Could grip on liquor loosen?”  It’s an interesting idea, but the Utah Mixologist must answer “probably not.”  The article does a good job of laying out the issues around privatization of the Utah liquor system, along with one surprising fact: the state’s Privatization Policy Board believes the state could “save” $21.6 million annually by privatizing the system.  One suspects that state pols think that this $21.6M would be on top of the $86M in revenue that the state made on wine and liquor in 2009.  $107M?  Cool.  The article reports that Washington state’s auditor thinks it could save $350M over five years through privatization of their liquor system.  It seems to the mixologist that when you sell a business, which is what the state liquor store system is, you do save the overhead of running that business, but you also lose the profits.

But would (or could) this really be the case?  Utah currently receives all of the proceeds from the sale of liquor because it runs the entire system.  In states where liquor is a business, the state taxes wine and liquor (a “sin tax”) and the businesses selling liquor pay this tax as part of their overhead before realizing a profit.  The state only gets the tax.  Today Utah gets the equivalent of the tax and the profits from the stores combined because the state runs the entire system.  They could get a bump from selling the stores (a business normally sells for about five times revenues), but that would soon be gone, and then what?

Locals like to complain about liquor prices in Utah, but when I travel I see that Utah prices do not appear to be out of line with what I see in other states.  Privatization would mean that a big chunk of that $86M in revenue that the state realizes from the liquor store system would go to the businesses that take over the stores, and the state would only get some portion of it as a tax.  In the Tribune article, Dennis Kellen, executive director of the DABC, mentions that Maine and Montana have privatized, and are now trying to make up the revenue.  If the state tried to set the taxes high enough to cover its current total revenue from wine and liquor, businesses would not buy the stores because they would know that they couldn’t charge prices high enough to make a profit without sales dropping through the floor.  If the taxes are reasonable, the state will lose the profit portion of the current revenue, and that will be hard to make up.

The real sticking point, however, will be advertising.  Do you remember when restaurants couldn’t print on their menus that they sold drinks?  Businesses will not take over the liquor stores if they are not allowed to advertise what they’re selling.  And if the state wants to set the tax high (this is Utah after all), businesses will have to sell a lot more liquor to make enough money to cover their overhead and make a profit.  Can you imagine seeing a full-page liquor store ad full of week-end specials on the back page of Section A of The Salt Lake Tribune, and then driving to a liquor store sporting a big neon sign reading “Sazerac Jack’s Liquor Emporium” to pick up bargain booze?  I didn’t think so.

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