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The Effects of I-1183

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Initiative 1-1183 was designed to introduce privatization of Liquor sales in Washington. The state has for 78 years exercised monopoly power over liquor sales in Washington. The recent passing of initiative 1-1183 by voters in November 2011 by the voters therefore puts an end to the 78 year state monopoly on the sale of liquor. It is important to note that for a long time, the Washington Policy Center has recommended privatizing the liquor sales business to allow for competition under state regulation. Thus initiative 1-1183 was not the first attempt toward privatization. Before initiative 1-1183, there was the initiative 1100 introduced in 2010 that was not passed by the voters, (Mercier, “Citizens’ Guide to Initiative 1183”). This essay will outline the 1-1183 provisions and discuss the policy implications now that the initiative has been passed.

Before the passing of initiative 1-1183, there have been 18 liquor monopoly states in the U.S, Washington being one of them. All the 18 states have had some level of monopoly over sale of liquor, with 12 of them (including Washington) imposing a government-only monopoly on wholesale and retail liquor sales. Passing initiative 1-1183 means therefore that the state will be forced to refocus on the enforcement of state’s liquor, public health and public safety laws as opposed to retail sales management that has been their regular activity. In the next section, this essay briefly highlights the provisions of initiative 1-1183 which reads as follows:

           

The people of the state of Washington, in enacting this initiative measure, find that the state government monopoly on liquor distribution and liquor stores in Washington and the state government regulations that arbitrarily restrict the wholesale distribution and pricing of wine are outdated, inefficient, and costly to local taxpayers, consumers, distributors, and retailers. Therefore, the people wish to privatize and modernize both wholesale distribution and retail sales of liquor and remove outdated restrictions on the wholesale distribution of wine by enacting this initiative, (I-1183-Washington Secretary of State’s Office, 2).

In order to achieve the goals outlined in the definition of initiative 1-1183, the sponsors have specific constitution based measures to be implemented. First, section 102 provides for privatization and modernization of the current wholesale distribution and retail monopoly of liquor. Following from section 102 therefore, state’s distribution warehouse’ liquor facilities and equipment will be auctioned. Sections 103 and 105 allows for introduction of a fee structure that would generate surplus revenues compared to the existing liquor monopoly revenues for government. By enforcing section 103, liquor sales outlets that can serve stores of 10000 and more square feet can be limited with limited exceptions. Another Measure would be to enhance state liquor safety enforcement and training as provided for under section 103.  As a requirement for licensing, local leaders will be required to give their comments before license authorization. Liquor licenses will be issued only to those stores that demonstrate effective liquor sale prevention to minors, (Mercier, “Citizens’ Guide to Initiative 1183”).

Initiative 1183 require the repeal of the recent SB 5942 legislation bill that was enacted in 2011. This is intended to allow for the leasing of the state’s liquor distribution warehouse to a private provider as a means to eliminate the current state monopoly. This means that there will be a private distribution monopoly instead. The intent section of SB 5942 partly reads as follows;

The legislature finds that it is in the public interest to seek revenue opportunities through leasing and modernizing the state’s liquor warehousing and distribution facilities and related operations. The legislature finds that it is also in the public interest to conduct a competitive process to select a private sector lessee for this purpose, (SB 5942 – Liquor Warehouse Distribution, 3).

The major aim for enacting SB5942 was to raise extra income for the state through leasing the state liquor warehouse to a private company. The effect of this would be to promote competition in both the wholesale and retail of liquor so that retailers will no longer have to purchase their liquor from one supplier. The disadvantage that accompanies this legislation however is that the state monopoly has simply been substituted with another monopoly- a private company monopoly. SB 5942 was enacted with an emergency clause that that bars instituting an amendment to 1-1183 initiative by way of a referendum. The emergency clause was opposed by a section of the legislators but still Governor Gregoire went ahead to sign the bill in it’s form. Among those who were against the emergency clause included Rep. Cary Condotta who wrote;

I do have a major concern with Senate Bill 5942 and the strong arm tactics used to add an emergency clause. It is obvious this is an attempt to preempt the Costco Initiative this fall. Please consider vetoing the emergency clause to make this a legitimate bill. I am not supporting the Initiative one way or the other, but think it would be scandal (at best) to try and sign a contract before a vote of the people, (Mercier , “Governor to decide if liquor contract is state emergency”).

Rep. Cary Condotta uses the phrase “Costco initiative” referring to the 1183 initiative. 1-1183 initiative stipulates that as a condition for licensing, that retail establishments must have space of more than 10000 square feet. It happens that Costco stores are among the few that meet these criteria. Costco had also supported the previous initiative 1100 that was not passed and had spent an estimated $22 million in support of this initiative. This is how the 1183 initiative earned itself the nickname “Costco initiative”. The sentiments and concerns of Rep. Cary Condotta were informed by the controversial intention of the office of Financial Management to announce private sector bidding recommendations in less than a week earlier than the November election yet according to the initiative provisions, the liquor distribution warehouse contract would not be signed before a vote by the people on the 1183 initiative. In the next section, comparison is made between the failed 1100 initiative and initiative 1183, (Mercier, “Governor to decide if liquor contract is state emergency”).

