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Overregulation stifles N.C. entrepreneurs in alcohol-related fields

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RALEIGH — Overregulation of alcoholic beverages in North Carolina stifles entrepreneurs hoping to expand a growing industry across the state. That’s one of the key findings of a new John Locke Foundation Spotlight report.

The state requires 43 different types of permits and licenses for different activities linked to alcohol sales, said report author Jon Guze, JLF Director of Legal Studies.

“A new permit is required for every change of ownership of premises licensed to sell alcohol,” Guze said. “A rule forbids the owner of multiple premises from moving alcoholic beverages from one location to another. There is a rule restricting happy hours and forbidding some kinds of drink specials, while another forbids distilleries that offer tours from selling any specific visitor more than one bottle of alcohol per year. Rules govern the size of alcoholic beverages in hotel mini-bars and the number of bottles or cans of beer in a case. The list goes on and on.”

Enforcement of these rules extends beyond the Alcoholic Beverage Control Commission and state Alcohol Law Enforcement Branch of the N.C. Department of Public Safety. “Various state and local police forces also have authority, and they exercise a good deal of discretion in how they interpret and enforce the rules, which makes consistency impossible, compliance confusing, and abuse inevitable,” Guze said.

Large producers, distributors, and sellers have the resources to deal with North Carolina’s complex regulatory scheme, Guze said.

“For small-time entrepreneurs who want to enter the market for the first time, however, the regulatory regime constitutes a huge barrier,” he said. “It’s very difficult for them to become familiar with the entire body of laws and rules, let alone acquire the expertise and contacts that are needed to deal effectively with all of the relevant agencies. Some try and fail. Some never try at all.”

Along with entrepreneurs, North Carolina’s alcohol regulations harm consumers and the state’s economy. Guze’s report explains how the regulations hold back the state’s improvement in national freedom rankings.

North Carolina’s overall ranking has jumped from No. 26 to No. 19 since 2010 in the “Freedom in the 50 States” report compiled by the libertarian Cato Institute. But the state lags behind at No. 35 in the category labeled “alcohol freedom.”

“If we truly want North Carolina to be ‘first in freedom,’ we need to reduce the burden that excessive regulation places on the production, distribution, and sale of alcoholic beverages,” Guze said.

Guze focuses particular attention on the state’s monopoly of liquor sales and its rules governing wholesale distribution of beer and wine. These represent just the most “egregious elements of a vast regulatory regime,” he said.

“The chapter of the N.C. General Statutes dealing specifically with regulation of alcoholic beverages consists of 123 densely packed pages, and many other alcoholic beverage regulations are buried in other parts of the statute book,” Guze said. “Chapters of the N.C. Administrative Code dealing with alcohol law enforcement and the Alcoholic Beverage Control Commission take up 143 pages. Again, there are other alcoholic beverage regulations buried in other chapters of the Code.”

Guze labels state government’s monopoly on liquor sales as the “most extreme” alcoholic beverage regulation. With a few minor exceptions, liquor may be sold only in stores operated under the authority of the Alcoholic Beverage Control Commission.

“If it weren’t for this state monopoly, entrepreneurs would be operating hundreds of private liquor stores in North Carolina, and they would be competing for business with each other and with entrepreneurs operating thousands of grocery stores and other retail outlets,” he said. “As it is, a limited number of ABC stores keep the same limited hours and charge the same artificially high prices for the same limited selection of products.”

A mandatory system of wholesale distribution creates a different set of challenges for beer and wine producers, Guze said. “Once producers hit a certain threshold of product, they are no longer allowed to sell directly to retailers,” he explained. “Instead they must deal with a limited number of licensed wholesale distributors who enjoy a profitable oligopoly on this trade. In addition to enriching distributors at the expense of retailers and consumers, the system protects big producers by giving small producers a powerful incentive to stay small.”

The current system offers a great example of a “bootleggers and Baptists” scenario, Guze said. “Economists came up with that term to describe a situation in which the Baptists — in this case, concerned citizens — support regulations because they believe those regulations will minimize harms associated with alcohol abuse, while bootleggers — in this case, wholesale distributors and large brewers and distillers — continue to support regulations that protect their jobs, their investments, their power, and their profits.”

Despite ongoing support for regulation among “bootlegger” and “Baptist” groups, Guze identifies reasons for optimism about reform. “A new generation of sophisticated consumers is demanding more variety and more quality when it comes to alcoholic beverages, and a new generation of entrepreneurs has emerged to serve them,” he said. “The entrepreneurs are well aware that the existing regulatory regime protects the big companies at their expense, and they are starting to push back politically. Many consumers are becoming aware as well.”

“There appears to be an emerging coalition of consumers and entrepreneurs ready and able to oppose the long-standing alliance of established interests opposing alcohol freedom.”

Jon Guze’s Spotlight report, “Hard to Swallow: Maze of rules hinders expansion of state’s alcoholic beverage industry,” is available at the JLF website. For more information, please contact Guze at (919) 828-3876 or [email protected] To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected]

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About John Locke Foundation

We are North Carolina’s Most Trusted and Influential Source of Common Sense. The John Locke Foundation was created in 1990 as an independent, nonprofit think tank that would work “for truth, for freedom, and for the future of North Carolina.” The Foundation is named for John Locke (1632-1704), an English philosopher whose writings inspired Thomas Jefferson and the other Founders.

The John Locke Foundation is a 501(c)(3) research institute and is funded solely from voluntary contributions from individuals, corporations, and charitable foundations.