by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor | John Locke Foundation
Bob has a bumper crop of North Carolina sweet potatoes. How can he get them to a consumer? Bob’s got a lot of options.
Maybe Bob knows some local grocers and restauranteurs who’ll sell his produce. He could contract with food handlers to deliver his sweet potatoes to other grocers. He might set up a stand at a local farmer’s market. He could set up his own roadside stand. Wherever he is, Bob can offer samples to prospective buyers. Bob could even become a member of the N.C. Department of Agriculture & Consumer Service’s “Got to Be NC” program, where his sweet potatoes could be listed and accessible to any consumer, grocer, or restaurant looking to showcase North Carolina products.1
Amber has a batch of North Carolina rum. How can she get them to a consumer? Amber faces a lot of roadblocks.
First, she has to get product recognized by the North Carolina Alcoholic Beverage Control (ABC) Commission. Then she has to persuade commissioners to think her rum will meet their profit threshold, so that they will put it on their official list of approved products. If it’s not listed, ABC stores can’t sell it. Once it’s listed, she has to contact each of the 433 ABC stores to urge the managers to carry her product.
Amber can’t sell her rum at farmers’ markets or fairs. She can’t sell bottles or even drinks away from her distillery. She can’t even hold tastings of her rum at ABC stores. She can’t distribute any of her products herself. If someone visits her distillery, Amber may offer a very limited amount of tastings and sell a limited number of bottles per visitor per year. But she still can’t serve drinks or cocktails to her visitors.
How did we get here? Like beer and wine and sweet potatoes, liquor is a legal product. The North Carolina State Constitution protects people’s self-evident right to “the enjoyment of the fruits of their own labor” and declares “monopolies are contrary to the genius of the free state and shall not be allowed.”2
So why does the state force Amber to deal with a government monopoly? Why does North Carolina make distillers go through a process less like what farmers face here and more like what farmers face in a socialist dystopia like Venezuela?3
The answer goes back to the end of Prohibition in 1933 and North Carolina policymakers’ worry that private retailers had financial incentive to encourage people to drink more.4 The Alcoholic Beverage Control Act passed in 1937 to make North Carolina a “control” state for liquor. A control state puts the government in charge of the distribution and retail of liquor products. There are 17 control states left in the United States.
Most U.S. states are “license” states, where the distribution and retail of liquor are handled by private ventures that receive licenses or permits from the state. North Carolina has that kind of system for other types of alcoholic beverages: beer and wine.
Not for liquor, however. After a distiller produces a bottle for consumption, it goes through several layers of government bureaucracy before it can reach a consumer. It must first be approved by the ABC Commission, then find storage in the ABC warehouse, then be ordered by a local ABC board, and then be offered for sale by that board’s ABC store at the price set by the ABC Commission.
If some cog in the bureaucracy says “No” along the way, the distiller is out of luck, and so are consumers. In September 2018, Carolina Journal spoke with several local distillers roadblocked by someone in the ABC system. Here are some of their experiences:
Total government control leaves these small business owners with no other option but to accept the answers received from the ABC system, however arbitrary or unfair they may seem.
Under our ABC system, there is one government-approved list of liquor products, one government-set price per product, and one state-owned warehouse (with another under lease). Then there are 170 local government ABC boards and 433 ABC stores.
North Carolina is the only state with local government control of the retail sales of liquor. These local boards present a thorny problem to the ABC system — but also to reforming that system.
The ABC system enjoys a side benefit from total government control of liquor: monopoly revenues. Systemwide, the profit margin is a whopping 11.2 percent.6 But in counties with several municipal ABC boards rather than a single county board,7 the profit margins are much lower.
A February 2019 report on North Carolina’s control of liquor by the Program Evaluation Division (PED) of the N.C. General Assembly highlighted three counties with multiple boards. Brunswick County, with nine boards operating 11 stores, had a county profit of 7.9 percent; Columbus County (five boards, five stores), 5.6 percent; Robeson County (seven boards, eight stores), 2.6 percent.8
By way of comparison, in a competitive market, the profit margin of private beer, wine, and liquor stores nationally in 2017 was 2.4 percent.9
There are 33 counties with more than one ABC board, according to PED. To a government monopoly, they are less efficient and less profitable because their stores are too close to each other. PED recommended consolidating them to make the ABC system’s profit margin even higher: “To increase the profitability and efficiency of the ABC system, the General Assembly should direct local ABC boards located in counties with two or more boards to consolidate local ABC operations and establish a merged board.”10
Having more options might be good for consumers, but it lowers the government’s profit margin.
