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Let’s Kill the Death Tax and Sell the ABC Stores!

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As the state’s economy continues to reel under this recession there are a couple of simple reforms that can take place nationally and in Richmond that could help Virginia.

First, the dreaded estate tax – known as the “death tax” – continues to be a hindrance to employment and investment. A recent study by the American Family Business Foundation, co-authored by the former head of the Congressional Budget Office, Douglas Holtz-Eakin, points to the economic advantages of simply doing away with the death once and for all. Today that tax is 45 percent charged to estates in excess of $3.5 million and will jump back to 55 percent on estates of $1 million in 2011.

Every time the death tax has been reduced nationally and at the state level, tax revenue has increased and additional employment has been generated. What this new study shows is that wiping out the death tax once and for all will create over 1.5 million jobs in the United States and, consequently, about 39,000 jobs here in Virginia. These jobs will be created at no cost to the government – and in this writer’s opinion – most likely with an increase in overall tax revenue. This makes more sense than the current policy of throwing some $800 billion at the economy in order to “save” 3-4 million jobs. There is great difficulty for economists to measure “jobs saved” and it would be much easier to connect the estate tax elimination to actual job creation. These studies have been done accurately with earlier death tax reductions. Job creation is the key to economic recovery, and 39,000 new Virginia jobs would also create hundreds of millions of dollars in new income taxes, sales taxes and property taxes.

The second action is for the state to privatize the ABC stores and take the money generated from the initial auction and pour it into our deteriorating road network. Arguably, the Commonwealth should never have been in the liquor store business and today there are only 18 states that control liquor sales as we do. Taking a government run business private almost always creates a positive economic benefit, but it has to be done carefully and it has to be done wisely. Shedding this enterprise to generate a large upfront cash payment will reduce state operational costs, should generate at least the same annual revenue and broaden consumer choice. This is fundamentally good public policy.

Auctioning off the ABC monopoly stores now controlled by the state would provide the private investor with that same monopoly in the current market areas.  Those now privately owned businesses should look and operate like stores in other states that are free to choose what products they offer.
How much would the private sector investors pay for a liquor monopoly? How many more stores might be allowed under a reasonable licensing process? How much additional taxes would be generated by increased sales as has occurred in other states that privatized? How much will the state save in retirement benefits? How many more customers would come into these stores if they were modernized by the private investors and if they broadened the products line? Answers based on a market-oriented framework would create a huge benefit for our state.

The current ABC Control Board could continue with the responsibility to approve new store locations, expansion of existing stores, licensing of bars and restaurants and general oversight of the enterprise. This could be similar to the way the old Federal Home Loan Bank Board functioned when it oversaw the privately owned savings and loans. It worked when done right and it would be the responsibility of those in charge of our public policy to set up the new system in a similar manner. And local zoning restrictions would also apply.

The controversy over how much can be raised up front will be determined by how such a privatization process is structured, how many years these monopoly franchises will last, what kind of new products can be sold in these privately-owned liquor stores, will expansions of existing stores be allowed to match some of the large “wine stores” that exist, etc. If structured reasonably, there will be more money generated. If undue restrictions are placed on the private investor then less money will be offered for these ABC franchises. Investment in the privatization of the ABC monopoly will depend on the way the state manages the sale.

There is every reason to believe that privately owned liquor stores will generate substantial taxes (likely as much if not more than today), save the state hundreds of millions of dollars in retirement benefits over time, remove the state from a business it never should have been involved in, and produce a large sum of money up-front to put into transportation infrastructure.

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