Washington Offers Lessons for Michigan Alcohol Law Reform
Imagine walking into your local wine, liquor or beer shop and finding all of your favorite brands on sale — permanently. This could be the reality for Washington liquor consumers as the state transitions from a government-run distribution system to a private one as a result of the state’s successful privatization initiative, which voters approved this month.
The new system permits liquor producers to sell directly to retailers; something that is generally prohibited under the three-tier distribution system which separates producers from retailers by forcing them to sell their product to a wholesaler who then sells to stores. Freeing the liquor market in this way allows producers to increase their profits and retailers to charge less. This increase in efficiency will result in more profitable businesses, lower consumer prices, reduced state spending and increased tax revenue.
Pennsylvania, Oregon and Virginia are considered likely to follow Washington’s lead. Michigan, however, with its long suffering economy, dwindling population, competition with neighboring states and the appointment of business-friendly regulators, is uniquely positioned to become the next state to truly transition from a control state to a free market for alcohol.
Michigan is one of the remaining 17 control states, where the government buys all hard liquor legally consumed in the state and then resells it to wholesalers. In Washington state, for example, before this month’s vote, the state had a monopoly on all liquor sales, both wholesale and retail. In some states, including Iowa, Montana, Wyoming and Mississippi, the government licenses private stores to retail hard liquor, but controls wholesaling.
For decades after Prohibition, Michigan controlled all levels of liquor sales — including both retail and wholesaling operations. Before the 1990s, supporters of alcohol privatization in Michigan had little success. In 1991, Gov. John Engler put the state on track to privatization. Gov. Engler was adamant about getting the state out of the liquor business. In 1997, the state sold off its liquor stores and ended government warehousing and shipping of liquor. It did not end the government monopoly on wholesaling hard liquor as well as continuing price controls. As a result of these remaining government controls, Michigan residents may pay an average of 3percent more for liquor than noncontrol states nationwide. Anecdotally, they pay far more than that compared with consumers in Indiana.
And in Michigan, it’s not just interference in the hard liquor market that drives up costs for consumers and businesses. The mandatory three-tier system and franchise laws give wholesalers in the state immense power over brewers. The three-tier system requires that producers sell to wholesalers and retailers purchase from wholesalers, making the wholesalers a state-mandated middleman. Franchise laws force brewers to enter into exclusive contracts with wholesalers. The contracts can sometimes span decades, and brewers may not extricate themselves from those contracts without risking significant costs. These rules may violate federal antitrust laws and eliminate competition among wholesalers, offering them little incentive to improve performance or lower prices. They also result in lost revenue for brewers and reduced availability and higher prices for Michigan craft beer lovers.
With this month’s vote, Washington becomes the first state to do away with the mandatory three-tier system for liquor. Michigan has a unique opportunity for reform. Gov. Rick Snyder appears to favor getting the government out of the alcohol market. He has appointed a knowledgeable business leader to the chair to the Michigan Liquor Control Commission — Andrew J. Deloney. Deloney is the former head of the Michigan Restaurant Association and is familiar with the cost alcohol regulations impose on Michigan businesses. Deloney says he hopes to create a system with “as little government restriction and regulation as possible.”
In addition, Gov. Snyder has commissioned a 21-member Liquor Control Advisory Rules Committee to review Michigan's liquor control system and offer recommendations for making it “simple, fair, transparent and efficient, and conducive to business growth and job creation.” If Michigan really wants to reduce consumer prices and aid businesses in the alcohol industry, it should not only follow Washington’s lead, but go further.
Michigan should allow private wholesalers to take over the state-run liquor operation and insist on competition for voluntary contracts with brewers, distillers and wineries. Those suppliers should also have the option to sell directly to retailers. The state should also end price-setting, franchise laws, and the post-and-hold laws that force wholesalers to announce changes in the prices they charge retailers, thus giving their competition time to adjust their prices as well. These protectionist laws undermine competition and keep prices high for businesses and consumers. Michigan has an opportunity to lead the nation in alcohol distribution reform.