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.

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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.

While Pennsylvania’s system seems skunked at first sip, it makes all too much sense looking through the bottom of a glass of ice-cold economic theory. The competing commercial interests of beer distributors, six-pack sellers, liquor companies, craft breweries, and the state store employee union make large, meaningful changes hard for all the interest groups to swallow, not unlike a shot of Malört. The most recent privatization proposal gave concessions to the distributors, tavern owners, breweries, and wineries, but nothing to the unions, prompting the United Food and Commercial Workers Local 1776 to produce this hilariously hyperbolic ad, which ends with, “Well, it only takes a little bit of greed to kill a child.”

That said, the ad did have another, more legitimate point: State-run monopolies generate huge revenues for state coffers. Virginia makes about $230 million a year from its ABC stores, and Pennsylvania collects $494 million in profit and tax from its shoppes, which is a ton of money for a state currently facing a $1 billion dollar deficit.

Supporters of privatization argue that licensing fees and increased tax revenues will more than make up for the lost profits, but the devil is in the details. Washington privatized its liquor stores in 2011, leading to a 9.7 percent increase in tax collections and an increase in average liquor prices. But that’s only because the law was designed to improve the state’s bottom line. Other control states would need to similarly increase their alcohol taxes in order to make privatization revenue neutral. Raising taxes to overhaul a socialist system would strike some right-wing reformers as a Faustian bargain.

Even downright inane laws can have serious economic effects. The 64-ounce growler is illegal in Florida, Idaho, and Mississippi. When I asked Orlando-based liquor law expert and attorney Trevor Brewer why, he said: “Every regulation has the ability to make someone very wealthy.”

According to Brewer, Miller Brewing upset the Florida legislators by opening its new beer-flavored carbonated drink factory in Georgia instead of the Sunshine State. At the time, Miller was heavily promoting its 7-ounce pony bottles, so Florida banned the sale of bottles and cans in sizes other than 12, 24, and 32 ounces. In 2001, that law was amended to allow any container 32 ounces or smaller, or 128 ounces or bigger. But everything in between—including the beer geek’s beloved growler—is verboten, because Florida’s beer wholesalers hate the idea of potential customers going to breweries and brewpubs filling up growlers.

Over the past two years, breweries and brewpubs have pushed to amend the container size law. Each time, though, the Florida Beer Wholesalers Association killed the reforms with amendments that required microbreweries to sell, then buy back, their own beer to sell at their brewery taprooms and gift shops. Like so many other states, Florida consumers have to choke down this regulatory rotgut while the special interests hold a barroom brawl over control of the Legislature.

There are plenty of other asinine rules that only serve the interests of entrenched groups. Packies in Connecticut benefit from price minimums on bottles of booze sold in package stores. Beer distributors in Utah, Colorado, Oklahoma, Minnesota, and Kansas love that convenience stores there can only sell beer under 3.2 percent alcohol by volume. Liquor store owners in Colorado and New York enjoy laws limiting the number of off-premise licenses one person can own because they effectively outlaw chains. All of these laws, too, would benefit from much needed firewater fixes. Thankfully, success stories abound: South Carolina bars are no longer forced to mix drinks using airplane bottles, and liquor stores are no longer forced to observe the Sabbath in the Constitution State. And if Washington and Iowa can privatize their liquor stores, maybe one day Pennsylvania can, too.

Admittedly, the continued existence of absurd booze laws—and there are plenty I didn’t get to mention—cannot be explicated by the economics of political competition alone. The teetotaler tendencies of the politically dominant Mormon church are the real reason for Utah’s “Zion Curtains,” which force bartenders to mix and pour drinks out of the patron’s sight.

And Chicago school theories can’t explain why home distilling remains illegal. Only the ghost of Carrie Nation (and moonshining’s redneck image) can explain the continued federal prohibition on artisan bathtub gins and handmade, organic white lightning. Many of America’s craft brewers—the beer industry’s fasting-growing segment—learned how to brew in their kitchens and garages. Indeed, the craft beer industry only really took off after Carter loosened federal home-brewing restrictions in 1978. But mastering the craft at home isn’t a legal option for aspiring distillers, which is holding up the nascent industry’s development.

Some argue that home distilling is more dangerous than home brewing, but I don’t buy that. Others say that there’s a federal fear of losing taxes on home brews, but voting to cut taxes in Congress isn’t exactly taboo. No, it’s sheer legislative inertia—a law at rest tends to stay at rest—that keeps home distilling illegal.

Justice Oliver Wendell Holmes once said: “It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.”

I’d drink to that. 

Jim Saksa is a writer and attorney in Philadelphia, where he’s also the editor of the Young Involved Philadelphia blog.