Maximizing the government’s profit margin not only cuts consumers’ choices, it also hurts distillers’ chances. The ABC Commission sets profit thresholds for products it lists, including N.C. distillers’ products (according to a November 2018 email from the ABC Commission to suppliers, it was “$15,000 for vodkas, $10,000 for other, $5,000 for N.C. products, $1,000 for boutique”).11 If the product can’t make that profit threshold, it doesn’t make the list and can’t be sold.
It also stands in the way of competition and job creation. In a competitive market, a profit margin of 11.2 percent is a clear welcome sign for more sellers. The very thing the government fears when it owns all the stores is what consumers, producers, and workers like in a competitive market: more outlets competing.
PED estimates that the current ABC system is preventing a sizeable amount of sales by keeping retail stores limited. More outlet stores would increase sales of liquor by 20 percent, they estimate.12 That’s one-fifth of current sales, thwarted. It’s a clear admission that North Carolina consumers are frustrated by the system.
Does that mean alcoholic beverage control is working? Only if you consider liquor the only alcoholic beverage. Government limiting liquor sales doesn’t seem to be pushing North Carolina liquor drinkers to abstinence. Evidence suggests it’s redirecting them to more beer and wine consumption.13
As a government monopoly, the ABC system generated over $1.1 billion from liquor sales in fiscal year 2017. To some, that is reason enough to keep the system. But is it?
Most of that money isn’t “profit.” Most of it went towards business expenses: paying for the cost of the goods sold and the expense of operating the boards, stores, and warehouse.
A much smaller portion went to the General Fund and other state and local government uses: just 38.1 percent, or $430.6 million portioned across several funds (see Table 2). The portion that went to county/city distributions was only 7.1 percent, or $80.3 million.14
Those amounts stem mostly from taxes and surcharges in state law. They’d be in law regardless of what kind of system North Carolina uses for liquor distribution and sales.
This revenue generation is a real sticking point preventing reform. But the state and local governments could maintain alcohol revenues by setting licensing fees and adjusting excise taxes and other taxes on liquor sales (See appendix). To accomplish this, PED projected a slight increase in the state excise tax from 30 to 33.6 percent and adding a local excise tax of up to 12 percent (offset some by losing the bailment surcharge and fee and the local government and local board markups).15
Every state has its own unique twists when it comes to regulating alcohol. The range of policy quirks across the 50 states and the District of Columbia (D.C.) means there’s no single benchmark state for alcohol regulation. States make different choices in how to regulate different areas, whether more free or more restrictive.
Beyond its ABC system and control of liquor, North Carolina’s extensive regulation of alcoholic beverages requires an immense stack of bureaucracy. Chapter 18B of the North Carolina General Statutes, regulating alcoholic beverages, fills 123 pages. On top of that, the North Carolina Administrative Code devotes at least 143 pages containing 1,009 regulatory restrictions and 75,870 words on the alcoholic beverage industry.16
Sometimes other states can point North Carolina policymakers to a better way. (See Table 1)
Overregulation isn’t just a nuisance. For small businesses like North Carolina distilleries, it can spell the difference between business life and death.
The distillery industry here was erased by state prohibition in 1909, like the beer and wine industry. But breweries and wineries returned faster and have grown much quicker under a license system than distilleries have under strict government control. As of last count, there were 168 wineries and 304 breweries in North Carolina.
Distilleries didn’t start returning to North Carolina until 2005. As of September 2018, the state had only 63 active distilleries.
Most distilleries rely almost exclusively on sales within their home state (see chart).17 When North Carolina places so many restrictions on distilleries trying to reach customers in their own state, it’s depriving them of their vital, natural consumer base. This is Amber’s problem: her own state is making it hard for her business just to survive, let alone innovate and grow.
Total government control over the price, distribution, and sales of a legal product is something you would expect in countries like Venezuela. It’s not something you’d expect in North Carolina, a state proud to be “First in Freedom.” It’s far from what the state constitution calls “the genius of a free state.”
Also, North Carolina law governing alcoholic beverages varies widely according to kind of alcoholic beverages. The state places one kind of alcoholic beverage (liquor) under total government control. For the others, beer and wine, North Carolina uses a license system.18
The common-sense answer to this is for North Carolina to become a license state for liquor, just as it is for beer and wine.
It’s a long-overdue reform with evident benefits, though there are questions to answer.
That is the big question whenever ABC reform is discussed. We forget temporarily that the system was set up to control liquor sales, not maximize government revenue. And the ABC Commission’s use of phrases like “billion dollar ABC revenue” makes this seem more irreplaceable than it is.19
As explained, most of the money generated in the ABC system covers business expenses. The actual amount in revenues that would need to be replaced is only about 38 percent of the money the ABC system generates.
