Liquored Up: Why Michigan Should Exit Its Liquor Wholesale Business

Liquored Up: Why Michigan Should Exit Its Liquor Wholesale Business
October 12, 2011

Michigan is one of 18 states in which the state government is the statewide wholesaler for all hard liquor (or “spirits”) sold to consumers by retailers, bars, and restaurants. Anecdotal and empirical evidence indicates this arrangement unnecessarily drives up costs while providing no public safety advantages.

As wholesaler, the state is in a unique position to drive up the cost of liquor. The Michigan Liquor Control Commission tacks on a 65 percent markup on every bottle sold, plus four separate taxes earmarked for various purposes. On top of this the state imposes a 6 percent retail sales tax. Michigan then artificially restricts competition between retailers by imposing a price control floor, below which stores may not sell.

The Mackinac Center has examined how all this impacts the retail price of Scotch whisky. We collected data on prices of J&B Scotch Whisky for all 50 states between 1995 and 2004 from the ACCRA Cost of Living Index and constructed a statistical model that controlled for such things as prices for alternative products; the proportion of the population who are moderate or heavy drinkers; demographics including age, gender and race; employment in manufacturing; employment in the leisure and hospitality industry; the unemployment rate; and the extent to which each state controls the distribution of liquor.

More Control, Higher Prices

The results show that a fifth of a gallon of J&B is, on average, $1.59 more expensive in liquor-control states compared to non-control (or so-called “license” states), or 6.3 percent higher. We further categorized “control” as either light, moderate, or heavy. The price of scotch in light-control states, which includes Michigan because the state does not have a retail monopoly, is $0.94 higher than in non-control states. Consumers in moderate-control states pay $1.72 more. Buyers pay $2.26 more in heavy-control states.

Anecdotally, we found similar evidence. On Aug. 10, we looked at liquor prices in Meijer stores in South Bend, Indiana, and Kalamazoo, Michigan. Most products were less expensive south of the Michigan border, some by a large margin. Of the 11 liquors in 750 ml bottles we examined, eight were less expensive in the Hoosier state. Out of 10 types in half-gallon containers, eight were cheaper in Indiana.

For example, a fifth of Johnny Walker Black cost almost 37 percent less in Indiana. Of the few products that cost less in Michigan, the largest price saving was 12 percent.

No Safer With Control

Supposedly, the regulatory regime responsible for these higher prices makes Michigan safer. But empirical evidence suggests this is a myth.

A 2010 study titled “Impaired Judgment: The Failure of Control States to Reduce “Alcohol-Related Problems,” by economists Don Boudreaux and Julia Williams, found no statistically significant difference between control and license states in binge drinking, alcohol-related traffic fatalities, or alcohol-related deaths overall.

The control-state concept was born in 1933 after the end of Prohibition, due in part to teetotalers’ fears that bootleggers would smuggle in illegal or adulterated products. Yet ironically, Michigan still has a smuggling problem—in part because of state-mandated price differentials with other states.

Costly Liquor Smuggling

The LCC itself estimated alcohol smuggling costs Michigan approximately $14 million annually in lost markup and tax revenues. It also reports distributors’ trucks have been hijacked and at least one driver shot in the process.

Previous Mackinac Center reports show the same consequences from artificially driving up cigarette prices with high excise taxes.

While the focus of our research has been on liquor, provisions of Michigan’s law also drive up beer and wine costs, both for producers and consumers. Notoriously, the state grants exclusive sales territories to beer and wine wholesalers and encourages anti-consumer collusion between them through bureaucratic “post-and-hold” restrictions on price changes.

Michael D. LaFaive (LaFaive@mackinac.org) is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy in Midland, Michigan. Todd Nesbit (nesbitTM@cofc.edu) is assistant professor of economics at The College of Charleston and an adjunct scholar at the Mackinac Center.