Will Texas Patch Up TABC Before It Bursts?

Illustration by Jason Stout / Getty Images

If ever an agency needed to be scorched by the liquid fire of the state's Sunset Act, it's the Texas Alcoholic Beverage Com­mis­sion. For not just years but generations, the state's liquor laws and the agency charged with enforcing them have left Texans scratching their heads, while their elected officials ... do other things with their hands, and their pockets, and the industry's money, and beer and wine and spirits. And everybody knows it! With Texas' required and oft-admired 12-year cycle of review and reform of its state agencies at hand, now's the time to do something about it! Right?

If not, why not?

Everybody knows the ancient "three tier" system is rigged, with the middle tier of distributors – between manufacturers and retailers – preserving its power with free spending on "advocacy." And so brewpubs can't sell their own products to go, and retailers still have to pay for beer in cash, 83 years after the adoption of the Liquor Control Act in 1935, at the end of Prohibition.

Everybody also knows the Alcoholic Bev­er­age Code, as the Liquor Control Act was renamed in 1977, is a hot mess of special pleadings and internal contradictions that – like the also-broken Austin land use code – confound even wise and capable regulators. One of its unique planks – the only-in-Texas prohibition on publicly traded ownership of liquor stores – is unconstitutional, according to a federal court ruling in favor of Walmart, now under appeal.

Everybody also knows that TABC regulators aren't that wise or capable, but pigheaded over here and spineless over there, thoroughly addled by competing influences. The Walmart case ostensibly displays state favoritism toward its "family owned" package stores, but the largest of those – Hous­ton-based Spec's – itself sued TABC in federal court last fall (the latest chapter in a conflict dating back to 2013) after agency auditors saw their effort to put the chain out of business utterly collapse.

Those whose livelihoods are regulated by TABC need little prompting to share what sticks in their craw. (See some of those stories in "How Has TABC Screwed You Lately?" Feb. 1.) Stepping back into the policy perspective, neither progressives, nor populists, nor free-marketeers, nor social conservatives are super-convinced that TABC does or can "serve the people of Texas, and protect the public health and safety, through consistent, fair and timely administration of the Alcoholic Beverage Code," as laid out in its mission statement. The agency didn't even have a defined "mission" until it last went through Sunset in 2007; now, 12 years later, it's up to the 86th Texas Legislature to try to plug up some holes in a system that's close to bursting under pressure.

"An Opportune Time"

The Sunset cycle lands TABC in the Lege's lap at a tender time for the agency. Right as the Spec's case fell apart at the State Office of Administrative Hearings in the spring of 2017, TABC's top leadership got caught grifting (by The Texas Tribune) in ways state leaders and legislators (led by Rep. Sarah Davis, R-West University Place) found stupid and offensive. Though the dollar amounts at issue – for luxury travel to conferences, partying with lobbyists, riding wild in state-owned vehicles, etc. – were relatively small, the sloppiness of it all led to the forced retirement of TABC Executive Director Sherry Cook, complete with a final kick in the ass via a tweet from Gov. Greg Abbott: "This is a good start." Six other executives departed within weeks.

Cook's replacement, Bentley Nettles, is a retired brigadier general in the Texas Army National Guard, hired by Abbott's appointee to lead the commission, former Army Captain Kevin Lilly of Houston. This military influence has by all accounts brought more discipline to TABC, and once-aggrieved stakeholders – including, as reported by the Tribune, both the chair of the Texas Craft Brewers Guild and the president of Spec's – have welcomed the change. "It's early, but so far they've done enough" to address lawmakers' concerns, says Sen. Kirk Watson, D-Austin, who serves on the Sunset Advis­ory Commission. "The current executive director [Nettles] gets a lot of credit for being a very straight arrow and somebody you can talk to."

