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The Michigan “Office of Regulatory Reinvention” has just released a list of 74 specific recommendations to reform the 74,000-word Michigan Liquor Control Code and its related administrative rules. Most of the recommendations deserve applause for two reasons:
First, they would lower at least a little bit the existing barriers to buying, selling and distributing alcohol, and do so without compromising public safety. Second, several ideas show real courage because they are sure to draw the wrath of Michigan’s politically powerful regional beer and wine wholesale monopolists.
Some of the recommendations are not beyond reproach, but overall they still represent a good, if very modest, start for alcohol control reform. Many of the ideas would clearly lower prices and should be given serious consideration by the Legislature or (when possible) by the Michigan Liquor Control Commission.
Key Recommendations
The key proviso is that microbrewers’ output must comprise less than 3 percent of the wholesaler’s “book of business.” This idea, if adopted, will offer small beer and wine makers more distribution alternatives than currently available.
The value of this reform is shown by past work from Mackinac Center analysts and others explaining how Michigan’s current law limits opportunity for these small producers, while unjustly enriching a few lucky wholesalers who get monopoly profits through a mandate that producers must grant them exclusive sales territories.
A 1993 study published in the Journal of Law and Economics has argued that mandated territories come with some pluses, such as more consistent product quality and promotion materials, but raised the cost of beer by 7 percent. Earlier studies found even greater savings as a percentage of the cost of beer when territorial exclusivity was limited.
Permitting at least a small amount of beer and wine to escape the wholesalers’ grasp will give small producers greater flexibility. Wholesalers may provide value, but their services need not be foisted on suppliers. Among other issues, doing so is just not fair.
The proposed change would let a winery or microbrewer own restaurants that sell brands that had not been produced by the owner, thus making their restaurants more appealing to the general public.
This general recommendation comes with two specific proposals:
This could increase sales of and exposure to Michigan-made beer products to a greater degree. It will also make more beer available for shipment into the state, giving connoisseurs more choices in their selection.
Both of these ideas would expand distribution flexibility, at least at the margin, and help Michigan producers reach new consumers. The Mackinac Center has written about of these options, with particular attention to the lack of any public safety downside.
Currently, a liquor license purchased for use in one county can only be used in that county. This means in economically depressed areas many licenses go unused, while in a neighboring county market demand is underserved. So for example, if Wayne County has 300 unused licenses being held by their owners “in escrow,” under this proposal they could be sold to establishments in Washtenaw, Macomb or Oakland counties.
This is an acceptable start, but much more can and should be done. Mackinac Center analysts have recommended making these licenses transferrable anywhere in the state. This would provide greater opportunities for businesses in growing areas and perhaps increase the value of licenses currently sitting idle. Lawmakers should tweak this proposal and permit licenses to be transferred anywhere in Michigan.
Currently, state law lets bar and restaurant owners who run short buy not more than nine liters of hard liquor per month from local retailers. Raising that cap is a good idea, but if “parity” is the goal, then regulations should also allow bars and restaurants to buy beer and wine at local retailers. Under current law, they can’t do so at all, but must go through those private monopoly wholesalers, a restriction that appears designed solely to protect the monopolists’ profits.
Current law mandates that gas stations that sell liquor, or just beer and wine, must keep at least $250,000 of inventory in stock. The proposed change would lower that threshold to $50,000.
This is in addition to other types of resort licenses with different investment thresholds. Like most of the reforms, this proposed change lowers the price of doing business in the alcohol trade without necessarily compromising public safety.
The Mackinac Center has long argued for this reform. For example, why should florists be prohibited from including a bottle of champagne in a celebratory flower arrangement? Such restrictions are arbitrary and capricious.
Key Criticisms
The hyper-regulation implicit in much of the preceding suggests the most obvious shortcoming of the proposed regulatory reforms: They don’t go nearly far enough.
All this fine-tuning wouldn’t be necessary if the agency struck at the root of over-regulation as a whole. For example, the state would not need to create a new class of resort licenses, make “economic development” licenses available to townships and villages, or permit licenses to be transferred to adjacent counties if it simply eliminated license rationing and quotas altogether.
Real reform would begin with demolishing the “three-tier” system that prohibits a business in one tier (producer, wholesaler or retailer) from doing business in another tier. In other words, big retailers like Meijer, Wal-Mart and Costco are prohibited from obtaining alcohol products directly from producers (or their national distributors). They must instead go through “second tier” wholesalers which raises costs for consumers.
Second, a prerequisite for truly meaningful reform is eliminating those beer and wine wholesaler privileges that require producers to grant territorial monopolies to a handful of lucky families. This is crony capitalism at its worst, directly harming consumers to further enrich a class that has made its millions the old fashioned way — by hiring the best Lansing lobbyists money can buy.
Finally, few people know that the state of Michigan acts as the wholesaler for nearly every drop of hard liquor consumed within its borders. This allows the state to impose higher prices with the usual detrimental effects for consumers. Recent Mackinac Center research found this causes prices to be 3 percent to 6.3 percent higher on average than in states that do not act as the official liquor wholesaler. The state should get out of the liquor business.
These fundamental reforms would make much of the deck-chair rearranging in the proposed regulation revisions entirely unnecessary. Since they didn’t go there, there are some other smaller-scale reforms the agency should have included. These include eliminating the state’s “post and hold” rule, “half-mile” rule and package liquor store population quotas.
The post and hold rule requires beer and wine wholesalers to post their product prices and then not change them for a certain fixed period of time. The effect is tantamount to legalized price collusion. A 2010 study suggests that it raises the cost to consumers from 6.3 percent to more than 32 percent, depending on the product.
Current law also prohibits packaged, carry out liquor stores from being located within one-half mile of one another, with some exceptions. There is no similar geographic restriction on the number of beer and wine sellers. Likewise, off-premise liquor store licenses are also subject to a limit based on population (one per 3,000). There is no such restriction for licenses if selling only beer and wine. In the name of “parity,” both of these artificial limitations should be repealed
The proposed revisions also include some that will probably make a bad system even worse. For example, it is recommended that the state increase the “per case” delivery fee that the handful of state hard liquor warehouse and delivery agents can charge. If the state got out of the liquor wholesale business altogether, this dubious proposition would become moot. That applies to other recommendations to further limit the number of these agents, and also limit the number of available liquor products for sale.
Conclusion
While most of recommendations are half-measures, the package of changes offered add up to a real net positive for Michigan. The agency and the Snyder administration deserve credit for attempting these reforms in the face of strident opposition from entrenched special interests used to getting their own way in the state Capitol.
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Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.
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