State Store Privatization

This past Wednesday, the House Liquor Control Committee held a hearing on House Bill 11 (HB 11), legislation being introduced by Rep. Mike Turzai to privatize the state liquor system. Although the committee is expected to hold at least two more hearings on this issue, the only individual testifying was Rep. Turzai. In this case, that seems appropriate because the legislation has yet to be introduced and a draft was just provided to the members of the committee at the hearing. While the Representative has spoken about the legislation for months, and held a press conference on July 13 announcing its introduction, it appears as if the bill is still not ready.

According to materials that Rep. Turzai provided, the bill will provide for the selling off of Pennsylvania Liquor Control Board wholesale and retail operations. A total of 1,250 retail licenses will be auctioned off to the highest responsible bidder with a reserve price based upon the fair market value (there are currently 621 state retail stores). The licenses will be divided into two categories—Class-A and Class-B. A Class-A license will include retail outlets with 15,000 or more square feet of retail space and at least 600 linear feet of shelf space. Most typically, these licenses will be held by grocery stores and “big box” retail outlets. Class-B licenses will include retail outlets with less than 15,000 square feet of space. Most typically, these licenses will be held by independent retailers and will be allocated by the Department of General Services (DGS) and PLCB based on population densities and market need.

Wholesale licenses will be transferred to Pennsylvania residents or Pennsylvania business entities based on a contractual relationship between manufacturers/importers and a wholesaler to be the exclusive wholesaler for their products within the state. The bill will also include anti-monopoly provisions and establish a biennial license renewal fee and a transfer of license fee comparable to other licenses issued by the PLCB. Additionally, the bill will eliminate the current 30% PLCB mark-up, the 18% Johnstown Flood Tax, the $1.50 per bottle handling fee and would replace those with a “gallonage tax” instead.

As is normally the case, I would expect that HB 11 will very well undergo several changes before it comes to the Senate for consideration. As a member of the Senate Law & Justice Committee, I look forward to hearings on this legislation and several others that have been proposed to change the way liquor is handled in the Commonwealth, including direct shipment of wine.

I do have concerns with the proposal as I understand it—including what will happen to the current employees (unemployment is high enough in our state; if these individuals lose their jobs, there will be a further cost to the Commonwealth through unemployment and state benefits that they may need to take advantage of). There are 14 store locations and two kiosks in the 42nd Senatorial District, employing 102 people on a full-time, part-time or seasonal basis. The Turzai summary states that employment support would be provided by providing tax credits for employers who hire displaced employees, tuition assistance for employees’ to further their education or re-train for a new career, and a preferential leg up in applying for other civil service positions in the Commonwealth.

I also have concerns about what the recurring revenue will be to the Commonwealth (the sale will result in a one-time cash influx) and whether there will be real variety and choice in a consumer-driven, supply and demand system. I also believe that we should consider other options that have been raised, such as direct wine shipping and other proposals as part of an overhaul of our liquor system.

This isn’t a partisan issue. Sen. Joe Scarnati, President Pro Tem of the Senate and a Republican from Warren County also expressed concerns in recent interviews. He was quoted as saying, “Before you sell a business, you get the best bottom line you can, and I'm not so sure that we in Pennsylvania have yet got the best bottom line out of our liquor system that we can. The liquor system is worth what somebody is willing to pay for it, and they're going to pay for it based upon how much they can make." Sen. Scarnati believes that there are other ways to boost sales and increase competition and also expressed concerns about whether any private bidders would be interested in the stores that serve rural towns.

Clearly, there is much to be answered in this process—and more to learn. I am going to remain open-minded about the proposal and look carefully at the pros and cons that there are in each opportunity. We can also learn more by looking at other states. Other than Pennsylvania, only three other states have state-run retail and wholesale. In the past 20 years, only one state has privatized its retail operations, West Virginia, which sold its retail stores in 1990 but continues to control wholesale sales. The state also re-licenses the retail sale every 10 years, experiencing a revenue spike in those fiscal years.

As always, I look forward to your thoughts on this and other issues that are of interest and importance to you and encourage you to contact me.