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Reform, Transportation Trump Revenue-Neutrality: The Rationale for ABC Privatization, Part 2

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Since Part I of this series was written, Gov. McDonnell’s administration has unveiled – and the Commission on Government Reform & Restructuring has endorsed – an ABC privatization plan that would dismantle the state’s wholesale and retail spirits enterprise and create a windfall investment for transportation (see presentations here for plan details).

Balancing policy goals, political realities and the plethora of competing stakeholder interests and concerns—include those of large retailers, small retailers, wholesalers, major distillers, local vintners, religious and social groups, law enforcement and many more – is inherently tricky work, and the McDonnell administration deserves credit for shaping the ABC plan in a way that integrates these varied concerns while achieving a sensible balance among them. This process will continue as the administration continues to solicit input from legislators, stakeholders and the public to help refine the details.

A recent poll suggests that strong majority (57 percent) of Virginians support ABC privatization, and recent endorsements from former Gov. Doug Wilder, former governor and Senator George Allen, Jerry Falwell Jr., the Virginia Fraternal Order of Police and the Virginia Chamber of Commerce confirm that support for the ABC plan falls along a broad and bipartisan spectrum.

Still, some in the Assembly are complaining that the current plan would not be revenue-neutral, since the annual revenue derived from the proposed spirits excise tax would fall $47 million short of the $226 million currently raised through the existing ABC monopoly markup and excise taxes (which would be eliminated under the plan). This argument isn’t unexpected – state legislators do not release their grip on state revenue streams easily, after all – but it is short-sighted, for two key reasons.

First, the current ABC monopoly is profitable because it does what monopolies often do – it abuses its monopoly status by overtaxing spirits consumers, sending profits to the state’s general fund to pay for general government services. Those services ostensibly benefit all Virginians, so the costs of those programs should properly be borne by all taxpayers alike, not just the convenient target of spirits consumers.

In that light, the fact that the proposed ABC plan would generate less revenue for the state suggests a major step in the right direction, since it implies that consumers and taxpayers would gain some relief from over-taxation concurrent with the benefits of more choice, convenience and competition. Weaning the state from excessive monopoly profits should not be construed as a bad thing, despite the inevitable complaints from legislators that would always prefer more tax dollars to spend.

Second, ABC privatization is not a fiscal issue; it’s a government reform issue. Running a liquor monopoly is not a core function of government, as Gov. McDonnell and others have stated repeatedly. A majority of 32 states rejected the state ABC monopoly model outright at the end of Prohibition – opting for privatized spirits wholesale and retail from the outset – and no state has ever transitioned from a privatized model to a state monopoly model. Texas, Arizona, Georgia, California and the other 28 privatized states simply recognized early on that alcohol is alcohol, and it doesn’t make sense to treat spirits any differently than beer or wine.

This is why two separate government reform commissions – both Gov. McDonnell’s current reform commission and the Governor’s Commission on Efficiency and Effectiveness chaired by Wilder in 2002 – have recommended ABC privatization to get government out of something it should not be doing in the first place. Further, in addition to ABC privatization, the current reform commission is in the process of researching and recommending other structural reforms in government that will more than offset the revenue differential. As Gov. McDonnell stated recently, “We will make up $47 million plus some.” Similar reform commissions in Louisiana, New Jersey and Arizona recently identified reforms that would save hundreds of millions of dollars on an ongoing basis, and there’s every reason to assume that the Virginia commission will yield similar results.

Stepping back from the ongoing revenue component of the ABC plan, there are also legislative critics of the other major component – using the estimated $500 million or more in upfront proceeds from ABC privatization (e.g., revenues from new wholesale licenses, retail license auctions, warehouse divestiture, etc.) to invest in badly-needed state transportation infrastructure.

Some policymakers have claimed that $500 million is not enough to meet the state’s transportation needs, but this is a red herring. Perhaps the most misunderstood aspect of the ABC plan is that the administration doesn’t merely intend to just spend that $500 million on a project or two. Instead, they propose developing a new state transportation infrastructure bank that could leverage that upfront ABC revenue with private funds several times over, essentially turning hundreds of millions into billions of new funds for transportation projects. Put simply, a well-constructed infrastructure bank could be a gift that keeps on giving for Virginia transportation.

Billions in smart transportation investment will generate massive economic and mobility benefits to the state. Removing bottlenecks, improving freight rail and port capacity and the like will reduce travel times, improve goods movement and generate positive productivity returns in the larger economy. More speed and more productivity will generate more jobs, more economic opportunity and more tax revenues to the state. Using data compiled by the American Association of State Highway Transportation Officials (AASHTO), Gov. McDonnell noted in a press release on the recent VDOT audit findings that, “every $100 million spent on highway construction and maintenance projects adds 3,000 jobs created or supported, $250 million in economic activity and $25 million in revenue for the commonwealth.”

If that’s the case, then let’s assume that $500 million in upfront ABC revenues can leverage three times that (a conservative assumption) through the infrastructure bank to achieve roughly $2.0 billion in highway investment. Using the AASHTO estimates, that could result in approximately $500 million in revenue for the state during project construction. And the underlying intention of the infrastructure bank would be to have a constant cycle of projects moving at any given time, not just a one-time slate of projects that would bring a temporary bump in tax revenues. Further, the estimated $500 million in state revenue would be derived from the direct benefits of construction and does not account for additional tax revenues that would flow to the state from new businesses and higher land values in improved corridors, business productivity increases commensurate with congestion reduction and other indirect – but very real – benefits of infrastructure investment.

It’s impossible to estimate whether the combined direct and indirect revenue benefits from transportation projects would be higher or lower than the $226 million the Commonwealth annually receives from ABC through the current markup and excise tax on spirits. Regardless, it is critically important for policymakers to recognize that the fiscal before-and-after of ABC privatization is not just an issue of how much alcohol-related revenues flow to the state, but also how much additional revenue enhancement would be derived from the new infrastructure investment.

Quibbling over revenue neutrality thus seems misguided. In theory, Virginia policymakers could even cut the proposed spirits excise tax rate in half as transportation projects ramp up, and the incremental tax revenue derived from the new transportation investment could still partially – or even completely – offset the reduction in alcohol-related revenues.

Hence, it’s puzzling that some Senate Democrats would balk at the prospect of real money that can make a big difference in Virginia transportation and the Commonwealth’s budget. Instead, they still cling to the fantasy notion of raising the state’s gas tax to fill the funding gap. They fail to acknowledge a broad consensus among transportation experts – including the Congressionally-chartered National Surface Transportation Infrastructure Financing Commission – that the gas tax has essentially run out of gas; its revenue-generating power having been on a steady decline in recent decades with increasing vehicle fuel efficiency. After all, the cleaner cars get, the less fuel they use and the less revenue a gas tax will generate.

Would it really make more sense to double-down on the dying gas tax and forego a realistic and viable opportunity to redeploy other state assets to achieve major transportation goals?

Of course not, which is why opponents and critics of ABC privatization should have to answer why they support preserving an outdated, unnecessary government-run liquor monopoly that abuses taxpayers and why they want to raise gas taxes for transportation and walk away from real money that’s already on the table. Policymakers should recognize this as a golden opportunity to streamline government and address transportation needs in one fell swoop, delivering massive benefits to taxpayers, businesses and the state economy alike.

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