North Carolina s Alcohol Beverage Control ( ABC ) system desperately needs

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1 North Carolina s ABC System Needs Modernization: Reform could net $1 billion while maintaining revenues and ensuring public safety February 20, 2013 North Carolina Institute for Constitutional Law Introduction North Carolina s Alcohol Beverage Control ( ABC ) system desperately needs modernization. Local ABC boards are plagued with corruption, unprofitability, and inefficiency. Moreover, the ABC system arguably violates the state constitution s anti-monopoly provision. To address these problems, policymakers should consider a program of ABC modernization. Modernization, which would end this monopoly, sell state owned assets, and open alcohol sales up to market competition, could yield as much as $1 billion up front with continued licensing and tax revenues each subsequent year. Moreover, privatizing alcohol sales can be done in a responsible manner that will protect public safety. The Need for Reform of the Current ABC System North Carolina is one of 18 control states that continue a post-prohibition era practice of heavily regulating the retail sale of liquor. National Alcohol Beverage Control Association, North Carolina is the only state that appoints local boards to run state owned and operated ABC stores, 1 the only locations permitted to sell liquor to the general public. N.C. Gen. Stat. 18B-800(a). The ABC system is overseen at the state level by the ABC Commission, which is tasked with administering ABC laws Report 4-8. The Commission controls which liquors can be sold in the state, sets prices, and contracts out 1 Program Evaluation Division, North Carolina General Assembly, North Carolina s Alcohol Beverage Control System Is Outdated and Needs Modernization, 1, Final Report to the Joint Legislative Program Evaluation Oversight Committee, Report # , December 10, 2008 (cited herein as 2008 Report ). 1

2 warehousing operations, among other duties. Id. In order to permit ABC sales, counties and municipalities must establish local ABC Boards and follow statutory guidelines, including obtaining local voter approval. Id. This system is rife with shortcomings, however, including corruption, unprofitability, and potential unconstitutionality. Over the past few years the state has seen a guilty plea arising out of a federal investigation into ABC corruption in New Hanover County, the resignation of the Mecklenburg County ABC chair after allegations of improper gifts from liquor companies, and reports of tens of thousands of dollars worth of alcohol going missing on multiple occasions from a Pembroke ABC store. 2 Meanwhile, many stores struggle to maintain profitability, and others continue to lose money, even after ABC reforms were enacted in Several factors hindering profitability were identified in the state s 2008 Program Evaluation report: Towns with as few as 500 registered voters can qualify to establish an ABC store in their community, allowing communities to open a store even though they are too small to support one. In some cases, stores are too close together, resulting in oversaturation of the market. Population and shopping patterns can shift, making store locations obsolete. ABC boards lack a clearly defined mission. While some local ABC boards think the purpose is to control alcohol sales, others believe the purpose is to promote alcohol sales. Some cite providing revenues or community service. Tellingly, some local boards use the lack of a clear mission. to justify ineffective and inefficient store operations by deemphasizing profitability Report 14-15, Finally, even though monopolies are prohibited by the North Carolina Constitution, N.C. Const. art. I, 34, the current ABC regulatory system presents the characteristics of a monopoly as identified in North Carolina case law. American Motors Sales Corp. v. Peters, 311 N.C. 311, 316, 317 S.E.2d 351 (1984) (defining monopoly as (1) control of 2 See Kelcey Carlson and Amanda Lamb, Contractor gets probation in New Hanover ABC case, WRAL, September 22, 2011, Chairman of Mecklenburg ABC board resigns post, WRAL, January 14, 2010, Report Mark Binker, ABC system earns money, but some boards still operate at a loss, WRAL, December 28, 2012, 2

