State policymakers will reform Michigan’s antiquated alcohol regulations this year if Gov. Rick Snyder adopts ideas submitted by a liquor reform advisory panel he created months ago.

Change is certainly needed; in particular, the state effectively grants monopolies to a few lucky private, for-profit beer and wine wholesalers. These regulatory privileges should be struck from state law in the name of fairness and competition.

A basic principle of economic theory is that competition — or the threat of competition — is good for consumers. Monopolies facing no such threat are generally bad.

In the strictest sense, a business monopoly is a single seller of goods or services. Most businesses find it difficult to maintain monopoly status in a system of rugged competition. As Nobel Memorial Prize-winning economist George Stigler has written, “Most important enduring monopolies … rest upon government policies.” Cable franchises and utilities come to mind.

Beer and wine wholesalers effectively possess monopolies because state law mandates that suppliers of beer and wine grant exclusive sales territories to wholesalers for the suppliers’ products. All retailers, such as liquor stores and bars, must buy their beer and wine from their area wholesaler. The result is a territorial monopoly.

You don’t need a Ph.D. in economics to understand what happens when firms obtain monopoly status: Prices rise and services suffer.

Consider just one example. In 2002, Northwest Airlines was busted for trucking beer and wine to Detroit Metro Airport instead of acquiring it through a Michigan wholesaler. According to the Detroit Free Press, Northwest reported it was saving up to $3 million per year by shipping the alcohol to the Great Lakes State, rather than buying it locally.

Now multiply this experience by the thousands of businesses licensed to sell at retail — and by their hundreds of thousands of customers — and you’ll understand the magnitude of what is effectively a state tax that benefits territorial beer-and-wine wholesale monopolies.

All of this might be acceptable if these wholesale monopolies somehow produced an overall increase in safety for Michiganders. The preponderance of the evidence, however, suggests that monopolies do not. Even state-operated monopolies on the wholesaling of all liquor products have not been shown to improve public safety.

Indeed, there is no statistically significant difference in alcohol-related fatalities, car crashes and binge drinking between states that monopolize liquor wholesaling and states that do not. While monopolies can discourage drinking through higher prices, they haven’t lowered the social costs of excessive drinking on balance.

For their part, beer and wine wholesalers typically blanch at the term “monopoly.” Mike Lashbrook, president of the Michigan Beer and Wine Wholesalers Association, recently disputed the term in The Saginaw News by arguing that there are many different beer and wine products to choose from on grocers’ shelves.

But this is like arguing that because there is a wide selection of items in a Meijer store, consumers won’t be hurt if Meijer is the only box store chain allowed to operate in Michigan. Obviously, Michigan consumers would suffer if Wal-Mart and similar wholesale-style retailers couldn’t compete with Meijer. Ultimately, many products can end up on retailers’ shelves while wholesalers still enjoy monopolies that jack up consumer prices.

Indeed, the state government also distorts the Michigan marketplace by acting as a monopolist wholesaler for stronger liquor products, such as whiskey. Recent Mackinac Center for Public Policy research suggests that nationwide, such state controls raise liquor prices by between 3 percent and 6.3 percent.

Granting effective monopoly status to a few lucky businesses — or to state government itself — is fundamentally unfair to Michigan consumers. It benefits a relative handful of wholesalers and makes our political institutions seem myopic.

Killing these wholesale regulations should be the first order of business for reforming Michigan’s alcohol control code this year.

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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.

(Editor’s note: This is an edited version of a commentary that appeared Feb. 2, 2012, in Michigan Capitol Confidential.)

Michigan could potentially have the nation’s highest gas tax if Gov. Rick Snyder’s proposal to replace the state motor fuel tax with a higher wholesale tax becomes law.

As of Jan. 1, motorists here pay 57.8 cents per gallon worth of state and federal taxes, according to the American Petroleum Institute. This includes the 6 percent Michigan sales tax imposed on fuel sales, from which not a dime goes to roads, although a small amount subsidizes public transportation. Michigan is one of only eight states that impose sales tax on fuel; the other seven are California, New York, Hawaii, Florida, Georgia, Indiana and Illinois.

The new tax would replace the current Michigan motor fuel tax of 19 cents per gallon with a wholesale tax, initially levied at an effective rate of 28.3 cents per gallon — an immediate 9.3-cent increase at the pump. Assuming no other changes, this would put government’s total take per gallon here at 67.1 cents, making Michigan the second highest after New York at 67.4 cents. California and Connecticut would be tied for third place at 67.0 cents.

But because the new levy would be based on a percentage of the wholesale price, any sustained increase in oil prices would gradually translate into additional gas tax hikes. This would be a double whammy for Michigan motorists, because the 6 percent sales tax on gas already has this effect. For example, if wholesale prices rose by $1 per gallon and stayed there for several years, Michigan drivers would eventually find themselves paying more than 80 cents per gallon in state and federal taxes — by far the highest in the nation (assuming other states stayed the same).

The governor’s proposal is contained in House Bill 5298, sponsored by Rep. Rick Olson, R-Saline, and Senate Bill 918, sponsored by Sen. Roger Kahn, R-Saginaw. Under the bills, the rate of the proposed new tax would be 10.1 percent of the statewide “average wholesale price” over the preceding 12 months. This rate, however, would be subject to various adjustments. The highest the tax could go would be the equivalent of 40.0 cents per gallon, and following the initial 9.3-cent increase, it could rise or fall by only 1 cent per gallon per year. 

To put this in perspective, the current wholesale gasoline rack price in Detroit — the price paid when the gas is loaded into a tanker truck at the terminal — is around $2.70 per gallon. Retail prices in the region currently average around $3.30.

Gas tax hikes are only one component of Gov. Snyder’s transportation infrastructure proposal. House Bill 5300, sponsored by Rep. Jud Gilbert, R-Algonac, and Senate Bill 919, also sponsored by Sen. Kahn, would increase the vehicle registration tax by 67 percent. This annual license plate tax — which has been called a “Birthday Tax” — is levied on the list price of a car when new. As an example, the annual registration tax on a $20,000 car would go from $103 to $172. Other bills in the package would give counties and a proposed Detroit regional transit authority the power to impose even higher registration taxes, subject to a popular vote.

No one disagrees that Michigan roads would benefit from an infusion of new resources. The real problem, however, isn’t that the state doesn’t collect enough money, but that it doesn’t properly prioritize the money it does collect and “skims” too much for other purposes.

In addition to the sales tax component mentioned above — none of which goes for roads — some of the remaining money is diverted to subsidize city buses, and some is wasted by mandating above-market wages on road projects through the state’s “prevailing wage” law. Another seven-eighths-of-a-cent-per-gallon tax originally intended for leaking underground fuel tank cleanups was diverted to other government spending in a 2004 fund raid, and it continues to be used that way.

Instead of reaching deeper into the pockets of motorists, Michigan needs to correct these abuses.

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Jack McHugh is senior legislative analyst 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.