Table 2 shows how that smaller portion of ABC money transferred to governments is segmented.
ABC money to the General Fund derives from the state excise tax, the mixed beverage and guest room surcharges, and the state sales tax.20 These taxes and surcharges exist in state law and flow to the N.C. Department of Revenue. They will remain in place even if the state switches to a licensing system.
Under PED estimates, state government revenue could be maintained by adjusting the state excise tax on liquor slightly, to 33.6 percent from 30 percent.21
Other governments have transitioned from control without harming their revenues. Alberta, Canada opened retail sales of alcohol to independent stores in 1994 with a new excise tax to hold province revenues harmless. Revenues increased, and the excise tax had to be lowered.22
The state of Washington became a license state by referendum in 2011. Washington had the nation’s highest excise taxes and fees on spirits as a control state, and it still does as a license state. Similar to Alberta’s experience, Washington’s liquor taxes and fees have been falling since 2014,23 while their impact on state revenues has been called a “windfall.”24
Supporters of the control system worry about a loss of local government transfer funds, but they are only a small portion of ABC monies — just 7 percent of ABC system revenue.
If the state modernizes and adopts a license system, how would we hold harmless local government revenues? PED estimates this could be done by replacing the local government markup of 3.5 percent with a local government excise tax of 12 percent.
How well a 12 percent excise tax would replace local government revenues depends on the local ABC board’s contribution. Some local governments would see large increases. The more efficient boards consume smaller proportions of their revenues to fund their operations. This means they return more funds to their communities, which would be harder to replace with an excise tax of 12 percent. PED’s estimate assumes 20 percent growth in sales. (See appendix.)
Giving local governments an option to increase the local excise tax could smooth this difference. A higher local excise tax would also limit growth in liquor purchases in those communities.
Local governments would also reap one-time windfalls from the sales of ABC stores.
This is another big question whenever ABC reform is discussed. It is based on the system’s founding rationale to control liquor sales. Will removing government control of liquor sales lead to a significant increase in underage drinking, underage binge drinking, DUIs, or other alcohol-related problems? If so, it would create problems for Alcohol Law Enforcement (ALE) or local law enforcement.
The question assumes again that liquor is a different kind of alcohol from beer and wine. But think about what a small subset of the state’s alcohol consumption is actually being discussed. Consumer purchases at ABC stores are of bottles for off-premise consumption. The limited number of stores are open Mondays through Saturdays 9 a.m. till 9 p.m.25
Compare that with all the other opportunities for alcohol consumption in North Carolina. Consumers can obtain drinks of beer, wine, and even liquor-by-the drink at a wide range of private ventures (taverns, bars, restaurants, grocery stores, convenience stores, specialty shops, even pharmacies and other places) for on-premise consumption as well as make purchases for off-premise consumption. And they have this access every day of the week from 7 a.m. most days (either 10 a.m. or noon on Sundays) on up till 2 a.m.26
From that view, it doesn’t seem that ALE or local law enforcement should see a significant change in problem consumption.
Furthermore, research into these concerns has not found statistically significant27 differences between control states and license states with respect to underage drinking, underage binge drinking, DUIs, or other alcohol-related problems. There’s little reason to think moving to a license system for liquor would impact law enforcement significantly:
Becoming a license state will open opportunities to the state’s fledgling distillery industry. Amber’s options for reaching customers would look more like Bob’s.
Her distillery wouldn’t be held hostage by a single “No” from within the government alcohol bureaucracy. She would have access to many more potential “Yes” answers from a wider range of outlets.
Under a license system, North Carolina breweries and wineries have been booming (168 wineries, 304 breweries). But under a system of strict government control, distilleries are growing at a much slower rate (63).
Our distilleries would also benefit from adopting other states’ better approaches to regulating distilleries (see Table 1). Overregulation of distilleries in North Carolina is placing unnecessary obstacles between distillers and local consumers, who are their lifeblood.
Consumers would enjoy a wider range of outlets as well as a wider range of choices and prices. With the ABC Commission no longer dictating the choices to them, retail liquor stores could decide which brands to carry as well as which local products to highlight. They could offer different brands than are currently allowed.
Private retailers could even take risks on new distillery products that might not offer much profit potential at first. They would also compete for consumers’ business in various ways: price, selection, service, access to hard-to-find brands, etc.