Right now, Lilly and San Antonio's Ida Louise "Weisie" Clement Steen are the only two TABC commissioners, with one seat vacant; Sunset calls for expanding the commission to five members. "That's a way to avoid the consolidation of power," Watson says. It would also help TABC, says the Sunset report, to more sensibly and flexibly execute its rulemaking authority, rather than encrusting the code with oddball provisions that tie up both the agency and the industry for years to come. To that end, Sunset is recommending an ongoing staff-and-stakeholder review to lay the groundwork for cleaning up and "modernizing" the code two years from now.

As with Austin land use, a more functional regulatory regime over booze in Texas would remove absurd pain points for the industry, and that makes people nervous. The Sunset staff commiserates: "TABC is in the precarious position of trying to balance its role as a regulator and law enforcement agency with the state's interest in supporting a robust alcoholic beverage industry." ("The state's interest" includes $1.3 billion in alcohol tax revenue in 2018, a 6% year-on-year increase, plus indirect tax collections, job creation, tourism promotion, and bragging rights.)

"With new leadership in place at TABC, this Sunset review comes at an opportune time for the Legislature to focus on more significant challenges in administering the complex labyrinth that is the Texas Alcoholic Beverage Code," the staff report continues. "Over the years, the Legislature – often in response to powerful industry groups seeking to protect their own interests – has taken a piecemeal approach to responding to the evolving industry, carving out exceptions for various activities and creating ever more complicated nuances in the law instead of taking a more holistic approach to regulating the alcoholic beverage industry in Texas."

"Deep Scar Tissue"

So, yeah, Sunset went there – the law sucks, deformed by powerful interests, and change is both needed and "opportune." Previous Sunset reviews have gone there, too: "Much of the current system seems to protect the interests of industry segments rather than public safety," the commission staff wrote in 2004. In the subsequent session, TABC's Sunset bill got torpedoed; two years later, Senate Bill 904 made some worthwhile changes but left the heart of the system untouched, as had the prior Sunset cycle in 1993.

This go-round, staff made some bigger asks, "questioning things that have been done for years," Watson says. "They'd be big steps." Watson's fellow lawmakers (and two public appointees) on the Sunset Com­mis­sion, led by Chair Sen. Brian Birdwell, R-Granbury, and Rep. Chris Paddie, R-Mar­shall, left some of those steps untaken. On the hearing-room floor lie efforts to shut down the wildly cost-ineffective collection of alcohol import fees at the border (punted, instead, to a study) and to finally ditch the "cash law" rules for wholesale beer in favor of the still-strict "credit law" used in other inter-tier transactions. (A single violation of the credit law, over an $800 invoice, was the only charge against Spec's to survive the TABC's audit debacle; the chain got off with a warning, as opposed to the more than $700 million in potential fines the agency had sought.)

Sen. Kirk Watson: "The Legislature ought to demand change, and if they don't, we'll need to know why not. People will need to be called out." (Photo by Jana Birchum)

However, the commission has asked the full Lege to eliminate the code's current distinction between "beer" (5% or less alcohol by volume) and "ale" (more than 5% ABV), which could in itself void the cash law. A beer/ale scheme was abandoned years ago by the feds and most states, and it makes almost no sense to the modern beer producer or consumer, but it's promulgated at every juncture in the Texas regulatory framework, from tax rates to labeling requirements to storage provisions to marketing rules (including the cash and credit laws) to permits and licenses required to make, handle, and sell either (or both, though a few dozen jurisdictions allow the sale of beer but not ale).

It's not a given that beer/ale – or other Sunset recommendations, or proposed fixes outside of Sunset, such as beer-to-go (see "The Battle of Small Beer vs. Big Distributors Rages on With Texas Beer-To-Go Bill," Feb. 1) – will survive the legislative shark tank, no matter how "opportune" the timing is. "I anticipate there will be a significant fix or fixes; a total fix is a different story," says Watson. "But there can be substantial progress in making positive change at the TABC. This is one of those agencies and industries that's done things for so long the same way that there is deep scar tissue that needs to be cut away without too much blood."

