America’s Booze Laws: Worse Than You Thought!

Commentary about business and finance.
June 12 2014 1:23 PM

Rum Deal

Counting up all the ways America’s booze laws are terrible.

140612_$BOX_StateLiquorLaws

Illustration by Charlie Powell

Last week in Slate, Alison Griswold highlighted a costly hurdle for would-be bar owners in Boston. The liquor licensing system in Massachusetts places population-based caps on the number of licenses available in a municipality, forcing restaurant and bar owners to look for liquor licenses on the secondary market, where they cost as much as $450,000.

When I read about the quota system in Massachusetts—the state I was born in—I immediately thought of the similar systems in New Jersey and Pennsylvania, the states where I grew up and currently live, respectively. While $450,000 for liquor is no Citywide Special, it would be considered a bargain in some parts of Jersey, where licenses have sold for $1.6 million. Pennsylvania is comparatively cheap: Lucky buyers can find licenses in the Philly burbs for just $200,000.  

So are liquor license quotas common, or are they only common in states where I’ve happened to live? Apparently, no one has bothered to look this up before, so I reviewed the liquor laws in all 50 states. After a few hours of thrilling statutory parsing, I had my answer to which states had quotas: Alaska, Arizona, California, Florida, Idaho, Kentucky, Massachusetts, Michigan, Minnesota, Montana, New Jersey, New Mexico, Ohio, Pennsylvania, South Dakota, Utah, and Washington. (Certain neighborhoods in D.C. have a moratorium on the issuance of new licenses, too, if you want to pretend that D.C. is a real state.)

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In most of these quota states, a locality’s population limits the number of available licenses there. In New Jersey, the cap is one license per 3,000 municipal residents, and in Massachusetts, it’s one license per 2,000. Utah probably has the strictest system, with a quota of one license per 4,925 residents.

In Utah, licenses are expected to go for about $1 million on the newly legalized secondary market, which is about how much liquor licenses already cost in New Mexico and Montana. Meanwhile, in nonquota states, liquor licenses cost a few hundred dollars in registration fees.

For would-be publicans, the quota system creates barriers to entry stiffer than a shot of cheap tequila, forcing aspiring restaurateurs to take on more debt, or surrender more of their business to equity investors, just to get off the ground. When Tom Mastronardo opened Fenice Creolo in Phoenixville, Pennsylvania, last year, he paid for a license by convincing one of his investors to loan him the $250,000. “Basically, I have another mortgage that I’m paying,” Mastronardo said. “One payment a month for the lease, and another for the license.”

The license quotas—along with many other onerous libation laws—were adopted in the wake of the 21st Amendment’s repeal of Prohibition. While admitting that the Noble Experiment had failed, politicians wasted no time imposing regulations to temper the many societal ills caused by too many social ales. Besides a shared historical genesis, however, these rum rules share another critical feature: They make a lot of money for specific groups of people.

All regulations have the ability to create winners and losers, and this phenomenon is particularly potent in potables. Economists noticed that the winners often are a concentrated group, such as beer wholesalers, whereas the losers—consumers, usually—are diffuse. Our beers are a bit pricier, our choices a bit constrained, and we might need to visit more than one kind of store to stock up for a party, but these costs are barely noticeable to all but the most tightfisted of tipplers. Yet all those little costs add up to princely sums for today’s booze barons, motivating them to defend the lucrative status quo through lobbyists and political donations.

Economists call this legitimate racket “regulatory capture.” When a regulatory scheme is transformed into a competition-stifling tool of the ostensibly regulated industry, that industry has “captured” the regulations. Regulatory capture in turn encourages rent-seeking behavior.

In quota states, holders of liquor licenses see them as fairly liquid assets—retirement packages that rarely depreciate in value and can be sold relatively quickly when the time comes to hang up the bar apron. Moreover, restaurateurs make investments in liquor licenses based on the implicit assumption of a fairly stable market: Tom Mastronardo, for example, will owe his investor $250,000 regardless of the actual fair market value of his license. If Pennsylvania removed its quotas overnight, Mastronardo would be paying off a worthless tab rather than building equity in an asset. Like all quota license holders, he therefore has a considerable financial stake now in maintaining the status quo.

Existing licensees tend to fight legislative efforts to remove or significantly raise the quotas, as those reforms both increase competition and destroy the value of the license-cum-asset. Moreover, because quota licenses are arguably valuable property in the eyes of the law, license holders will be able to launch constitutional challenges to any reform that destroys the license market for violating the Fifth Amendment’s takings and due process clauses. These laws are as entrenched as they are archaic.  And, unfortunately, we can’t simply ignore them.

Worse yet, the quota system is just the tip of the Norwegian iceberg when it comes to special interests’ capture of the imbibing industry. Spirits statutes come in all shapes and sizes, allowing all sorts of groups to join the rent-seeking party.

Perhaps the most egregious example of unwarranted state interference is also one of the most prevalent: Eighteen of our United States are “control” states, meaning that the government controls a monopoly on the sale of hard alcohol. In half the control states, the government merely controls the wholesale distribution of hard alcohol. In the other half, the state maintains a direct monopoly. And in Pennsylvania, the state-run Wine and Spirit Shoppes (the extra “pe” is for “pricier ethanol”) are the exclusive retailers of both hard alcohol and wine, making the Pennsylvania Liquor Control Board the largest purchaser of wine and spirits in the United States.

Pennsylvania’s eccentricities don’t stop there. You can only buy a case or a keg of beer at a privately run beer distributor, and I mean only a case or a keg: Pennsylvania beer distributors are prohibited from selling in smaller quantities. If you want a six-pack of Keystone Light in the Keystone State, you need to go to a bar, deli, or bottle shop with an “eating place retail dispenser” license, which allows the purchase of up to 192 ounces at one time, or 16 twelve-ounce beers. But there is no restriction on how many times in a row you can do this, so College Me has personally (1) walked into a deli, (2) bought a 12-pack, (3) handed that 12-pack to an underage friend outside, and repeated steps 1–3 until we had enough booze to forget how expensive our tuition was.

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