Liquor Control Board: A case for the state giving up the booze business

By Hans A. Zeiger, Evergreen Freedom Foundation

Washington state's Liquor Control Board has a long track record of corruption and mismanagement, and the reason is simple: It is a monopoly in charge of both regulating and distributing the product it sells.

A state audit recently uncovered $839,706.90 in unauthorized payments made by the Washington State Liquor Control Board (LCB) to a vendor who submitted false billing records. The vendor—Russell Lee LaFountaine—inflated delivery weights on 600 shipments by 5,000 pounds each, billed for 1,370 deliveries that were never made, and double-billed for 273 orders (1).

This wasn't the first little hiccup in the LCB's accounting. In February 2002, State Auditor Brian Sonntag discovered the Board couldn't figure out what happened to $421 million worth of sales (2). In 2001, it was the fiasco surrounding the Board's new, but useless, $32 million liquor distribution warehouse (3). A litany of additional audits have uncovered misappropriation of funds, lack of internal controls, misuse of petty cash, and non-compliance with state laws governing distribution.

So what's going on? In the case of LaFountaine's heist it's simple: there wasn't much to stop him. Staff are not required to verify reported deliveries and weights and LaFountaine was not required to provide original copies of his invoices (4). Further, he was a friend of the staff member who reviewed his billings and personally delivered his payments (5).

Other problems can be blamed on administrative changes made by the Board in 1999, such as the decree that invoices no longer had to be "reconciled." (Current Board members are unable to recall who made this change, or even who hired Russell LaFountaine.)(6)

These internal shortcomings are all symptoms of the bigger problem: as the sole distributor of liquor and the entity responsible for regulating liquor sales, the Liquor Board is a monopoly operating with a blatant conflict of interest.

As one Seattle Times editorial remarked, "The Board's very mission challenges logic: At the same time as it is supposed to keep minors from buying liquor and drunks from getting drunker, it is responsible for keeping liquor profits flowing into the state treasury."(7)

It seems impossible that state officials are blind to this obvious "fiasco waiting to happen." The Board's dual purpose ensures that neither liquor sales nor efforts to regulate and educate will be managed effectively. First, since the state has a monopoly over the sale of liquor, it has no incentive to set competitive prices and consumers have no choice of vendors. Second, the state will hardly be inspired to effectively deter excessive use of alcohol among adults when its revenue is dependent on that use.

Certainly the larger question, in this day and age, is why the state is even in the liquor business at all. Selling booze is not a core function of government.

Washington state should take steps to privatize its liquor sales, as many other states and countries have done around the world.

How did it all begin?
In 1934, Washington state was not alone in its creation of a Liquor Control Board—the turbulent results of a short-lived Prohibition demanded response (8). What remains today however, nearly seventy years later, is a painful hangover. Is the Board really serving the best interests of the state's citizens?

The LCB is comprised of three governor-appointed panel members who each serve a six-year term and earn an annual salary of $70,000. Qualifications for the positions? "None specified by law."(9) The three Board members oversee a staff of 1,265 and operate on a $140 million annual budget (10).

The LCB's primary stated purpose is to "oversee the sale and distribution of alcoholic beverages," and the Board claims to accomplish this task through "licensing, enforcement, education, and controlled distribution and merchandising systems."(11)

Washington is now one of only eighteen states that directly controls the regulation, distribution and sale of alcohol. Thirty-two states and the District of Columbia, as well as many countries around the world, have privatized liquor sales and limited their role to managing sales licenses and any associated taxes (12).

Thus far, Washington officials and lawmakers who have tried to move in the direction of privatization have been soundly rejected. In 1994, Governor Mike Lowry proposed legislation that would allow private bidders to buy and operate a number of liquor franchises. The bill died in its first committee hearing (13). Representative Kathy Lambert sponsored a similar bill in 1999, and it too died a swift death (14).

The climate surrounding the issue was apparent again in 2000 when Governor Gary Locke appointed a panel of eighteen citizens to review and enhance the Liquor Board's effectiveness. The panel examined three options: (15)

1. Retain the current Liquor Control Board with operational improvements.

2. Privatize retail sales while retaining state wholesale operations.

3. Privatize all liquor sales operations, including wholesale operations.

Option 3 was immediately eliminated from consideration. Five of the eighteen panel members recommended Option 2, but that idea was also eliminated by the majority. The panel voted 11-5 to keep the current system. The minority panelists weren't the only ones unhappy with the decision. "The panel has offered bad advice," wrote the Walla Walla Union Bulletin. "The state should get out of the booze-selling business."(16)

While the governor appoints the LCB's panel members, the Board does not answer directly to him for its decisions. In fact, it doesn't answer to anybody. When Board members create new regulations, those regulations are binding. When they make financial decisions, those decisions are not reviewed by any outside authority. Recognizing the tendency of power to protect itself, it is little wonder the Board offers no meaningful accountability.

