Pa. should privatize liquor sales, Corbett report says

HARRISBURG - When it comes to the future of Pennsylvania's wine and liquor stores, one word applies: privatize.

So concluded a report commissioned by Gov. Corbett, finding that auctioning off the state Liquor Control Board's 600-plus retail stores, as well as its wholesale liquor operations, could raise as much as $1.6 billion.

The nearly 300-page study, conducted by Public Financial Management Inc., also noted that over the last decade, LCB profitability has shrunk as expenses rose faster than revenues. Freeing it to focus just on its role as regulator would make financial sense for the state and would stimulate the private sector, according to the report.

The LCB "has grown into a complex and expensive organization that endeavors to balance its dual role of regulator and retailer," the study said. "Privatization can unlock valuable resources for the commonwealth."

Corbett put it this way when asked about the report Tuesday: "We shouldn't be in the business."

Stacey Witalec, the LCB's spokeswoman, said the agency had not had time to review the report, made public Tuesday afternoon.

But as for profitability, Witalec called the findings "a general observation about the agency that you can make about any agency."

"We look forward to discussing that with the governor and his team as we go forward," she added.

The report recommends selling off the retail and wholesale side of the LCB to raise between $1.1 billion and $1.6 billion. That money could then be used for transportation and infrastructure needs or economic development.

On the retail end, Pennsylvania could limit the number of licenses it auctions - the favored approach among privatization proponents here - without compromising consumer convenience. The report suggests selling off 1,500 licenses, which in Philadelphia would quadruple the number of retail outlets from the current 55 stores to 219.

What would all this mean for the consumer?

The answer, particularly on pricing, is not quite as straightforward.

The report found Pennsylvania's prices generally higher than in neighboring states. Wine prices in Pennsylvania were 20 percent to 40 percent higher, while liquor costs were closer to a match.

Case in point: A 1.5-liter bottle of Sutter House White Zinfandel, noted as the state's top-selling wine, retails for $2 more than the average price elsewhere. But a 750-milliliter bottle of Absolut Vodka sells for $19.99 at state liquor outlets - about 24 cents cheaper than the average regional price.

The higher cost is driven by the LCB's pricing policies. The agency imposes an 18 percent tax (better known as the Johnstown flood tax) on all products on its retail shelves. That is on top of the automatic 30 percent markup it slaps on wine and liquor, as well as the state's 6 percent sales tax.

Under a privatization scenario, the state would switch to a gallonage tax - and for that tax to raise the same amount of revenue, it would have to be the highest in the nation for wine and the 14th-highest for liquor.

"This study only confirms what we've known all along: Taxes and prices for wine and spirits will increase," said Wendell W. Young IV, president of United Food and Commercial Workers Local 1776 representing 3,000 employees in wine and spirits shops.

Young argued that the report all but ignores the negative effect that privatization, which could eliminate up to 5,000 jobs, would have on the state's economy.

He questioned the report's timing, months after its expected midsummer release. There has been much hand-wringing in recent weeks over whether privatization will be a front-burner issue this fall. With other big-ticket items on the agenda, including school vouchers and a natural gas drilling impact fee, it is questionable whether the legislature will have time to tackle the complex and controversial liquor question.

"They knew this report was going to be a problem for them, so they held it until the issue was dead for the year," Young said.

In the summer, House Majority Leader Mike Turzai (R., Allegheny) introduced a bill to privatize retail and wholesale LCB operations.

The issue seemed to be gaining traction until Senate President Pro Tempore Joe Scarnati (R., Jefferson) said he believed the state should stay in the liquor business for now.

Another top senator Tuesday also appeared noncommittal.

Senate Majority Leader Dominic Pileggi (R., Delaware) said through a spokesman that he "looks forward to studying" the report over the next few weeks.

But Corbett on Tuesday called Turzai's proposal "the place to start" and made no secret of his desire to get Pennsylvania out of the liquor business.

"Our system of state stores harkens back to a time government thought it knew best what was good for us," Corbett said, adding that the LCB was created in 1933 when Prohibition ended.

He added: "History has shown - as it always will - that the people, not government bureaucrats, know best how to live their lives."