Saturday, November 5, 2011

Retail Booze Privatization: why HB11 doesn't cut it

HB 11, a bill proposed by House Majority Leader Mike Turzai back in July, is still the standard bearer for privatization. Privatization currently has the support of Republican Governor Tom Corbett, who has majorities in both houses of the legislature (although the Senate Republicans are stalling, possibly trying to squeeze out a deal on a Marcellus Shale "tax"). To make things more likely, the PLCB has obligingly stumbled badly in the past two years with: 

  • two contracts of questionable ethics and effectiveness – one for the wine kiosks, the other for 'courtesy' training
  • the embarrassing public failure of the wine kiosks (and a clumsy attempt to cover up a strongly negative internal review of the idea)
  • a disastrous install of a $66 million inventory system that led to a gross overbuy of inventory (which then had to be stored in trailers in summer heat) and a shutdown of licensee deliveries pickups (the PLCB doesn't deliver...what was I thinking?!) for a week
  • a still-simmering corruption debacle at the Philadelphia warehouse in which over 20 employees were suspended (and another cover-up)
  • a complete fiasco over beer registration raids on three Philadelphia bars that led to very uncomplimentary hearings on the subject
  • a frustrating inability to promptly close nuisance bars
  • and a baffling failure to turn significant 'profits' with a police-enforced monopoly on sales of wine and spirits
This is the time to strike on privatization, and as you know, I've been all for it. I've called for it, argued for it, howled for it. 

But unless substantial changes are made in HB11, I cannot support it

It is not a question of the perfect being the enemy of the good; this bill has fundamental flaws that are simply not in favor of the citizens of Pennsylvania. I believe that they will result in the replacement of an unresponsive public monopoly with a poor selection of goods…with an unresponsive private oligopoly with a poor selection of goods, and I cannot support that. We have one chance to get this right, because changing the laws again will be even tougher. Let's have a look.

First, and most important to me, HB 11 does nothing about the intolerable police-enforced monopoly. If it passes as is, Pennsylvanians are still forbidden by law to bring home a bottle of wine from New Jersey (or Maryland, or Delaware, or New York...). I've been assured directly by Representative Turzai that the police will no longer enforce this, but that's not good enough. You're a legislator; don't tell me the police won't enforce a despicably un-American law; change the law. When so much of the state's population lives in the tight pocket of the southeast, just across the bridges from huge liquor stores, to do anything else is simply ridiculous. Kill the monopoly, encourage competition. The only reason this is even faintly legal and constitutional is because of the overboard interpretation of rights granted to the states through the 21st Amendment by federal courts; there is no such monopoly on any other goods. The police-enforced monopoly is insulting and intolerable. I cannot and will not support HB11 or any other privatization proposal that does not end it, and neither should you.

Second, the proposed wholesaler fees for exclusivity of brands pretty much guarantee a smaller selection of wine and spirits. Nathan Lutchansky (of the PLCB Users Group blog) has explained this in greater detail than I'd care to replicate; read it there. You'll soon realize that this is a non-starter. Why is this here? Well...maybe this is the reason (and Turzai's general counsel Jim Mann is extremely protective of the bill as written, BTW). Clean bill, please: do-over time.

Taxes are another issue: they're too high. Turzai has replaced the insulting “Johnstown Flood Emergency Tax” with a more rational gallonage tax, but it attempts to replicate the revenues from the onerous Johnstown tax – plus state sales tax, plus the PLCB's “profit” that goes to the state (not really "profit," but a somewhat arbitrary number set each year by the legislature; didja know that?) – by boosting it to crazy high levels...more than twice the taxes in neighboring states. Again, Lutchansky hasthe numbers on this; have a look (see his "Issue #2"). The taxes on wine and liquor simply do not have to be that high. They're unfair at those levels; why should I be paying so much more to fund state programs that benefit everyone just because I drink -- moderately!? Now's the time to make these taxes more equitable, instead of some of the highest in the nation (which is weird, because we have one of the lowest beer taxes...). Replace the revenue with a shale gas tax if you have to.

A huge problem: what about beer?  Why hesitate when we can fix some of the most egregious problems with a couple quick penstrokes (see below) Get rid of the insane case law, now! While we're at it, do away with ALL limitations on sales by licensees: “distributors” can sell anything from a single bottle to a keg, and so can taverns (and delis, and supermarkets with deli licenses), and fix the tax laws so that all retail outlets are on the same footing (right now, bars pay more taxes than distributors...say what?). Then, allow beer distributors to add wine and liquor to their licensed sales; allow the new wine/liquor licensees to sell beer. The artificial separation of sales is all about protecting business status quo; rewrite these laws for the benefit of Pennsylvanians, citizens, and voters for a change! Hell, if Joe "CEO" Conti can say “I'm for the people of Pennsylvania,so can I!

1,250 licenses is simply not enough. If the number were doubled, to 2,500, we would still be under the national average per capita, and this would help address the issue of oligopoly (see below). It will also help address the red herring issue of rural retail access.

