Commentary: Rethink Michigan's Liquor Distribution System
This article first appeared in the Detroit Free Press on July 31, 2011.
The State of Michigan maintains a so-called three-tier liquor distribution system that erects legal walls between suppliers, state-approved wholesalers and retailers. This arcane system drives up the cost to consumers by limiting competition without necessarily making any contribution to public safety.
The system was created after Prohibition ended in 1933, ostensibly to curb potential distribution and sales abuses. Today it's merely a tool used by a handful of politically powerful beneficiaries to tap consumer pocketbooks. Specifically, the system appears to have been captured by a private, for-profit second tier -- beer and wine wholesalers -- who enjoy monopoly profits and limited competition. For reasons of economic efficiency and just plain fairness, the Legislature should dismantle this dysfunctional system.
A logical first step would be to end the bizarre system in which the state is the wholesaler for all distilled liquor, tacking on a 65% markup before applying an array of other taxes. A price comparison of liquor products in Michigan and Indiana showed many items cost 20% less in Indiana, which does not act as a wholesaler or impose minimum shelf prices.
Michigan's protection of regional beer and wine distribution monopolies should be dismantled. Unlike distilled spirits, state government is not the wholesaler for beer and wine, but it is complicit in artificially driving up prices by legally restricting wholesaling and distribution to a handful of families that have become rich by exploiting territorial monopolies granted by the state.
According to a House Fiscal Agency analysis of the 1976 law that granted these privileged beneficiaries their beer monopolies, the rationale was that "retailers may ask for unfair discounts for [sic] competing wholesalers in order to get the best deal possible." How competition was unfair to consumers is unclear.
In 1986, the Legislature granted similar distribution monopolies for wine, with some minor exceptions. Gongwer News Service at the time reported this as "a concession granted to the Michigan Beer and Wine Wholesalers in negotiations with legislators," apparently to obtain support for a wine cooler bottle deposit bill.
Another law (or rule in this case) protecting beer and wine monopolists from competition is known as "post and hold." In 1972, the state first adopted both a post and hold such a measure for beer. This law requires wholesalers to announce -- or post -- any price changes in advance and hold those prices for a length of time, in the case of beer for 180 days. In effect, the law makes it easier for wholesalers to legally collude to the detriment of consumers. A similar stipulation for wine also exists.
All these anti-consumer laws should be repealed. These "post and hold" laws result in dramatically higher prices, according to a 2010 report by James Cooper of the Federal Trade Commission and Joshua Wright of George Mason University. Specifically, prices for a representative six-pack of beer were estimated to increase somewhere between 12 percent and 30 percent. The price increase for a bottle of wine ranged from 6.4% to 18%, and the price of distilled spirits rose between 9 percent and 32 percent.
Despite the fact that this law hikes prices, the authors found "no measurable effect" on drunken driving or underage drinking. And if a state wants to suppress consumption by increasing the price, it can do so by imposing a simple excise tax -- something Michigan already does.
These laws are bad for consumers and taxpayers, but good for the wholesalers who spend big bucks on lobbying and campaign contributions to protect their privileges. Busting this relationship between lawmakers and monopolists is overdue. The next time your family shops for a nice merlot to go with dinner, or you purchase a "sixer" for the big game, make a note to ask your own state elected officials how much they received from beer and wine monopolists in the last election campaign.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.