The ABC system may prefer a limited number of stores to maximize revenue, but consumers don’t. PED estimated that access to more retail outlets could increase purchases by 20 percent. Perhaps this is why a majority (52 percent) of North Carolinians polled by Elon University in October 2018 favored closing ABC stores (only 32 percent opposed). Of respondents who actually shop at ABC stores, the majority in favor of closing them was even higher (58 percent).34
With new opportunities for distillers and potential for more private liquor stores, there would be more jobs. As breweries and wineries have blossomed already under a license system, North Carolina’s distillery industry is poised for growth under a less restrictive system.
More jobs, more retail outlets, and more distilleries would lead to faster economic growth than could be expected under the ABC system’s strict control. Distilleries rely almost exclusively on local consumers, so building relationships with their neighbors is very important to their survival.
Distilleries also hold the potential for local tourism, especially if the state relaxes many of its restrictions against them (see Table 1). For these reasons, changes that help boost distilleries also hold the potential to boost community pride.
North Carolina exerts total government control over liquor distribution and sales. Most states have a license system for liquor, like North Carolina has for beer and wine. But even from other control states, North Carolina deviates by imposing local government control over liquor sales through 170 different ABC boards.
As a government monopoly, North Carolina’s ABC system seeks to maximize revenues and minimize choice and competition. Local distillers like Amber trying to reach consumers here face several layers of government bureaucracy, and any “No” along the way means they’re out of luck. Consumers lose out, too.
Advocates for keeping the ABC system are quick to point to its over $1 billion in sales and talk about its government revenue transfers. But most of the sales revenue covers business expenses. Just 38 percent goes to government purposes.
Importantly, state government revenue from liquor sales is already built in by taxes and surcharges in state law. They don’t depend on whether North Carolina is a strict control state with an ABC system. If North Carolina becomes a license state in liquor as it is in beer and wine, state revenues could be held harmless with a slight adjustment to the state excise tax on liquor.
Also, only 7 percent of ABC revenues goes to local governments. If North Carolina becomes a license state in liquor as it is in beer and wine, local government revenues could be held harmless through a local government excise tax. For this purpose PED would replace the 3.5 percent local government markup with a 12 percent local government excise tax. See the appendix for discussion.
Advocates for keeping the ABC system also speculate that without it, North Carolina would see a spike in teenage drinking, teenage binge drinking, DUIs, and alcohol-related deaths, which would create havoc for ALE and local law enforcement. While underage drinking and alcohol abuse are serious problems, these fears appear to be unfounded.
Sales of bottles of liquor for off-premise consumption are a small subset of alcohol consumption, and research finds no significant differences in control vs. license states in any of these negative outcomes. A higher local excise tax could more directly limit liquor purchases in a community. Most importantly, a change to the licensing system would retain existing consumer safeguards.
Consumers, distillers, private retailers, future entrepreneurs, local job-seekers, and local communities would all benefit from liberating the liquor industry in North Carolina. A majority of North Carolinians favor this change, including nearly six out of 10 liquor consumers.
North Carolina’s state constitution favors free enterprise and opposes monopolies. It’s past time to end its own government monopoly on liquor. Fears that this would cost government revenues and create problems for law enforcement and the community are unfounded. The state is standing in the way of consumers, local distillers, potential growth in future distillery ventures, potential future growth in retail ventures, greater choice, greater competition, local job creation, and community benefits.
Replacing the local government ABC revenue distribution with a local government excise tax
Only about 7 percent of ABC revenues goes to local governments. Replacing that amount to hold local governments harmless under a license system is a matter of setting the right level of local excise tax on liquor sales. The General Assembly’s Program Evaluation Division estimated it could be done with a local government excise tax of 12 percent.
This estimate assumes a 20 percent increase in liquor sales from more sales outlets. While it works statewide, its effectiveness varies significantly among locations, depending upon the efficiency of the local ABC board a new licensing system would replace. Some boards consume greater proportions of their revenues in operating expenses and working capital and so have comparably little left over for local distribution. Their communities would see large returns from a local government excise tax. Communities with more efficient ABC boards would not, however.
Some communities would not need a full 12 percent excise tax to maintain their expected revenue contribution from liquor sales, whereas others would need more than 12 percent.
Setting a statewide local government excise tax and giving local governments a local option to add their own excise tax could bridge this gap. Note that the higher a local-option excise tax were set, the more it would limit liquor purchases in the community.
The table on the following pages uses ABC data on the board level to estimate how revenues from a 12 percent local excise tax would compare with local distribution levels under different sales levels (from no change up to 20 percent increase).
