Opinion: Michigan's alcohol control benefit monopolies, not buyers

James M. Hohman and Michael D. LaFaive

The state is supposed to regulate alcohol to protect the public from a dangerous product. But too much of Michigan’s alcohol control policy is designed instead to enrich a handful of people who have legally protected monopolies. That’s not right, and lawmakers should turn to smarter liquor control policies.

The legal monopolies are vestiges of ending prohibition and were, ironically, an attempt to stop monopolies. State lawmakers were worried that that the production, distribution and retailing of alcohol would be concentrated in a few companies, so they mandated that the functions be performed by separate businesses. States also limited the number of companies that can offer those services, and thus began restricting competition. Consequently, companies can profit from their legal privileges instead of creating gains for themselves by serving customers.

Liquor control policies are supposed to be about public health, not benefitting monopolies, the authors write.

In recent years, the production side of things opened up a lot, and there are now a number of wineries and an expanding number of craft breweries in the state. And there are many different kinds of retail licenses, with different regulations and privileges involved with each. While there may be some barriers to entry and protectionism in policies governing production and retail, it is the intermediary functions between them where the largest gains from legal monopolies are available.

Exactly how much in the way of monopoly profit comes from state privileges is difficult to say. The companies with them are private, even if they are regulated. But the gains from maintaining exclusive monopolies were highlighted in a public case in 2002. Back then, Northwest Airlines figured that it could save roughly $3 million a year by buying its beer for in-flight consumption in Minnesota and hauling it to Detroit Metro Airport rather than buy it through Michigan’s beer and wine wholesaling monopolists.

Profits are generated for special interests by other alcohol rules, too. The state’s “post and hold” rules, as just one example, requires wholesalers to disclose their prices and then keep them for a period of time. A 2010 research paper from the Federal Trade Commission found that these rules raise beer and wine prices by between 6.4% and 30% depending on the product, with the wholesalers, not state government, gaining financially.

It’s clear that the special interests who benefit from the legal monopolies want to keep their privileges. That’s why they fight against attempts to dilute the value of their protections. Gov. William Milliken tried to erase post and hold rules during his tenure and was met with strong opposition. While his effort was unsuccessful, the question has been raised as recently as 2014, when the Michigan Liquor Control Commission held a hearing and the idea of doing away with the rules came up. But commissioners decided to keep them and cited opposition from Michigan beer and wine wholesaler monopolists in their decision.

Perhaps the gains from restricting the wholesaling and distribution markets could be justified if they clearly protected people from alcohol’s harms. But it’s not clear that this happens. Each state has different regulations on intermediaries in the alcohol industry, and neither heavy nor looser regimes are clearly better at limiting deaths from alcohol, drunk driving accidents, binge drinking, or underage drinking. This applies in Michigan, where more than 10% of kids aged 12-17 say that they’ve drank alcohol sometime in the past month, which is more than the national average, according to a survey from the U.S. Department of Health and Human Services.

As it regulates alcohol’s wholesaling and distribution in the name of public safety, Michigan pursues two goals — limiting its availability and increasing its price — and in complicated ways. It can achieve those goals, however, without granting private, for-profit companies legally protected privileges. Getting rid of intermediaries’ control over distribution would result in lower prices. If lawmakers wish to keep prices higher to discourage consumption, they could increase taxes. That would be a much more transparent approach.

There are some practical benefits from revisiting liquor control policies and allowing open competition in the wholesaling and distribution of alcoholic beverages. But there is a more basic reason to do so: Liquor control policies are supposed to be about public health. It’s wrong if they are used to enrich select interests.

James Hohman is the director of fiscal policy at the Mackinac Center for Public Policy. Michael LaFaive is the senior director of fiscal policy at the Center.