"Were Lawmakers Drunk?"

The struggle to bring the Texas industry into this century has left some folks quite ready to spill blood. The craft brewing community, which had to fight its own lawsuit against TABC (prevailing in 2011) to operate profitably in Texas at all, feels it's been "fighting this fight a long time, but it really hasn't," Watson notes. "In this building, patience is a virtue rewarded when, as here, we have a very developed regime in place, and lobby power and entrenched mechanisms. But progress is being made."

Though members of both parties can enjoy a tasty beverage together, the craft brewers (and before them, the winemakers) have typically had better luck with Demo­crats. But the other end of the spectrum also harbors proponents of change. In an op-ed last April in The Dallas Morning News, free-market academic Matthew Kelly of UT-Dal­las slammed the three-tier system itself as "a product of Progressive Era social engineering," conceived to "limit competition by raising barriers to entry" by proponents who "openly preferred outright nation­al­ization and 'the elimination of the private profit motive' in the alcohol industry." (The op-ed was headlined "Were lawmakers drunk when they wrote Texas alcohol laws?")

Before we all start singing "The Inter­nation­ale," let it be known that the book Kelly quotes from, Toward Liquor Control, is still in print, published by the national Center for Alcohol Policy, which says the study – originally commissioned in 1933 by John D. Rockefeller Jr. – "has done more to shape modern alcohol policy than any other book except the Bible." The Center was founded and is funded by the National Beer Wholesalers Association; its state affiliate, The Beer Alliance of Texas, spent more than $500,000 through its political action committee in the last election cycle, sloshed all over the Capitol to 168 different candidates and officeholders (not just legislators), including those on both sides of primary and general-election contests, as well as to other PACs.

Watson got $5,000, as did Birdwell; Paddie, $5,500. Sen. Kelly Hancock, R-North Richland Hills, who chairs the Business and Commerce Committee that will receive the TABC Sunset bill, took in $10,000, as did Rep. John Kuempel, R-Seguin, whose Lic­ens­ing and Regulation panel will run point in the House; new Speaker Dennis Bonnen, R-Angleton, got $11,000. Gov. Abbott got $20,000 plus some free booze; Lt. Gov. Dan Patrick got $33,000. The Texas Package Store Association's PAC splashed out $120,000 in the same period, not quite as freely under the dome but touching all the same people, except for Patrick.

The TABC itself, in its self-evaluation report that kicked off Sunset review in 2017 (after Cook and her lieutenants bounced), repeatedly commits to protecting "the integrity of the three-tier system" and tacitly expresses misgivings about tweaking it: "The Code is complex and fully understood by very few people. Most laws in recent years have created exceptions to the three-tier system, making enforcement ... difficult." The agency cites "tied house" prohibitions written into post-Prohibition code to protect mom-and-pop stores and saloons from bullying by brewers and distillers. (When Anheuser-Busch bought Sea World, the Lege hurriedly carved out a "marine park" exception to the tied house rules.) Today, the script is flipped, with retail chains from Walmart to Spec's to your corner quick-mart holding "buying power [that] often dictates or attempts to control distribution and/or wholesale pricing for specific brands."

Because the rules of the game are so weird and scary, and because of the frisson of actual malice that shadows the alcohol trade (TABC agents carry guns for a reason), it's been easy, as Watson notes, to thwart change "by just saying things will somehow impact the three-tier system, without telling you why or how, so people will back off and say, 'Well, I don't want to mess with that!' People are afraid of it." But, he continues, "I can't stress enough that stakeholders – all of them – have to participate in good faith and not just try to kill the Sunset bill. The Sunset Commission and the Legislature ought to demand change, and if they don't, we'll need to know why not. People will need to be called out."

For more on Texas beer laws, see “ The Battle of Small Beer vs. Big Distributors Rages on With Texas Beer-To-Go Bill ,” Feb. 1.