Is the sale and distribution of Jack Daniels a core function of government? Most would think not however, since the days of Prohibition the Old Dominion has held monopoly control over both the sale and distribution of distilled spirits. And as is the case with any monopoly, the consumer is left with fewer choices, poor service, and higher prices. With this in mind, Governor Bob McDonnell has pledged to pull the cork on the sale of alcohol and join the other 32 states nationwide that currently follow a more free market approach to liquor sales.
Presently, Virginia owns and operates some 332 stores, each with their own distinctive blah ambiance, a staff with very little liquor knowledge and overall limited selection (a big problem for those of us who enjoy a specialty cocktail or two). As a current resident and drinker in Virginia I usually find myself crossing the river into DC to shop in the city’s various privately owned stores. In comparison, DC shops have the specially liquor I’m looking for, a knowledgeable staff, and a comfortable shopping environment. Now, why such a difference? Well, in the absence of government monopoly DC store owners are forced to compete on price, quality and choice to retain customers. They do so in an independent but regulated market.
In response to Virginia’s budgetary problems, Governor Bob McDonnell has had his radar set on the privatization of the wholesale, distribution, and retail sale of alcohol. His hope is that privatization will provide customers with better service and convenience while still allowing the state to regulate consumption, generate needed transportation revenue, and streamline costs. On Wednesday, September 8, senior members of McDonnell’s staff unveiled the official staff recommendation for ABC privatization at a meeting of the Simplification and Operations Committee of the Virginia Commission Government Reform and Restructuring in Richmond.
Some highlights of the plan include auctioning off 1,000 retail licenses to the highest bidders. These licenses will be broken into three categories: 600 licenses for large establishments such as grocery stores; 150 for smaller establishments such as package stores and wine and beer shops; 250 for convenience stores/retail pharmacies. 332 licenses will be guaranteed for areas currently served by an existing ABC outlet, while the additional 668 licenses will be granted based on population density. The wholesale side will also be privatized, allowing the state to completely focus on law enforcement and regulation.
Administration staff claim there is no tax increase in the proposal. However, there are reports of a $17.50-per-gallon excise tax on distilled spirits, which would exceed the national average. In addition, there would be a 1 percent tax on the gross receipts of wholesalers to be paid each year and a 2.5 percent tax on restaurants. McDonnell’s staff mention this restaurant tax in their memos to the public but say it’s optional. They claim that this is because they would only pay if they chose to buy liquor at discounted prices from wholesalers.
Additional forms of annual revenue would come from annual license fees for new private liquor retailers, varying from $500 to $2,000 a year depending on the size of the store, and the continuation of $13 million a year in existing fees on restaurants.
We will see what happens. Changes are bound to occur between now and October 4 when the full commission will vote on the proposal.
Nevertheless , the concern over state revenue will linger as lawmakers consider give up their 76 year-old monopoly. According to the Washington Post, “Virginia's Alcoholic Beverage Control board deposited $248 million in liquor profits, as well as excise and sales taxes, into state coffers during fiscal 2009.” This is because in Virginia, more than $13 of the retail price goes to the state as opposed to the dollar or two generated from that same bottle sold in Maryland and DC.
Yet, it is important to remember what privatization would mean: more stores and therefore a larger tax base to generate more tax revenue. Administration officials estimate that selling ABC assets and new liquor licenses could bring in $300 million to $500 million to the state to be used for improving roads. In addition, private businesses would now be subject to corporate income and property taxes representing additional revenue streams to the state and local governments. Secondly, the state could regain the estimated 15-20 percent of Virginians (including me) who drive to DC’s more than 500 privately run liquor stores. Once Virginia establishes its own competitive market, a multitude of convenient specialty shops would emerge, thus recapturing those out-of-state shoppers. And lastly, Leonard Gilroy of the Reason Foundation notes that with privatization the state would no longer be spending millions in overhead, salaries and benefits for nearly 3,000 public employees, and store space. He notes that these operating costs currently swallow a significant amount of state revenue.
But, is there any real life evidence of this? Well, yes! Gilroy notes that since 1987, West Virginia, Iowa and Alberta (Canada) have each fully privatized the retail side of their ABC operations and as a result saw tax revenue increases. He writes, “Each of these jurisdictions had to lower their alcohol markup rates after privatization—effectively lowering taxes on consumers—to maintain revenue neutrality because revenues to the state increased after privatization and operational costs to the state declined.”
When state governments are experiencing shaky budgets, policy makers need to be on the look out for any and all innovative ways to streamline or cut functions that are not inherently governmental. Many claim that liquor sales surely are an example of this, considering most other states allow the private sector to handle it.