There are several differences between initiative 1100 and 1183.  If initiative 1100 had passed, it would cause the state a loss of $76 to $85million and a loss of $180 to $192million to the local government within a five year’s duration. Initiative 1183 on the other hand is expected to generate a gain of $216 to $256million for state and a gain of $186 to $227million for local government within a six year duration. Whereas initiative 1100 would allow manufactures to offer quantity discounts to retailers for purchase of wine, beer and liquor, initiative 1183 allows this only on liquor and wine but not on beer. Regarding retail licensing, Initiative 1100 would attract an application fee of $1000 and annual fee of $1000. Initiative 1183 on the other hand will require license issuance fee equivalent to 17% of all liquor sales under the license, plus annual fee of $166. Initiative 1100 had no restrictions on authority of cities and counties to limit where liquor would be sold. Initiative 1183 on the other hand limits liquor licenses to those stores that demonstrate effective sale prevention to minors and requires commends from the local government authorities before license approval. As a result, initiative 1183 has 1428 as the estimated number of retail liquor outlets compared with 3357 under the failed initiative 1100, (Mercier, “Citizens’ Guide to Initiative 1183”).

The passing of initiative 1183 has a number of policy implications. To begin with, initiative 1183 makes Washington to become the first state in which retailers of liquor will bypass the wholesaler and make their liquor purchases from producers and wine from vineyards. It is due to this reason that wholesalers of beer, wine and liquor were actively engaged in efforts to try and stop initiative1183. It is feared that other state may also duplicate the Washington precedent where retailers and producers are allowed to bypass the wholesalers. It is yet to be observed the impact of initiative 1183 to consumers in terms of how much savings can be made from allowing producers the freedom to choose whether to bypass the wholesalers or not. As a result, the wholesalers who will loose regional monopoly will only be able to compete using price and quality. The advantage is that consumers will be able to enjoy lower prices. At the same time, the producers and retailers who decide to continue using wholesalers will enjoy better quality services, (Minton, “Liquor Privatization Would Edge Washington State Toward Freedom”).

From the face of it, it would appear as if initiative 1183 promotes free market operation since it encourages competition through price and quality. However, a closer look reveals that initiative1183 is far from the free market system. This is because the requirement that licenses be issued to stores with space of over 10000 square feet locks out many small liquor stores. More so, initiative 1183 has not provided any clear justification for the exception in which beer will remain captive to the mandatory three tier system. However, having been passed, initiative 1183 will go along way to avail the long awaited alcohol freedom by putting an end to the long standing state’s liquor wholesale monopoly. In conclusion, it is important to reiterate fact that the state had enjoyed monopoly power in control of liquor sales for 78 years. The passing of initiative 1183 therefore effectively ended this state monopoly. There were substantial differences between the failed initiative 1100 of 2010 and initiative 1183. For instance, the following major differences were observed: If initiative 1100 had passed, it would cause the state a loss of $76 to $85million and a loss of $180 to $192million to the local government within a five year’s duration. Initiative 1183 on the other hand is expected to generate a gain of $216 to $256million for state and a gain of $186 to $227million for local government within a six year duration. Whereas initiative 1100 would allow manufactures to offer quantity discounts to retailers for purchase of wine, beer and liquor, initiative 1183 allows this only on liquor and wine but not on beer. Regarding retail licensing, Initiative 1100 would attract an application fee of $1000 and annual fee of $1000. Initiative 1183 on the other hand will require license issuance fee equivalent to 17% of all liquor sales under the license, plus annual fee of $166. Initiative 1100 had no restrictions on authority of cities and counties to limit where liquor would be sold. Initiative 1183 on the other hand limits liquor licenses to those stores that demonstrate effective sale prevention to minors and requires commends from the local government authorities before license approval, (Mercier, “Citizens’ Guide to Initiative 1183”).

With initiative three presenting more advantages and better policy issues compared to initiative 1100, it is clear why initiative 1100 was not approved by the voters. Since nothing can be completely perfect, initiative 1183 had its shortcomings as well. For instance, initiative 1183 only substituted state liquor monopoly with private company liquor monopoly. It is also true that initiative 1183 licensing requirements technically locks out majority of small retail outlets hence does not meet the free market expectations. However, initiative 1183 will promote more freedom in the alcohol business by allowing for competition hence enhance efficiency, service quality and better consumer prices, (Minton, “Liquor Privatization Would Edge Washington State Toward Freedom”).

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