Sunday, November 23, 2014
Inquirer Daily News

A toast to privatization? Not yet

An IOM editorial in the Daily News:

A toast to privatization? Not yet

An IOM editorial in the Daily News:

If Pennsylvania were to build a state government from scratch, there are certain things you'd definitely want that government to do. Build roads so we can get around. Pay police to catch bad guys.

"Run the wine and liquor industry like Fidel Castro" would probably not be on the list.

But Pennsylvania is not building a government from scratch. The state's had a monopoly on booze for 80 years. Gov.-elect Tom Corbett and incoming House Majority Leader Mike Turzai, R-Allegheny, want to privatize the state store system. But an established entity like the Liquor Control Board needs to be dismantled carefully. This is not the kind of thing you do in a drunken rush.

The impetus for the push to privatize is the $4 billion deficit the state faces next year. Corbett has an inconvenient "no tax hikes" pledge to keep. Harrisburg Republicans, led by Turzai, believe they can raise some of this cash by pawning off the state stores: A previous proposal floated by Turzai would auction the current inventory, 750 retail licenses and 100 wholesale licenses for a windfall payment of about $2 billion.

That plan will likely change, especially as Corbett prepares his budget. We have a few concerns we'd like resolved before we raise our proverbial glass to any plan to privatize.

Liquor stores make money for taxpayers . . . every year. The current system may not be perfect, but it's a money-maker for the state. The LCB generates about $466 million in revenue annually; about $90 million is profit, the rest is sales tax. Right now, sales tax on liquor gets collected at a rate of 100 percent, which would be hard to achieve in a privatized system. The $90 million in profit would disappear entirely. Supporters of privatization argue that most of it would be replaced by license-renewal fees and increased liquor sales, but that's far from certain. Any privatization plan would need to account for this loss of recurring revenue, not just the big upfront payment generated by the initial sale.

Another problem with the Turzai plan is that it wouldn't necessarily accomplish its central objective, increasing consumer choice. As WHYY reporter Dave Davies has pointed out, in order to reach the magic revenue goal of $2 billion, each license the state auctions off will need to go for about $2.6 million. No one's going to pay that much for a license just to compete with lots of other stores. That means the number of licenses will have to stay low . . . and that means Pennsylvania will be replacing a state monopoly with a state-authorized private-sector monopoly, with no incentive to lower prices or widen selection.

More competition would mean a smaller upfront windfall- and a big windfall is what this plan is all about, not giving wider and better choices to consumers.

Privatizing would also throw 2,200 employees out of a job. The pay for this work isn't lavish (the average salary of a clerk is $29,000, of a supervisor, $45,000), but state employment does provide health care and a small pension. Turzai has proposed offering tax credits to stores that hire former LCB employees - whose average age is 48 - but it's unlikely private jobs would offer the kind of middle-class benefits they have now.

Turning liquor sales over to the free market and getting the state out of the business may be a worthy goal. But it's important to remember that the stores are a public asset, used for the greater good of taxpayers and 2,200 middle-class workers. What the state does with that asset should benefit Pennsylvanians beyond Tom Corbett's first year in office.

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Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.

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