The Tavern License Cartel Threatens to Choke Off Philly’s Restaurant Boom

The saying “there’s no such thing as a free lunch” refers back to the pre-Prohibition days when you could actually get a free lunch at a bar in exchange for buying a drink or two.

The point is that the lunch wasn’t really free – it was cross-subsidized by the booze sales. The people buying the drinks were paying for the lunches.

Even though all restaurants charge for food today, it still works like this to some extent. In restaurants who sell alcohol, the booze is cross-subsidizing the food.

And it’s a great deal for restaurants, their workers, and also for diners who don’t buy drinks with their food. It gives restaurant owners a fatter profit margin that helps them weather the business cycle and buck the industry’s high failure rate. It means higher tips and wages for servers and other staff. And it means lower food prices for people who don’t buy the drinks.

But Pennsylvania for some reason rations this awesome opportunity instead of extending it to all restaurants.

This creates huge barriers to entry and competition in the restaurant market, lowers service sector wages, and deprives state and local governments of revenue from sales and property taxes as storefronts that want to be bars and restaurants sit empty instead.

Michael Klein shows how it’s creating barriers to entry in Philly, where the number of licenses has been declining even as the city’s been experiencing a restaurant boom:

Licenses that last fall sold for $60,000 to $65,000 are now fetching $85,000 and perhaps more, according to lawyers who specialize in the transactions. That is more the double the asking price for a license in 2002, when they sold for $35,000 [...]

Although Philadelphia is known for its BYOBs, which do not require licensing, a liquor license is considered important for the bottom line of a restaurant and, of course, is necessary for a bar [...]

In Washington, D.C., where his company is based, liquor licenses go for a fraction of that price – between $9,000 to $11,000, including legal fees, Bucher said.

In Philadelphia, prices for a license hovered between $15,000 and $18,000 in the 1970s and early 1980s. They rose, to $28,000, in the early 1990s, and reached $35,000 in 2002 before making a steady climb over the last decade.

The LCB counts about 1,440 active restaurant/bar licenses in Philadelphia County, down from 1,543 in 2011 and 2,112 in 1997. Some of these so-called R licenses are in safekeeping – perhaps awaiting a sale – but others have been withdrawn permanently because of liens and violations incurred by their owners [...]

Prices in Pennsylvania’s suburban counties are dramatically higher, with most at $200,000 or higher. Their prices have not risen dramatically recently, observers said.

This is completely ridiculous. Any restaurant that wants a liquor license should be able to get one for like $5000. Not through an auction, but by paying the state or locality a simple flat fee.

The County Quota system which caps liquor licenses at 1 per 3000 people per County needs to be unwound in a big settlement with tavern license owners. While Philly and Pittsburgh manage to avoid the full misery of the tavern license cartel because of high population density, older downtowns in smaller cities are suffering needlessly with empty storefronts that want to be bars and restaurants but can’t because the license prices make opening restaurants unaffordable.

This is a much worse problem than the state monopoly on wine and liquor, but politicians left it completely untouched in the alcohol reform proposal.

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