For the third year a row, Sen. Arthur Orr (R-Decatur) is pushing to get Alabama state government out of the liquor business by eliminating the 176 storefronts leased and operated by the Alcoholic Beverage Control Board.
In SB292, Orr outlines a plan to phase out the storefronts over a five-year period, closing 20 percent of them each year through 2021. The bill is currently pending in the Senate committee on Fiscal Responsibility and Economic Development, but has already been reviewed favorably once.
Though Orr admitted streamlining ABC would require “complex legislation,” he said aside from cost savings his concern is simple — a government-owned entity, able to charge less for its products, is currently allowed to compete in the free market.
“We currently have the government in competition with the private sector, an area I would argue is not necessarily a function of government,” Orr said. “Plus, we’re looking at substantial cost savings of anywhere between $4 million to $6 million on the low end, but I’ve seen numbers as high as $40 million.”
According to Orr, even if the numbers fall somewhere in the middle, the Senate’s fiscal office has scored the bill at saving around “$16 [million] to $18 million.” He also said a full-scale privatization would mean any savings that occur would continue year in and year out.
Orr assumed private liquor store owners would support taking a competitor out of the marketplace, but while the idea of privatization has support, the Alabama Beverage Licensees Association represents a percentage of the state’s 610 private stores and has openly opposed his efforts.Dean Argo, manager of government relations and communications for the ABC Board, said removing all of the state’s storefronts would affect not only state funding and the board’s employees, it could hurt private store owners as well.
“Philosophically, most people would agree we should not be in retail business, but the devil is in the details,” Argo said. “The state realized in [Fiscal Year] 2015 about $240 million in revenue from liquor sales. If you look at the last three states that have fully privatized — Washington, Iowa and West Virginia — the state lost money.” Argo said often, larger corporations begins to monopolize the business and the money starts flowing out of state.
Alabama realized that income through complex legislation establishing the state’s taxes on alcohol, which today are the fourth highest in the country. Excluding excise and sales taxes, a 30 percent markup is assessed on every spirit sold in Alabama — 5 percent of which goes to the state’s General Fund and 25 percent of which funds the ABC’s operations.
ABC doesn’t receive money from the General Fund, and according to Argo, that 25 percent received from the markup on liquor sales produces roughly $35 million to $40 million a year for the board to pay for its employees, operational costs and to purchase the spirits themselves.
Eliminating that is where Orr’s $40 million figure comes from, but Argo said he believes Orr is “too optimistic about the net effect of privatization.” He listed several reasons, but specifically said despite there being fewer state stores, they regularly outsell their private counterparts.
“There was approximately $430 million grossed from liquor states in Alabama last year, and ABC’s 176 stores accounted for $330 million of that, where private package accounted for a little less than $100 million,” Argo said. “The thinking is, ‘Well, Jim will just go buy his bottle from the private package store,’ but they’re just not set up to handle that type of volume.”
While the tax structure wouldn’t change, Agro said larger companies would be in the best position to seize the opportunity in the liquor market and customers would likely see higher prices. In 2014, the Seattle Times reported the base cost of a liter of liquor in Washington had gone up $3.20 two years after privatization, and residents were also picking up an $8 increase in taxes on the same product.
Currently, Washington has the highest state tax on spirit sales in the U.S., but Orr said he knew a push for privatization would draw horror story comparisons to Washington state, and said his bill is an “entirely different animal.”
“Washington prices went up a lot because they had no private stores, and they went cold turkey from being 100 percent state controlled. Plus, they privatized their wholesale operations as well, and two wholesalers come in and take control of the market,” Orr said. “[The ABC Board] would still have enforcement and wholesaling and would still have the control mechanism of state government. That’s not touched in this bill.”
Orr also pointed out that Washington’s privatization bill tacked on additional taxes in the 11th hour of its passage in an attempt to make legislation revenue neutral.
Orr has previously made some changes to address concerns raised by ABC and others in previous years, including the creation of a separation fund for expenses related to the closing of state liquor stores. That fund would use proceeds from the sale of ABC stores’ fixed assets and equipment.
However, Argo said the majority of the stores are leased and the only fixed assets in them are security systems, cash registers and inventory computers. He said the products in the stores are the most valuable asset at any given time but under the bill’s current wording would not qualify as a “fixed asset.”
When asked, Argo said one of the biggest concerns he’s heard from private package store owners is that privatization would make it easier for “big box stores” like Costco and Wal-Mart to enter the liquor market. Yet Orr says they are coming either way — pointing to Costco stores in Hoover and here in Mobile already licensed to sell hard liquor.
Argo said the buying power and flexibility of pricing for other retail products gives large stores an advantage “mom and pop” liquor operations can’t compete with. He said that’s why Washington’s liquor market — dominated by two large wholesalers — now has a more limited variety, higher prices and fewer independently owned stores.
Orr’s bill does include a provision limiting the number of stores purchased by a single retail licensee to no more than five, but Argo said that wouldn’t stop companies from applying for separate licenses in other locations.