I don’t know enough about how the PLCB sells to licensees to complain about it, so I’ll tell you what a friend of mine, a licensee, said:
“My concerns are from a licensee’s point of view. I don't want to be forced to buy from one wholesaler that has a limited selection, makes it difficult to place special orders, and charges retail and sales tax on ‘wholesale purchases.’”
To tell the truth: I don’t even know what HB11 does to address these concerns. I do know that almost every licensee I've talked to who tries to keep a premium wine or spirits inventory finds the PLCB frustrating, and that almost every one is afraid to criticize them. I’d like to hear more about what HB11 has for licensees...I suspect it's not much.

The licensing scheme in HB11 is just that: a scheme. It’s easiest to quote from a licensee who emailed me about this:
“The huge issue I see with the bill is the emphasis on large (over 15,000sf) stores. Was this bill paid for by big retailers like Total Wines? Who the hell is the state to mandate the square footage of a private business? Many of the state stores are much smaller than this. As per the bill, over half of the roughly 1200 stores will need to be over 15,000sf! These large stores often have lots of bottles, but by necessity need to focus on industrial products, not small producers. How is this going to increase selection? We don't need bigger Absolut displays. We need many smaller stores run by entrepreneurs who find and offer cool products. This bill would be the equivalent of mandating that over 50% of all restaurants be more than, say, 5000sf in size. Can you imagine what Philly would be like? A lot more Ruby Tuesdays, a lot less anything good. This aspect of the bill nearly makes it pointless to have privatization!”
I agree. The “protections” against private monopolies could be made much more effective by simply dropping the maximum licenses owned by any one company/person to ten instead of forty. Problem solved. If that loses support from big chains, well, first, too damned bad; and second, it will gain support from the people who are concerned about big chains grabbing all the licenses, and throttling selection. Who are we more concerned about? What’s good for business -- ho ho ho, don't you worry, little voter! -- is good for citizens? Sorry, that’s how we wound up with 75 years of the case law!

Finally, let the results of Granholm flow, and again: favor Pennsylvania’s citizens, not business interests who’d rather see no direct shipping of wine (or spirits or beer) because it might cut into their sales (studies show it doesn’t). Make the taxes realistic, and let direct shipping happen.

Those are the issues I have with HB11. I’d like to see them addressed, or explained, before I solidly support this bill. I've been told that some such changes are under way, but HB11 shows no changes online. Until such time as a majority of these issues are addressed and the police-enforced monopoly is done away with, I do not support this bill, and I urge you to consider these points before you support it. We have paid -- Lord God, we've paid -- for the misguided morality of our Repeal-era legislators and Governor Gifford Pinchot. We've earned a better road to privatization; one that takes our concerns into account first.

Where are we going to get that? I hope that Governor Corbett is doing what I'm starting to think of as his Swan Routine: serene and quiet on the surface, paddling like hell out of sight under the water. From the way he's talked about HB11 after the PFM Report came out (more on that soon) -- "a place to start" -- I don't think he likes it any more than I do. So here's hoping he puts leverage on Representative Turzai (and Jim Mann), or better, puts out his own version of a privatization bill that actually writes privatization for citizens.


Anonymous said...

Don't forget about the absurdity of the current licensing system; a liquor license in Williamsport will cost you $100,000, if you can find one for sale, zero dollars of which goes to the state/taxpayers. The sate will get around $700, for the transfer fee. Why was this system ever started? Why can a license be bought and sold like a commodity? Why are there quotas on how many can be issued? How will businesses be able to afford them if they're auctioned off to the highest bidder, as HB11 proposes? Why not just issue a license, like any other, that comes directly from the state, and disappears when it's no longer valid? This system must be changed!

Rich said...

As far as the police-enforced monopoly is concerned, I could care less. I agree that in principal it is wrong, but I also feel that currently, people scoff at it. Not to mention that under a properly crafted privitization effort, it shouldn't be a big issue because it should open up better competition in the state.

The taxes suck. This is a huge deal breaker for me. They need to figure out the tax issues to make it affordable or again they will shoot themselves in the foot and drive even more business out of the state, then noone will want to buy here and they will be forced to enforce the border laws.

The license structure is limited in order to drive up the "bidding" on licenses. It's all an economics game to make the bill look good financially. Personally, I don't think the number of licenses should be limited and there should be a fixed cost on the license, set by the state. If you want to open up shop, you simply buy a license from the state and they are obligated to sell it to you. I think the bid system is crazy. Honestly, in this day and age, who cares how many licenses there are out there?

Lew Bryson said...

Rich, on the close do you live to a border over which are good liquor stores? I'm in NJ in 15 minutes, for instance. What's weird, though, is that even though there are only 620 State Stores in the whole of PA, there are FOUR within ten minutes of my house. And I still like to go to NJ instead.

But really, the taxes sucking are the whole point about the monopoly. The monopoly is why they can get away with the taxes sucking. But as I say again and again: high excise taxes (on booze, smokes, whatever) are simply a government subsidy for smuggling...