In a recent video
, Mackinac Center investigative reporter Kathy Hoekstra looks at how the Liquor Control Commission hurts Michigan’s entrepreneurs in the craft beer industry.
Most residents would be surprised
to learn that under the current system, the state buys all the liquor, or
“spirits,” distributed in Michigan. Our government, via the Liquor Control
Commission, slaps its own price mark-up on liquor before imposing an array of
taxes and price controls, effectively protecting the state distribution
Residents should insist that the
Michigan Legislature take a hard look at the costly and cumbersome system it
has protected for decades, in large part because of the excessive political
influence of a small handful of individuals who profit from the status quo.
The higher prices in Michigan entail a 65 percent price markup the state imposes to ensure its own profit.
No one would design such a system
from scratch today. It was conceived in 1933 out of a perceived need to
maintain government control over alcohol sale and consumption following the
repeal of Prohibition. State government made itself the sole wholesale agent
for all liquor sales in the state. (It very nearly became the exclusive retail
agent too, and to this day sharply limits competition through a quota system
for merchants licensed to sell spirits.)
The arrangement was based on a
belief that such direct government involvement would protect public health and
safety, among other things preventing the distribution of adulterated products
like “bathtub gin” from the remaining Prohibition bootleggers and gangsters.
The system also appealed to prohibitionists who still wanted to limit access to
the newly re-legalized liquor.
Nearly 80 years later the bathtub
gin has disappeared, but Michigan’s LCC is still buying and supplying all the
liquor consumed in the state, making ours one of 18 so-called “control” states
with similar setups. Nevertheless, proponents of this system still argue that
direct government control prevents an array of imaginary tragedies.
Modern scholarship seems to suggest
otherwise. To cite one example, a July 2010 paper from the Virginia Institute
for Public Policy found no statistically significant difference in
binge-related drinking, drunk driving fatalities and total alcohol-related
deaths between the 18 control states and other “open” (free) states.
In addition, the state isn’t just a
direct player in the distribution operation; it also mandates minimum shelf
prices, under which stores may not sell their products. For example, I
inspected prices on June 3 at the Meijer in Coldwater, Mich., (near the Indiana
border), and found that half gallons of Smirnoff vodka, Crown Royal whiskey and
Captain Morgan rum sell for $23.96, $53.98 and $26.99, respectively. Twenty
minutes south, the same products were available at the Meijer store in Angola,
Ind., for $18.49, $47.49 and $21.99, respectively. In other words, Michigan
consumers were paying in excess of 20 percent more for the same products.
The lower costs in Indiana are probably directly related to it being a free
The higher prices in Michigan
entail a 65 percent price markup the state imposes to ensure its own profit. It
then discounts the liquor to retailer licensees by 17 percent so they, too, can
make a profit. Through Sept. 30, 2010,
the LCC’s net income exceeded $333 million for fiscal 2010. Some of this
revenue is generated by license and inspection fees, fines and taxes. The money
goes to the state School Aid Fund, the General Fund, convention facilities and
the “Liquor Purchase Revolving Fund,” which pays for the LCC’s own operations.
Many will correctly observe that
this amounts to a “sin tax” on liquor. They’re right, but taxpayers and
consumers are still being shortchanged by a system that prevents the savings
that could be realized by a modern, competitive private-sector supply chain
distribution system. Those savings could either be returned to consumers, taxed
to provide government services, or some of each.
In other words, this direct
government “control” isn’t just an archaic relic; it’s an expensive middleman
that imposes a deadweight loss on both the state’s people and government. The
state should get out of the distribution of spirits and leave it to the private
D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac
Center for Public Policy, a research and educational institute headquartered in
Midland, Mich. Permission
to reprint in whole or in part is hereby granted, provided that the author and
the Center are properly cited.