Audit Supports More Liquor Permits for Utah
A recent legislative audit made several strong recommendations for reforming Utah’s liquor laws, in particular the quota system for granting alcohol permits. The audit echoes reports that the current shortage of alcohol permits is stifling economic development and does not reflect the state’s changing population.
Utah is in the small minority of control states that grant liquor permits based on population. Of the states polled, the audit commission found that only two other states, Pennsylvania and Idaho, use a state-wide quota for liquor permits. Idaho allows one permit per 1,500 people for clubs and restaurants and has no quota for beer and wine. Pennsylvania allows one permit per 3,000 people regardless of permit type. In contrast, Utah allows one permit per 7,850 people for clubs and one permit per 5,200 for restaurants.
According to the audit, quota numbers have not changed since 1990. In the meantime, the state’s population has increased by 22 percent with significant demographic changes. For instance, the percentage of the state’s population that were reported to be members of the Church of Jesus Christ of Latter Day Saints, whose observant members do not consume alcohol, has shrunk from 70% in 1989 to 58% in 2009. Further, alcohol consumption rose 54% from 2001 to 2009. The audit also reports an increase in the number of people who are eating out. These changes make the state appealing to restaurant and bar development. Many restaurateurs, including large chains, have, however, expressed reluctance to develop businesses in Utah given the uncertainty over obtaining a liquor permit.
The audit recommends increasing the number of overall liquor permits, and in particular restaurant permits. As previously reported, a bill to allow current permit holders to sell their alcohol permits is being considered for the next legislative session, which begins in January. Another proposal would allow resorts to obtain one license to cover the range of alcohol services provided rather than the current system that requires a separate permit for each service. This could free up numerous additional permits; one resort alone reportedly holds 17 permits to cover its restaurants, bars and other services.
In response, the Executive Director of the Utah Department of Alcoholic Beverage Control suporrted the audit’s recommendations. The Utah Restaurant Association and Utah Hospitality Association also embrace such reforms. It is still unclear, however, whether the state legislature will support any of the recommended reforms. Stay tuned for updates.
More Liquor Permits Possible for Utah
Senator John Valentine (R – Orem) has announced that he intends to introduce a bill in the next Utah legislative session that would establish a property right in liquor permits, allowing restaurants with current liquor permits to sell them. Use of any purchased permit would be conditioned upon approval by the state liquor-control board. The intended bill will also convert about 25 of the 50 unused tavern permits (which allow only the sale of 3.2 beer) into restaurant permits. Senator Valentine currently has no plans to make any changes to the state’s club permits.
Utah limits liquor permits based upon population and ran out of restaurant and club permits earlier this year. The proposed legislation may help alleviate the resulting logjam if existing businesses that are struggling elect to sell or if other restaurants elect to stop serving alcohol. Questions remain as to whether the bill will pass. Legislators have expressed reluctance to increase the number of permits granted, so the proposed legislation may create a work around. The Church of Jesus Christ of Latter Day Saints, a major stakeholder in Utah’s liquor policy, also has yet to weigh in on the proposed change.
The proposed change is likely to put small and start-up restaurants at a distinct disadvantage to well-funded chains. Senator Valentine is quoted in a Salt Lake Tribune article as acknowledging this issue and indicated that some permits could be set aside for small businesses.
Attorneys in our Salt Lake City office are closely following this issue. Please send us an email here if you would like to receive regular updates.
Possible Privatization of Utah Liquor Stores
The sixteen-member Utah Privatization Policy Board was created by the legislature to determine what services currently provided by the state can be privatized. State liquor stores are one of many state functions that the Board is examining.
Utah is one of 18 states, and two Maryland counties, that currently use a state run retail system, commonly called control states. The other 32 states issue licenses to private companies to sell liquor. Four control states (Washington, Virginia, North Carolina and Utah) are currently considering privatization. See Susan Johnson’s blog for a terrific discussion of the Washington initiative process. Utah also controls the wholesale market for liquor, which is not under discussion for privatization.
The debate thus far has centered on the economics of privatization and the level of state control exercised over liquor sales. There seems to be consensus that privatization will occur only if shown to be both profitable and to allow for sufficient state control.
From an economic perspective, state liquor stores are one of the few profitable government agencies in Utah. Estimates indicate that state liquor stores sold $269 million dollars worth of product in 2009, yielding $59 million in profit and $41 million in tax receipts, with $27 million going to the school lunch program. Information gathered by the Board so far indicates that privatization could result in $21 million dollars in annual savings from lowered payroll, operational and liability costs. The potential cost savings are more than offset by last year’s profit levels, however, which exceeded the potential annual savings by $38 million. It is not clear that tax receipts would remain consistent either. Both Montana and Maine, two states that recently privatized, have reported a drop in sales (and thus tax receipts) due to increased prices. It is not clear whether a privatization of Utah liquor stores would be likely to result in increased prices. Although privatization could lead to a decrease in revenues for the state from profits and tax receipts, privatization would bring in new streams of revenue, such as real estate taxes on liquor store properties, which are currently exempt. The state would also realize one-time gains from selling the current liquor store businesses and property. The Privatization Policy Board will need to consider whether these revenue streams would be sufficient to replace any lost revenues associated with lost profits and tax receipts.
With regard to control, the primary question is how to balance free-market principles with moral regulations. Many supporters of privatization equate state-run liquor stores to socialism. Opponents question whether a loosening of state control would result in increases in impaired driving and alcohol consumption, particularly by minors. One Board member, Senator Howard Stephenson, Republican from Draper, has indicated that liquor stores lend themselves to privatization, but that all of the current controls should remain in place. It is unclear whether business would be able to operate profitably if the state maintains current restrictions on advertising, locations, hours and days of operation. Further, as long as the state keeps its monopoly on wholesale liquor distribution, the state would maintain control over the brands offered and any volume discounts negotiated, which could limit the ability of retailers to compete based on selection and price. It is unclear what effect, if any, consumers would experience other than new names on the liquor stores.
Stoel Rives will be monitoring the privatization debate in Utah. We will post an update after the next Board meeting, expected to be held in late September.