1. See the “Got To Be NC Agriculture” web site, North Carolina Department of Agriculture & Consumer Services.
3. Q.v., Mariana Zuñiga and Nick Miroff, “Venezuela’s paradox: People are hungry, but farmers can’t feed them,” The Washington Post, May 22, 2017.
4. Ben Steelman, “North Carolina has complex history with liquor,” StarNews, March 6, 2010.
5. John Trump, “North Carolina’s monopolistic system of controlling liquor is broken, but will lawmakers fix it?”, Carolina Journal, September 10, 2018.
6. “Follow-Up Report: Implementation of PED Recommendations Has Improved Local ABC Board Profitability and Operational Efficiency,” Program Evaluation Division, North Carolina General Assembly (hereafter PED), Report Number 2018-05, May 21, 2018. Also see “Profit Percent to Sales: Fiscal Year Ended June 30, 2017,” ABC Commission.
7. Owing to local-option elections, when town voters had opted to approve liquor sales if their home county had not yet.
8. “Changing How North Carolina Controls Liquor Sales Has Operational, Regulatory, and Financial Ramifications,” PED, February 11, 2019, Report Number 2019-03.
9. Mary Ellen Biery, “These Industries Generate The Lowest Profit Margins,” Forbes September 24, 2017.
10. “Changing How North Carolina Controls Liquor Sales,” PED.
11. John Trump, “State ABC cutting options on shelves as it praises controversial warehouse operator,” Carolina Journal, November 21, 2018.
12. It seems a rather loose estimate, since it assumes liquor consumption “increases by estimated 20% with higher outlet density” for each different option of changing the ABC system, regardless of price effects. “Changing How North Carolina Controls Liquor Sales,” PED.
13. Jon Sanders, “When Controlling Alcohol Doesn’t Control Alcohol,” Research Brief, John Locke Foundation, January 29, 2019.
14. “2018 Annual Report,” North Carolina Alcoholic Beverage Control Commission.
15. “Changing How North Carolina Controls Liquor Sales,” PED.
16. Page counts are from Jon Guze, “Hard to Swallow: Maze Of Rules Hinders Expansion Of State’s Alcoholic Beverage Industry,” Spotlight No. 482, John Locke Foundation, November 28, 2016. Restrictions are based on author’s count using Patrick A. McLaughlin, Oliver Sherouse, and Daniel Francis. RegData North Carolina (dataset), QuantGov, Mercatus Center at George Mason University, Arlington, VA, 2017, https://quantgov.org/state-regdata.
17. “Annual Craft Spirits Economic Briefing,” ACSA with Park Street and IWSR, September 2018, accessible at https://americancraftspirits.org/education/research.
18. North Carolina’s three-tier system of distribution for beer and wine is not without its problems, including creating a wholesale distribution oligopoly, as argued in Jon Guze, “Hard to Swallow: Maze Of Rules Hinders Expansion Of State’s Alcoholic Beverage Industry,” Spotlight No. 482, John Locke Foundation, November 28, 2016.
19. “2018 Annual Report,” N.C. ABC Commission.
20. “Changing How North Carolina Controls Liquor Sales,” PED.
21. “Changing How North Carolina Controls Liquor Sales,” PED.
22. Björn Trolldal, “An investigation into the effect of privatization of retail sales of alcohol on consumption and traffic accidents in Alberta, Canada,” Addiction 100(5):662-71, June 2005.
23. See discussion in Jon Sanders, “North Carolina’s Alcoholic Beverage Control System: How it works and why it should be modernized,” Spotlight No. 502, John Locke Foundation, February 15, 2019.
24. Chad Sokol, “5 years after privatization, Washington liquor sales are up despite price increase,” The Spokesman-Review, December 13, 2017.
27. Essentially, this phrase means that the evidence is not strong enough to show that any differences that exist aren’t due to chance or some other factor or combination of factors not anticipated by the research.
28. Antony Davies and John Pulito, “Binge Thinking: A Look at the Social Impact of State Liquor Controls,” Working Paper No. 10-70, Mercatus Center, George Mason University, November 2010.
29. Michael LaFaive and Antony Davies, “Alcohol Control Reform and Public Health and Safety,” Policy Brief, Mackinac Center, May 14, 2012.
30. Donald J. Boudreaux and Julia Williams, “Impaired Judgment: The Failure of Control States to Reduce Alcohol-Related Problems,” Policy Report No. 14, Virginia Institute for Public Policy, June 1, 2010.
34. John Trump, “Elon Poll finds slim majority in N.C. support ending ABC monopoly on liquor sales,” Carolina Journal, February 12, 2019.