Unraveling Newport’s Liquor License Black Market


So, here’s an interesting problem of political philosophy, as noted by Dan McGowan:

Because Newport has capped the number of alcoholic beverage licenses it will issue for the last four decades, the going rate for those permits on the private market has swelled in recent years. Willis said some licenses are now valued above $400,000.

But with two new hotels opening next year and more development planned for Newport’s north end, a controversial proposal from hotel developers to expand the number of licenses has touched off the hottest debate of the summer in a city known far more for its tourists than its politics.

On one side are existing business owners, like Willis, who say it’s unfair to allow new companies to obtain a license without having to pay hundreds of thousands of dollars. Flooding the zone with licenses, they contend, will lower the value of existing ones. Some worry they’ll no longer be able to use their licenses as collateral for business loans.

By placing a severe limit on the number of these licenses for several decades and apparently making them transferable, the city has inadvertently created a very valuable asset, of which there are only 117, broken down separate segments for restaurants, hotels, liquor stores, and clubs.  If we assume they average $300,000 in value, that’s a $35 million market that the local government has artificially created.

On one hand, the business owners who hold these licenses have no real right to their artificial value.  They purchased their licenses at inflated value because it made sense for their business plans, and they shouldn’t have counted on them maintaining their value over time.

On the other hand, the city did create an expectation of that value, and every year that has gone by with the cap in place has strengthened that expectation.  Moreover, the people who’ve bought those licenses at inflated prices arguably shouldn’t have had to do so.

The city absolutely should unravel this mess, but who should pay the price?  Of course, many of the 117 paid much less than $300,000.  The owner of Sardella’s Restaurant, for example, paid $5,000 in 1980.  Even allowing for an inflation adjustment of 3% per year, that license would only be valued at $15,835.  But that isn’t how the value of an asset is determined.  The going rate for these licenses in 2014 was $200,000, which represents more than an 11% compounded annual increase.

Arguably, all of Newport allowed this market to develop, so all of Newport should bear the cost of correction.  If that’s one’s position, the cleanest way to take care of it would be for the city simply to cut checks to every license owner for some negotiated estimate of the present value, but that would be ridiculous and expensive.

As a lover of complicated equations, I’d go with something more flexible and less immediately expensive.  The city should change the cap from the total number of licenses to a certain percentage per year, with new licenses non-transferable (except maybe as part of the continuation of a specific business).

For old license holders, that percentage could be translated into a non-transferable property tax credit.  To figure out the amount, the city could track sales of old licenses to keep track of the market value in each subsegment (restaurant, liquor store, etc.).  That way the credit would fade over time as the increased number of licenses reduced the value.  For the old licenses, the whole deal would remain transferable.

I’m just brainstorming, here; an actual solution would require some months of study and debate.  Unfortunately, government at the local level doesn’t seem to do this sort of policy very well.

  • Rhett Hardwick

    Could someone explain to me why it is that we license alcohol sales. What “real purpose” is served? I have always assumed it was just a holdover from the end of Prohibition when the government just “couldn’t give it up”.