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Commentary: Recommendations for Gov. Snyder’s Liquor Control Advisory Rules Committee

On Oct. 24, the Mackinac Center dispatched letters that made 15 major and explicit recommendations for reform of Michigan’s alcohol control system to Gov. Rick Snyder’s 21-member Liquor Control Advisory Rules Committee. The advisory committee first met in August and is due to make recommendations to the governor for reform as early as mid-December. We suggest that the committee and Gov. Snyder reform boldly.

The 15 major ideas presented below are by no means the only reform ideas we intend to make, but they do represent some of the most wide-ranging and beneficial ones. Where appropriate, I've added nuance and detail for Capitol Confidential readers that were left out of the original letter.

  1. Eliminate beer and wine distributor monopoly mandates. Strip from the Michigan Liquor Control Code the mandate that suppliers of beer and wine grant exclusive sales territories to a select group of wholesalers.

These protectionist stipulations result in consumer dollars simply being transferred to distributors. Wholesalers provide valuable services, but supplier-wholesaler relationships should be voluntary, not coerced. The code seems rife with legal privileges accorded to millionaire monopolists. The exclusive territories mandate is unfair, unnecessary and costly to consumers.  

  1. Eliminate the “post and hold” rule from the Administrative Code. This is a measure that protects beer and wine manufacturers and wholesalers.

The rule is tantamount to state-mandated price collusion in that it mandates posting of beer and wine prices and then restricts changes in those prices to a period of time depending on the product. One study suggests that such rules keep prices 8 percent to 30 percent higher than they would otherwise be.

  1. Eliminate the mandated three-tier system outright. These walls prevent free and rugged competition between buyers and sellers of alcohol and have effectively evolved into a system of government protection, primarily for wholesalers.

The state’s three-tier system evolved after Prohibition and was designed to keep one tier from having an influence in and thus unduly and negatively influencing the other tiers. This reduces competition and likely raises price. For instance, a beer brewer is not allowed to own a system of distribution and must instead use state-approved wholesalers. It would also prohibit, say, the owner of a winery from obtaining a license to sell alcohol as an off-premises retailer.

  1. Lower the height and width of each tier. Short of eliminating all barriers between the tiers, business in each should be more permissible.

Some 32 other states explicitly allow some degree of self-distribution. Michigan could, too, and in different forms. This might include removing a recent addition to the Code preventing retailers (out-of-state or otherwise) from distributing products using the method of their choice.

Other related ideas include allowing bars, beer and wine and packaged liquor stores and even grocery stores to fill growlers of craft brew and repealing the law that bans brewpubs, microbrewers and winemakers from having an ownership interest (direct or indirect) in other on-premise locations.

  1. Remove Michigan government from liquor wholesaling. State involvement with liquor purchases is unnecessary and expensive.

We have found that liquor prices are on average 6.3 percent higher in control states vs. license states. A control state — such as Michigan — is one that buys almost every legal drop of spirituous liquor for consumers. The higher prices likely lead to a “substitution effect,” driving people who would otherwise buy liquor to consume more beer and wine instead. This, once again, plays to the advantages already possessed by beer and wine monopolists.

  1. Eliminate quotas for all retail licensees. Of-age adults who wish to consume alcohol and businesses that wish to sell it to them are both harmed by quota laws.

Michigan maintains very strict quotas for certain licenses based on population. This prohibition is an archaic holdover from the Prohibition era. Wisconsin lived without quota laws from 1933 to 1997 (and newer quotas are less restrictive than in Michigan), so the existing quota law is largely symbolic.

7. Repeal the Specially Designated Distributor quota requirement completely. Short of eliminating all quotas, the state should eliminate the quota on SDDs.

There is no quota for off premises beer and wine licenses and the sale of spirits should be treated equally. The quota restriction limits competition and drives up the price, which likely leads consumers to substitute beer and wine for liquor — again to the benefit of the state’s beer and wine wholesalers.

  1. Permit cross jurisdiction transfer of licenses. Short of eliminating quotas, the state should allow cross jurisdiction transfer of licenses. Currently, licenses can be sold (or transferred) but certain license may not be transferred across certain boundaries.

If 300 licenses are in escrow in Wayne County, would permitting their transfer and use to areas such as Grand Traverse, Charlevoix or Kent County really be so detrimental to citizens’ health, safety or economy? We believe the answer is “no.”

  1. Adopt all 10 reform ideas in the 2005 MLCC “Customer Advisory Committee” report. The recommendations in this document are not only good ones, they’re very modest.

It is deeply frustrating to learn that such ideas could not be wholly embraced when they were suggested six years ago. (The first of their recommendations is highlighted directly below.) The reform ideas were reportedly the third such attempt to make the process more user friendly since the 1970s.

  1. Eliminate the need for proving the legal source of funds.  This reform idea was described by the 2005 MLCC advisory committee as “long and sometimes unpredictable.”

Worse, it is likely to hurt honest, law abiding businesspeople more than it hurts savvy criminals. A savvy criminal will know how to hide their assets. Also, in today’s digital world money can be transferred so fast the Michigan Liquor Control Commission’s well-intentioned investigators probably can’t keep up anyway.

  1. Repeal the list of “allowable” businesses that may have beer and wine and spirit licenses. Florists, as one example, may be able to improve business by selling champagne with flowers, if only they were allowed to do so.

Florists already own the cooler space. How many florists have backgrounds of such questionable repute as to prevent licensing? We’re talking about mums, not mobsters.

  1. Repeal the limit on the amount of alcohol that can be purchased by an on-premise licensee/retailer from an off-premise licensee/retailer. Currently, an on-premise licensee can only purchase nine liters a month of spirits and no beer and wine — again to the benefit of monopoly wholesalers — from a retail store. 

The state should take no interest in prohibiting purchases from a licensed entity as all licensees are investigated in the licensing process anyway.

  1. Eliminate price controls. There is simply no good reason to mandate a minimum shelf price for liquor.

It hurts competition, and facilitates substitution of beer and wine — to the direct benefit of Michigan’s beer and wine wholesalers — and likely results in smuggling, a subject with which the MLCC is painfully familiar. The Commission's own estimates suggest the state loses up to $14 million a year in revenues due to cross-border smuggling.

  1. Eliminate the ban on retail quantity discounts in the Administrative Code. How many other industries are prohibited from offering discounts in exchange for large purchases? 

Empires have been built and consumers served well on the nature of steep discounts in exchange for quantity purchases. Indeed, the warehousing company Costco is not only a renowned discounter but at one point the world’s largest seller of fine wines. That is probably a function of its ability to command the best prices for its customers through quantity purchases. 

  1. Repeal the half-mile rule and the church/school rule from the Administrative Code. Licensing an on premise establishment 500 feet from a church or school has become a perfunctory exercise and usually delays the process by six to eight weeks.

The question of how close a seller of alcohol may be to a school or church inside 500 feet (if at all) might be best answered by local units of government. This is not the only question that might be better addressed by local zoning.

The MLCC also involves itself in local entertainment issues solely because alcohol is being served. Believe it or not, a hearing was once held by the MLCC over a fine involving Polka dancing at a bar at which beer was served. The commissioners actually had to take testimony from a police officer on what they thought constituted a dance move. Surely our regulators' time might be better spent.

Gov. Snyder has repeatedly said he wants to see greater policy fairness amongst businesses and entrepreneurial dynamism in the Great Lake State. The ideas presented above are just a few good ones to facilitate such goals. We encourage the advisory committee to give them serious consideration.

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.