Costco, the nation’s largest wine retailer, successfully challenged Washington’s archaic liquor control laws and won the right to use its market clout to reduce prices.
The victory may save beer and wine drinkers a few bucks a pop. More important, though, it sends a message to the governor and the Legislature that it’s time to scrap a system that’s lost sight of its goals.
In ruling for Costco on Friday, U.S. District Court Judge Marsha Pechman found that the policies the retailer challenged “are plainly anti-competitive, and there is no dispute that these restraints increase the average cost of beer and wine in Washington.” Among these hoary restraints is the state’s “three-tier” distribution scheme, which dates back to 1934, shortly after the 21st Amendment ended Prohibition.
Under the three-tier system, manufacturers sell to distributors, who then sell to retailers. That’s right. Our state guarantees middle-men a piece of the action. The state also mandates a 10 percent mark-up by both manufacturers and distributors, and requires distributors to sell to all retailers at the same price, regardless of the cost of delivery.
There’s more, but you get the gist. State regulators micromanage in a big way.
This all might have made some sense in the wild post-Prohibition days, when state governments struggled to regulate the industry. Some states, including Washington, chose to set up state monopolies (either retail or wholesale) for liquor sales. Eighteen states operate some form of monopoly today. But you’d be hard pressed to find any ongoing justification for the practice or for the kind of overregulation Costco fought successfully in federal court.
Pechman’s ruling, which she stayed for 30 days so the state could consider an appeal, found that the state’s regulatory interests “do not trump the federal interest in promoting competition.” More important, she concluded that nothing significant was accomplished by the regulation.
The state argued that the regulations promoted temperance, ensured orderly market conditions and raised revenue – a three-pronged justification that failed on all counts.
The temperance justification falls flat as stale beer. Not only did Judge Pechman conclude that “Washington does not seek to promote ‘temperance,’” she observed that the state “actively promotes its domestic beer and wine industries.” Moreover, a member of the state liquor control board testified that the board has “no mandate to increase or eliminate or reduce consumption.”
Orderly markets operate in most spheres of economic activity without the benefit of price controls and mandated middle-men, a point not lost on the court. In delicious understatement, Pechman writes, “The Court finds persuasive Costco’s argument that all manner of goods, from potato chips to chewing gum, find their way to even the most remote parts of the state,” without the dubious benefit of the control board’s regulatory regime.
The regulations don’t help much with state revenues, either. Pechman notes, “the challenged restraints increase the average price of beer and wine in a manner that leaves most of the increased revenues to beer and wine wholesalers, rather than the state.” A more effective and direct way to raise revenues would be that old legislative remedy, a sin tax increase, which would also help achieve the temperance goal of reduced consumption.
In the past, the state banned liquor by the drink and Sunday sales of beer and wine, kept women from being seated at the bar in nightclubs, and required servers to carry a patron’s drink from table to table. These blue laws are now as faded and frayed as stone-washed jeans.
Recently, in a limited “experiment,” some state liquor stores are open on Sunday. Does anyone doubt that the experiment will be deemed successful, and Sunday sales will be the rule? State liquor stores are no longer bleak, unattractive places, but have become “customer friendly,” with sale prices, product displays and promotions. In other words, they’re like any other retail outlet with a bottom-line orientation.
The Costco ruling should be celebrated, as the retail Goliath with David’s PR has struck a blow for common sense. But there’s more work to be done. The state’s legitimate goals can be better achieved through public education, law enforcement and regulation. Let’s finish the job and get the state out of the liquor business.
Richard S. Davis, president of the Washington Research Council, writes every other Wednesday. His columns do not necessarily reflect the views of the council. Write Davis at rsdavis@researchcouncil.org or Washington Research Council, 108 S. Washington St., Suite 406, Seattle, WA 98104-3408.
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