Liquor Privatization Initiatives Part 3: Potential Implications

Editor's note: This post was written before OFM released official fiscal impact estimates for I-1100 and I-1100.  For updated information on how these measures would impact the state budget view the following schmudget post: Update: Liquor Privatization Measures Would Impair Public Priorities.

Earlier this week, schmudget featured two posts about proposed changes to Washington’s liquor control system.  The first post detailed our current, state-run liquor control system while the second explained the differences between Initiatives 1100 and 1105 – both of which would privatize the sale of hard liquor in Washington.  Today’s analysis, the last of the series, discusses these measures' potential fiscal and social implications.

Uncertain impact on the state budget

The extent to which I-1100 and I-1105 would impact the state budget is yet unclear.1  A number of factors suggest that both initiatives could significantly reduce state resources in the coming years, however.

By privatizing retail and wholesale liquor sales in Washington, more than $70 million per year in state markup revenues would be lost under both I-1100 and I-1105. Initiative 1105 would also repeal all existing state taxes applied to liquor, which generated some $222 million in fiscal year 2009. A portion of these revenues would be replaced by a new six percent tax on gross liquor sales at the retail level and a one percent tax applied to distributors. At current liquor prices and sales volumes, these taxes would generate only about $44 million per year, however.2 

To make up the difference (plus an additional $20 million per year over the next five years), I-1105 would require the Liquor Control Board (LCB) to develop and propose to the legislature a new per-liter liquor tax. It is important to note that nothing in the language of I-1105 requires the legislature to act on the LCB’s recommendation. Furthermore, should Initiative 1053 be approved by voters in November, the Board’s proposed tax would have to be approved by a supermajority (two-thirds) vote in the state legislature or a vote of the people. Under I-1053, the proposed per-liter liquor tax could be blocked by a small minority of lawmakers.

On the other hand, under both I-1100 and I-1105 the state would incur significant savings from shutting down the state liquor stores and the distribution center. The bulk of these savings would be realized as a result of laying off about 932 state liquor store and distribution center employees.3   In addition, the LCB would generate new revenues from the proposed liquor retailer and distributor licensing fees, and from additional B&O tax receipts.   But it is not clear at this time whether total state savings would be large enough to offset the forgone markup and liquor tax revenues.

Long-term costs

It is possible that the consumption of hard liquor would increase significantly under both I-1100 and I-1105.  There are currently 316 state liquor stores and contract liquor stores in Washington. An analysis conducted by the Washington State Auditor’s Office found that the number of retail stores selling hard liquor could grow to as high as 3,357 under a privatization scheme similar to the ones proposed in I-1100 and I-1105.  The Auditor’s office also found, based on comparisons with states with privatized systems, that the consumption of hard alcohol in Washington State could increase by nearly 15 percent in the coming years.4

A sharp increase in the consumption of hard liquor in Washington could entail significant long-term social costs.  Under I-1100 or I-1105, the state could face increased costs associated with diminished public health and law enforcement — due to higher rates of drunk driving, illegal liquor sales to minors, and other alcohol-related crimes.  These costs would begin building at time when Washington continues to struggle to meet basic public needs while recovering from the Great Recession.

For more information on I-1100 and I-1105 read the Budget & Policy Center’s latest policy brief, “2010 Initiatives Could Impact Public Services.”