As Michigan's Mackinac Center for Public Policy so aptly stated, "It may not be easy to remove state government from its liquor operations. As long as the state-imposed price markups feed the public treasury, the state will not want to leave the liquor price control and wholesaling business."(17)

What about the money?
During its existence, the LCB has pulled in more than $4 billion for state and local budgets. Last year, more than $200 million was collected from taxes and license fees imposed on the retail sales of beer, wine and other alcoholic beverages (18).

But the state's liquor income has been declining overall for the past several years. The LCB's budget may seem whopping at $140 million this year, but that's down from $200 million last year and $447 million the year before. Perhaps spending its revenue to convince consumers not to buy its product is working for the state after all (19). In any event, the state's liquor income is uncertain and unreliable.

So what happens to the state's revenue if liquor sales are privatized? For one thing, the state can likely cash-in on $125-150 million up front by auctioning off its sales operations. In addition, far from cutting off the flow of revenue to the state, privatization "generates a steady stream of new revenues from business taxes paid by private liquor stores."(20) A 1991 study conducted by the Commonwealth Foundation of Pennsylvania to explore that state's taxation options under privatized liquor sales concluded that basic business taxes and license fees would produce funding equal to what the state was pulling in prior to privatization (21).

Learning by example
Privatization is working well in other states and countries. As mentioned earlier, 32 states are classified as "non-controlled," meaning they have ceded their liquor operations to the private sector on a license basis. Some of these states have undergone this reform just in the past fifteen years. Iowa privatized its retail liquor sales in 1987, with one state legislator noting, "It strikes me as hypocritical to have Iowa all uptight about drunk drivers and also sell the stuff."(22) Michigan followed Iowa's example two years later (23). Then, in 1990, West Virginia sold its retail liquor sales for more than $20 million (24). And Ohio followed suit in 1991, privatizing 75 stores for a net gain of $10 million (25).

According to the World Health Organization, alcohol is privatized on a license basis in more than forty major countries, including Australia, Canada, Denmark, India, Ireland, Italy, Japan, New Zealand, Norway, Sweden, Switzerland, Taiwan, and the United Kingdom (26). A 1994 study published by the World Health Organization shows that in developed countries, privatization can indeed be effectively balanced with efforts to reduce alcohol abuse (27).

Taiwan privatized liquor sales this past January, resulting in a significant increase in liquor retail, brewer and distiller tax collections. Having previously relied on imported liquor, Taiwan's privatization of alcohol production opened the doors to a new domestic industry, stimulating the economy and diversifying the country's agricultural interests (28).

In Canada, the province of Alberta moved to privatize all liquor sales in 1993. Alberta sold its assets for a net of $82 million (29) and, according to the Fraser Institute, "the privatization of liquor retailing in Alberta has had quantifiable impacts on liquor store locations, product selection, prices, wages, employment, and government revenues."(30)

Just what were those impacts? Privatization resulted in the opening of 840 new stores, which led to an expanded tax base and increased tax revenues (31). In fact, as revenues increased, Alberta's Legislative Assembly had to lower taxes four times to keep revenues constant!(32) The jump in Alberta's tax revenues was so eye-catching Ontario was soon looking at the privatization of liquor sales in its hunt for solutions to a $5 billion deficit in 2001 (33). "It's not simply expenditure cuts, but it's also the possibility of increasing the revenue side of things as well," said Ontario official David Tsubouchi (34).

Alberta discovered other benefits to privatization as well. In the seven years following the transition, the overall crime rate at liquor stores in Calgary declined by 32 percent. "Break and entry declined because criminals who approached were more likely to find staff in attendance," according to the Frontier Center for Public Policy (35).

In August 2002, British Columbia officials also began taking significant steps toward privatization of liquor sales. Listing the government's goals for these reforms, B.C.'s Ministry of Public Safety and Solicitor General included plans to: (36)

• Reduce red tape and bureaucratic delays

• Provide a strong focus of safe and responsible liquor service

• Strengthen local involvement in liquor licensing decisions

• Promote B.C.'s tourism and hospitality industry

• Regulate liquor service in an efficient and effective manner

Reforms for Washington State
Two key questions must be answered before the state can effectively address the issues surrounding the regulation and distribution of liquor.

First, is the consumption of alcohol inherently bad for individuals and the community? If it is, the Prohibitionists were correct in their attempts to ban it completely. But if it isn't, allow it to be privatized where it can be more efficiently and effectively managed within the bounds of healthy competition.

Second, is ownership of liquor distribution necessary for effective regulation? If it is, the decision of Governor Locke's review panel to keep the current system is the best route to go. But if liquor can be properly regulated without a government monopoly on its distribution, privatize.

Washington lawmakers can learn from other states and countries that have reformed their regulation and sales of liquor in a sane and responsible way. Privatization cannot be achieved overnight, but there are gradual steps to encourage its progress. Stated simply, some short-term steps include:

• Simplifying and shortening the license approval process.

• Reducing the number of license types.

• Eliminating regulations that have no health or public safety relevance.

