Time to deregulate the ABC system (or In vino, libertas)

This week’s “Daily Journal” guest columnist is Jon Sanders (twitter.com/jonpsanders), Associate Director of Research for the John Locke Foundation.

You know, when I drink alone,
I prefer to be by myself.
— George Thorogood and the Destroyers, “I Drink Alone”

Regardless of how or if you drink, the State of North Carolina prefers to be by itself in controlling liquor sales. As the majority of U.S. states have shown, however, liquor retail is no core province of government. And the good news for state and local leaders is, deregulation in North Carolina wouldn’t even force them to go cold turkey on their alcohol revenue addiction.

The state’s Alcoholic Beverage Control (ABC) system is a relic of the Prohibition era, but its roots run deeper. In 1874 the North Carolina General Assembly passed local-option legislation that gave citizens the ability to vote to ban the sale of alcoholic beverages in townships. Local option is still, with some modifications, the process governing local alcoholic sales. A statewide referendum in 1908 made North Carolina the first Southern state to prohibit alcohol outright, following the Watts Act of 1903 that limited the sale of alcohol to incorporated areas, in effect a rural prohibition.

The Alcohol Beverage Control Act of 1937, which established the current control system in North Carolina (with some modifications since), came on the heels of the 21st Amendment to the U.S. Constitution and the repeal of Prohibition in 1933. North Carolinians voted against holding a convention to ratify the 21st Amendment.

Following the repeal of Prohibition, most states opted against controlling the sale of alcoholic beverages at the retail or wholesale level. Eighteen states, however, adopted differing kinds of controls of the sale of alcoholic beverages. North Carolina’s system is unique among control states in that instead of having a single state board in charge of sales, local governments appoint boards to operate the ABC stores in their respective areas (countywide if county voters have approved liquor sales, citywide if municipal voters in a dry county have approved liquor sales). At present there are 415 ABC stores in North Carolina operated by 163 local ABC boards.

The state ABC Commission determines what brands of alcohol may be sold in the state, sets uniform retail prices for each of them, owns the central liquor warehouse, and oversees the local ABC boards. The local boards operate ABC stores, buy from the state warehouse, and sell to the general public as well as mixed-beverage licensees, such as restaurants and bars.

Such a centralized, political system set up to thwart market forces invites corruption. In the past few months, the ABC system has been rocked with scandal. In Charlotte, it was an extravagant, $12,700 dinner for members of the Mecklenburg County ABC Board and guests, paid for by the distiller Diageo North America. Meanwhile, exorbitant salaries, bonuses, and resort travel for a New Hanover County ABC administrator and his son raised hackles in Wilmington.

Earlier this year, Gov. Beverly Perdue raised privatization as an option in requesting an evaluation of the ABC system. Nothing nearly that ambitious is on the agenda, however. It should be.

Historically, the ABC system was about controlling a product regarded as evil. It was not about maximizing state revenue through monopoly provision of the evil product, although that was the logical consequence.

Now, however, maintaining state revenues appears to be the top concern with ABC reform, especially as it pertains to deregulation. The other concern is preventing social ills from an assumed increase in alcohol consumption (drunk driving, domestic disturbances, addiction, etc.).

Maintaining state revenue from deregulated liquor sales is no real concern at all. As part of deregulation, state leaders could settle upon a menu of sales and excise taxes and fees that would maintain state revenues from alcohol sales. Just know that it could be a double-edged sword, revenue-wise. When Alberta, Canada, converted from control to a license system, officials there set up revenue-neutral excise taxes. In subsequent years, however, they have had to reduce those taxes in order to stay revenue-neutral.

Furthermore, depending upon the extent of deregulation, the state could reap one-time windfalls from the sales of the state warehouse and the local retail stores. Those properties would also become new sources of property and business income taxes for the state and local governments, as well as places for potential job creation. The state could also expect more revenue from licensing.

All things considered, the revenue picture could be brighter for North Carolina with a deregulated system.

As for the social concerns, North Carolina already allows liquor-by-the-drink in restaurants, bars, taverns, and other privately run enterprises. The state also allows beer and wine to be sold in grocery stores, convenience marts, specialty shops, restaurants, taverns, bars, and other privately owned establishments — and to be sold at competitive prices that vary from outlet to outlet, town to town.

Studies have shown that alcohol consumption is not affected by who sells the alcohol — whether the state or private licensees. Deregulation in West Virginia and Iowa resulted in less per-capita alcohol consumption. Deregulation should therefore not cause increases in such things as drunk driving and domestic abuse.

Besides, there is another social ill in the mix. The current centralized system — outdated, convoluted, and removed from market incentives — presents an ongoing temptation for public corruption.