by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor | John Locke Foundation
A January 27 article in the News & Observer announced that a bill to make North Carolina a license state for selling liquor is unlikely to receive a vote this year. But according to reporter Colin Campbell, House Bill 971 could at least lead to further study of the state’s antiquated Alcohol Beverage Control (ABC) system.
Ever since 1937, North Carolina has been a “control state” for liquor. As explained in my May 2019 policy report on North Carolina’s ABC System, we’re one of only 17 control states in the country. North Carolina has one government-approved list of liquor products, one government-set price per product, and two warehouses (one owned by the state, the other under lease).
And here’s where it gets really crazy:
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.
That profit margin is extremely high. In competitive states, liquor stores have very low profit margins — 2.4 percent.
Still, most of the ABC revenue goes toward business expenses. Private businesses in a modern license system would shoulder them instead.
Also, much of the revenue going to the General Fund or other government uses would still be raised regardless of the system used, because it stems from taxes and surcharges in state law.
The wild card in modernizing liquor sales here is replacing the expected ABC revenues (about 7 percent in 2017) going to city and county distributions. That’s because the distributions vary greatly, depending upon the efficiency of the local ABC board. The more wasteful the board, the less money is left over for the city or county. Efficient boards result in more local distribution.
Here’s what that means: Replacing the boards and installing an equitable tax revenue distribution system based on local sales would effectively boost localities that lose inefficient ABC boards while penalizing those that had efficient boards.
As the N&O explained:
While privately owned liquor sales still face strong opposition from conservative religious groups and leaders of the current ABC system, [Rep. Chuck] McGrady says the primary hurdle will be local governments. They benefit from ABC stores’ revenues and are unlikely to support any proposal that reduces that revenue stream.
McGrady said he’s working to fine-tune the tax and revenue formulas in the privatization bill to ensure that local governments don’t lose money.
“It’s very difficult because you’ve tied all sorts of things to the sale of alcohol revenue,” he said. “I’ve had fiscal staff and bill drafting (staff) tell me that of all the legislation we’ve worked with, this is some of the most complicated.” …
“Ironically the [local government]s that end up losing money, at least in the first effort, are the ones that are the most efficient,” he said.
My report found a similar problem when it examined a solution proposed by the General Assembly’s Program Evaluation Division: a local excise tax of 12 percent. The report appendix showed local revenue distribution estimates under different sales growth levels. They varied widely. For example, under a 5 percent growth scenario, Brunswick County would realize an eightfold increase in local ABC revenue distribution, but Pasquotank County would see it fall by 40 percent.
To smooth over this huge variance, my report suggested a local excise tax set lower than 12 percent (because not all localities need that much to be held harmless) with an option for local governments to add their own excise tax to bridge whatever local gap remained.
For what it’s worth, HB 971’s proposed flat tax ($28 per gallon) on liquor seems a better approach than a local excise tax plus local option excise tax. It’s simpler. Also, because it would be regressive, it would hew more closely to the original rationale behind the ABC system. It would tend to dissuade loading up on cheap hooch.
Both, however, are attempts to get around artificial problems created by a needlessly complex state/local government hybrid system set up to control alcohol sales that, after the fact, became attractive to state and local government to deliver monopoly revenues.
It’s plenty obvious North Carolina needs a better, freer, 21st-century system for liquor sales. But it’s a real quandary how we’re going to get there to the satisfaction of all the different government factions involved.
In the meantime, there are plenty of smaller regulatory fixes that can help North Carolinians buy — and sell — legal alcoholic products. Why do we ban “Happy Hour” and other drink specials? Why can’t distilleries provide more tastings? Why can’t distilleries sell bottles at fairs and farmers markets? Why can’t they hold for-profit events? Why can’t ciders and perries be taxed like beer instead of wine?
And those are just some of the 1,000-plus restrictions North Carolina places on alcoholic beverages.