• Selling or auctioning off the state's 318 liquor stores.

• Issuing private licenses to existing stores.

• Granting a limited number of new licenses until privatization has stabilized.

• Eventually, fully privatizing the wholesale distribution of liquor.

• Adjusting wholesale and retail liquor taxes and license fees to meet or exceed pre-privatized state liquor income.

• Getting the state out of the wine industry. (Irresponsible wine consumption is not a widespread problem and wineries in Washington are dependent on efficient sales.)

• Providing more severe penalties for individuals who violate the law through fraud or other corrupt means. (People who waste or divert tax dollars for personal gain should be immediately relieved of their position and should face deterrent penalties.)

• Creating more effective accountability measures, including oversight hearings and tighter budget language.

Prohibition is over, yet Washington state is still operating a monopoly in the liquor regulation and distribution business. It's time for lawmakers to learn from the successful examples of other states and countries and end this blatant conflict of interest for the benefit of Washington's taxpayers.

Notes:

1. Washington State Auditor's Office. Washington State Liquor Control Board. 14 August 2002: 3.

2. Washington State Auditor's Office. State of Washington Accountability Report. 7 February 2002.

3. "Liquor Control Board's warehouse is $32 million fiasco." Halsne, Chris. KIRO 7 Eyewitness News. 26 February 2001.

4. Gigi Zenk, staff, Liquor Control Board. Phone interview, August 2002.

5. Brad Shannon. (2002, August 15). The Olympian. Alcohol fraud plan detailed.

6. Zenk, Gigi. Phone interview. Liquor Control Board. August 2002.

7. Dionne Searcey. (1999 October 31). Seattle Times. State faces hard choices when it comes to hard liquor.

8. Liquor Control Board. (2002 January). A Control State System Regulating Alcohol Responsibly. <http://www.liq.wa.gov/publications>

9. Dionne Searcey. (1999 October 31). Seattle Times. The pay: $70,000 a year; job qualifications: none.

10. Liquor Control Board. (2002 January). A Control State System Regulating Alcohol Responsibly.

11. ibid.

12. National Alcohol Beverage Control Association. The Control States.
<http://www.nabca.org/control.html>

13. Washington State Liquor Control Board. Executive Summary.
<http://www.liq.wa.gov>

14. Malkin, Michelle. (2 March 1999). Seattle Times. State Liquor Board is due for a wholesale makeover.

15. Washington State Liquor Control Board. Executive Summary.
<http://www.liq.wa.gov>

16. (5 December 2000). Walla Walla Union Bulletin. Washington State should get out of liquor business.

17. LaFaive, Michael. (1 June 1997). Mackinac Center for Public Policy. Liquor Privatization: Pouring a 200-proof opportunity down the drain

18. Currier, Tricia. Liquor Control Board. "Where does the Liquor revenue go?"
<http://www.liq.wa.gov/releases/funds.asp>

19. Liquor Control Board. "Strategic Plan." July 2003-08.
<http://www.liq.wa.gov/board/LCB%20Strategic%20Plan.pdf>

20. Eggers, William D. (January 1993). Reason Public Policy Institute. "Privatization Opportunities for States." < http://www.rppi.org/privatization/ps154.html>

21. Buck PhD, Andrew. (January 1997). Privatizing Wine and Liquor Distribution in Pennsylvania. Commonwealth Foundation for Public Policy Alternatives.

22. Alcohol Research Group. (1991). Alcohol Monopolies and Alcohol Control. <www.bks.no/monopoly.htm>

23. Reason Public Policy Institute. Liquor Sales and Distribution. <http://www.rppi.org>

24. ibid.

25. ibid.

26. World Health Organization. List of countries with privatized or license-only liquor policies. <http://www.who.int.>

27. World Health Organization.(1999). Global Status Report on Alcohol.
<http://www.who.int/substance_abuse/PDFfiles/
global_alcohol_status_report>

28. Chou, Wilma. Taiwan Government Information Office. Farmers Eye new business as government liquor monopoly abolished. <http://publish.gio.gov.tw/fcj/past/02020841.html>

29. Frontier Center for Public Policy. (28 August 2000). Alberta's Liquor Policy Bonanza.<http://www.fcpp.org.>

30. Fraser Institute. The Economic Impacts of Privatization. <http://www.oldfraser.lexi.net>

31. Frontier Center. Alberta's Liquor Policy Bonanza.

32. ibid.

33. Canadian Press. (22 November 2001). Tories eye privatization to offset $5B deficit.
<http://www.web.ca/~apolnet.>

34. ibid.

35. Frontier Center. Alberta's Liquor Policy Bonanza.

36. BC Liquor Control and Licensing. (10 June 2002). Liquor Policy Review.
<http://www.pssg.gov.bc.ca/lclb/plrev.htm>

The Evergreen Freedom Foundation is a non-profit public policy research organization dedicated to preserving and advancing individual liberty, free enterprise and limited and accountable government.

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org