Analysis: State Alcohol Control Law Expensive, Unfair, Ineffective

(Editor's Note: This article first appeared in The Detroit News on Dec. 1, 2011. Dec. 5 marked the 78th anniversary of the end of Prohibition.)

The recent release of Ken Burns’ “Prohibition” documentary has raised many good questions about the subject of alcohol control. For Michigan, the questions are timely. Gov. Rick Snyder’s 21-member Liquor Control Advisory Rules Committee will soon present its ideas for alcohol control reform, and would be wise to think and reform boldly.

Michigan’s laws and rules governing alcohol control have been treated like the play things of politicians and powerful special interests for decades. They are not as protective of public safety as neo-prohibitionists want people to believe, and are actually protectionist in many ways, treating different businesses and people unfairly. They may also hike the price of consumption 3.0 to 7.8 percent depending on the product.

To better measure the relative degree to which Michigan regulates alcohol consumption, the Mackinac Center collected state control codes from all 50 and counted their word lengths. Code verbosity may reflect the degree to which government “controls” alcohol and ultimately affects prices and safety. Michigan’s code is second longest in the Midwest at 74,000 words.

We then constructed a statistical model that took into account the prices of five liquors and a representative six pack of beer in 25 Metropolitan Statistical Areas scattered throughout 18 states plus the District of Columbia code lengths in those states and, whether or not a state was a “control.” A control state — like Michigan — is one that buys nearly every drop of hard liquor legally consumed in the state. The model also controlled for other variables that may influence prices, such as a state’s proportion of population that are moderate or heavy drinkers.

First, and with regard to hard liquor, we found that prices of the liquor in our model were 3 percent higher in control states. Perhaps more interesting, we found that a 10 percent increase in the length of a liquor control code was associated with a 10.4 percent increase in price. Second, we found that beer prices in control states are 7.8 percent higher than in non-control states. A ten percent increase in code length was associated with a 3.2 percent increase in price.

Our data set for spirituous liquor included Absolute and Smirnoff vodkas, Bacardi Superior and Captain Morgan rum and Jack Daniels whiskey; and a representative six-pack of 12-ounce Heineken. The data was provided by quarter from 1995 through 2009 by the American Chamber of Commerce Research Association and the Beverage Information Group. Wine was not included in our analysis due to the difficulty in obtaining a consistent dataset.

It must be noted that our statistical output likely shows understated price differentials because law length may be a crude proxy for control. Indiana’s code, for example, is almost 24 percent longer by words than Michigan’s, but unlike Michigan it does not impose minimum selling prices, allowing for greater competition. There are key differences between Michigan and Wisconsin, too.

The Badger state doesn’t play liquor wholesaler and its alcohol code does not mandate that suppliers of wine grant territorial monopolies to anyone. In Michigan, the state mandates that a few, privileged wholesalers be given monopoly sales territories for beer and wine. Including such nuanced variables in our model might better distinguish the degree to which Michigan regulations needlessly hike the cost alcohol, but such an analysis goes beyond the scope of this essay.

If these higher prices actually bought greater public safety, then perhaps neo-prohibitionists would have an argument for keeping the status quo. Research suggests otherwise; indeed at least one study comes to the opposite conclusion.

In a working paper titled, “Does State Monopolization of Alcohol Markets Save Lives?” economists John Pulito and Anthony Davies examine control states and license states from 1982 to 2002. They found that states with a lighter regulatory touch — license states, for instance — “generally experience lower alcohol-related traffic fatalities.”

Theirs is not the only work to show that greater regulation does not necessarily equal more and better public safety.

Fortunately, Michigan residents may not need to tolerate the high price and questionable safety provisions of our alcohol code much longer. The Snyder administration’s advisory committee may present recommendations for reform by Dec. 22. The Mackinac Center recently provided the committee a list of 15 substantial reform ideas, some of which include:

• Repeal of state mandates forcing suppliers to grant territorial monopolies to Michigan’s beer and wine wholesalers. The law is unfair to consumers, suppliers and retailers and an embarrassment of riches to just a handful of lucky distributors. Make supplier-wholesaler relations voluntary instead of coerced.

• Eliminate the “post and hold rule” in the state’s Administrative Code that forces manufacturers and wholesalers of beer and wine to publish product price changes and hold them in place for some length of time. One study suggests post and hold rules up the cost of alcohol products between 8 and 30 percent.

• Eliminate the “Specially Designated Distributor” license quota. This law works to the advantage of Michigan’s beer and wine wholesalers in two ways. It distorts consumption opportunities by making beer and wine more available than liquor, increasing the cost of accessing it, leading consumers buy more substitute more beer and wine for preferred spirits.

• Eliminate the restriction on the amount of spirits, beer and wine an on-premise licensee (a bar, for example) can purchase from a retailer each month. For liquor the monthly limit is 9 liters. For beer and wine the limit is zero. This inconsistent restriction benefits Michigan’s beer and wine wholesalers.

• Eliminate the state’s role as liquor wholesaler and associated price controls. The state unnecessarily acts as hard liquor wholesaler and mandates minimum shelf prices. This drives up the cost of liquor and prevents price competition, again to the benefit of Michigan’s beer and wine wholesalers.

• Eliminate legal prohibitions against direct and indirect interest (such as ownership) in the supplier-wholesaler-retailer tiers. Preventing a maker of wine from also having an interest in an off-site retail establishment that sells alcohol is an absurd, archaic prohibition.

The Michigan Liquor Control Code unnecessarily increases the cost of both doing business in and consuming alcohol. Significant parts of the Code are sold as a way of protecting public safety but overall the code seems more geared toward protecting the alcohol profits of the state and a few chosen wholesalers.

Reforms advanced by the Snyder administration should be bold and strip away the monopolist, regulatory privileges now accorded to the state and private-sector wholesalers.