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Divesting Virginia’s Liquid Assets: The Rationale for ABC Privatization, Part 1

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Paradigm shifts are tough in government. This helps to explain some of the myths and confusion on the subject of privatizing Virginia’s ABC monopoly, and it helps shed light on why some policymakers—in a fiscally conservative state like Virginia, no less—seem reluctant to consider abandoning the state’s long-standing, socialized monopoly on the distribution and sale of distilled spirits.

In the 21st century, does it really make sense for Virginia to rely exclusively on a “public option” in the wholesale and retail distribution of liquor? This question seems especially salient when there appears to be widespread agreement on the notion that, as Delegate Bob Brink recently wrote in the Washington Post, “[n]obody considers the sale of distilled spirits to be a ‘core function of government’.”

This begs an important follow-up question: if transporting and selling liquor isn’t a core government function, then why is the state doing it?

State-run liquor monopolies hurt taxpayers and consumers. Taxpayers and consumers in wholesale “control” (i.e., state-run monopoly) states absorb higher liquor taxes and mark-ups, politically added spending items, and reduced product choices. Taxpayers in wholesale/retail control states like Virginia additionally pay the expense of retail establishments, salaries, benefits and pensions for thousands of state ABC employees. Worse, beyond significantly higher long-term costs, localities suffer with a smaller tax base, thereby losing out on local, real estate and/or corporate taxes not paid under a state-run system.

ABC privatization would benefit the consumers of Virginia through increased choice, convenience and more competition on price and quality. Adults in neighboring states—in fact, in 32 states nationwide—are entrusted to responsibly shop for beer, wine, and spirits in stores that are convenient, offer greater choices, and lower prices. Why shouldn’t Virginians have that choice?

Private stores have more freedom and flexibility to innovate and be more responsive to the customer by offering more and tailored options relative to state owned and operated entities. A key benefit of eliminating the government’s monopoly of wine and spirits is that independent but regulated private sector businesses are forced to compete on price, quality and choice.

Despite the benefits that would accrue to consumers in a privatized system, some policymakers remain wary based on a myth that ongoing revenues to the state—the so-called “profit” from the ABC system—would somehow disappear with privatization. However, framing the debate as “privatization vs. state profits” paints a false choice.

First, tax revenues from the sale of spirits will continue to flow to the state, if not rise with increased sales due to the expected repatriation of spirits purchases currently lost to Washington D.C. and other jurisdictions. According to some estimates, the Commonwealth loses on the order of 15-20 percent of liquor sales to neighbors like Maryland and D.C., where Virginians flock to take advantage of lower prices and more convenience and choices. The high prices and inconvenience of purchasing spirits in-state has literally driven Virginia consumers to shun the state liquor monopoly in droves, and privatization offers a way to bring that lost business back to the Commonwealth.

Second, a new and significant form of revenue will be generated through privatization—licensing of wholesalers and new retail outlets.  This upfront windfall, projected at $300-$500 million, will be used to invest in transportation projects across the Commonwealth and will leverage billions of dollars. Private establishments would also pay corporate income and property taxes representing additional revenue streams to the state and local governments.  In addition, revenues collected from licensing bars and restaurants will continue to flow to the state.

And last, one cannot ignore the tens of millions of current state dollars that would not be spent on overhead, salaries, space, employee benefits, etc. Operating costs for state retail ABC stores currently drain a significant portion of the revenues from the state’s mandated liquor tax mark-up, with what’s left over being termed the system’s “profit.”

Beyond theoretical arguments, it’s instructive to examine the real world evidence from other jurisdictions that have already made the switch to privatization and did not suffer from a loss in liquor-related revenues. Since 1987, West Virginia, Iowa and Alberta (Canada) have each fully privatized the retail side of their ABC operations, and all decided to pursue a revenue neutral policy, working to generate the same year-over-year government revenue before and after privatization. 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.

This certainly isn’t lost on other states. In December 2009, an analysis by the Washington State Auditor’s Office found that the state could increase revenue from liquor sales and distribution by up to $277 million over five years if it sold their state’s liquor distribution center and auctioned liquor licenses to private retailers. State legislators failed to act during the 2010 session, prompting petition drives that eventually landed two competing initiatives to end that state’s liquor monopoly on the November 2010 ballot.

Virginians won’t decide the issue at the ballot box, but they should still be asking some fundamental questions of their elected leaders. If private businesses can responsibly sell beer and wine already in Virginia today, then why not distilled spirits? If private businesses can reliably warehouse and distribute practically every other product we buy in the marketplace, why does it make sense for the state invest in the capital stock, equipment, logistics, etc. to operate an outdated liquor wholesale business when investments in long-lived assets like roads and bridges offer a vastly higher economic return for state dollars?

ABC privatization would spin non-core wholesale and retail liquor enterprises out of government, while preserving the state’s regulatory and oversight functions—what many would argue are the proper role of government. Certainly there’s nothing inherently governmental about selling liquor, because 32 states don’t do it that way. At a time when economic and fiscal conditions are tenuous at best, policymakers should be looking for every opportunity to downsize and streamline government and get the state out of non-essential, non-core functions better handled by the private sector. Operating state liquor stores and a liquor wholesale monopoly would seem to fall into that category.

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