3 so large a portion of the market of a certain commodity that (2) competition is stifled, (3) freedom of commerce is restricted and (4) the monopolist controls prices. ). In light of the proprietary nature of selling alcohol and the tenuous connection to any core governmental function, the constitutional deficiency of the current ABC system should be cause for reexamination of the state s program of alcohol regulation. The Benefits of ABC Modernization Modernization of ABC regulations would have many benefits. The state could bring in as much as $1 billion from full-scale ABC modernization/privatization, according to a study commissioned in 2011 by then Gov. Beverley Perdue. 4 In addition to this infusion of cash, modernization would alleviate the corruption and inefficiencies that accompany operating a proprietary business according to political considerations rather than economic realities. Stores would have to cater to the needs of customers and failing stores would necessarily shape-up or shut down. Thus, with reductions of corruption and unprofitability along with increases in revenues and efficiency, it should come as no surprise that the modern trend among the states is toward privatization. 5 Opponents argue, however, that modernization will lead to a liquor store on every corner, spur an increase in alcohol-related social ills, and cause the state to forgo millions in revenue from ABC profits each year. These concerns are overblown and unfounded. First, doom and gloom predictions of a massive proliferation of liquor stores defy reason and experience. The state is not overrun with 4 See Lynn Bonner and Rob Christensen, Privatizing ABC system will be legislative issue, News and Observer, January 21, 2011, see also North Carolina Alcoholic Control Commission Workshop: Potential Restructuring Models and Valuation, Scott Balice Strategies, January 10, 2011, (cited herein as Scott Balice Study ). 5 Leonard Gilroy, Will States Toast Liquor Privatization in 2012? Reason Foundation, Feb. 2, 2012, 3

4 strip clubs, tattoo parlors, bars, or tobacco stores on every corner; and yet, the state has wisely refrained from establishing its own monopolies on these markets. It is even plausible that the number of liquor stores would decrease due to privatization because many of the struggling or unprofitable state ABC stores would presumably be shut down or merged. It is also possible that additional taxes on the newly privatized industry could require retailers to raise prices, further reducing the likelihood of large-scale proliferation. 6 Second, although some studies differ, 7 recent research by the Commonwealth Foundation suggests that alcohol-related social ills ironically tend to decrease when alcohol controls are relaxed. 8 This research made several key findings, including: Alcohol consumption decreased in states (Iowa and West Virginia) that had recently privatized alcohol sales. Consumer buying patterns in those states actually shifted away from hard liquor toward less alcoholic beverages possibly due to a convenience effect where a consumer tends to buy less per visit when alcohol is readily available, rather than stocking up on special trips to government controlled stores. Full retail control (i.e., where the state owns and operates stores) does not have a clear affect on overall levels of alcohol consumption. Underage binge drinking is unaffected by the level of alcohol control. DUI fatalities were found to be 25 percent higher in full control states than in licensure (i.e., fully privatized) states. 6 After Washington State privatized alcohol sales retailers were forced to raise prices to make up for lost profits under the old system. Joel Millman and Mike Esterl, Liquor Buyers Cross State Line, The Wall Street Journal, Sept. 3, 2012, 7 Stephen Herzenberg, National Public Health Task Force Recommends Against Privatization of Retail Alcohol Sales, p. 3, Keystone Research Center, June 2, 2011, Force-Alcohol-Privatization.pdf. 8 John Pulito and Antony Davies, Government-Run Liquor Stores: the Social Impact of Privatization, 4, Policy Brief from the Commonwealth Foundation, Vol. 21, No. 03, October 2009, (cited herein as Commonwealth Foundation Study ). 4

5 Commonwealth Foundation Study 4, Third, excise taxes and licensure fees could be adjusted to recoup most, if not all, yearly profits lost due to privatization. 9 Profits currently account for roughly one-sixth of state ABC revenues. Scott Balice Study, 14. According to the state s Program Evaluation study, even under a full privatization-licensure model, the excise tax rate could be increased to maintain state and local revenues Report 34. Conclusion North Carolina s ABC system needs modernization. ABC modernization would end an arguably unconstitutional monopoly while providing much needed revenues, perhaps as much as $1 billion, to the state. Claims that the state will be overwhelmed with new liquor stores are unfounded. Moreover, research shows that the social ills opponents warn against are not exacerbated by modernization and privatization but rather improved. Finally, profits the state would give up by relinquishing its monopoly can likely be recaptured through license fees and excise taxes. Thus, there is no reason to delay an overhaul of the state s corrupt, inefficient, potentially unconstitutional, and outdated ABC system Report 34. The study states that even under a full privatization licensure model, the excise tax rate could be increased to maintain state and local revenues. 5