Guest Post from Eric Brescia – 2009 GOP Candidate for 47th District House of Delegates
When then-candidate Bob McDonnell announced that he was in favor of privatizing the state-run ABC liquor sales system, I was happy to see one of my own platform planks gaining traction. I wish I could claim that my long-shot campaign to represent Arlington’s 47th District in the House of Delegates inspired this move by the top of the ticket. However, the truth is that the McDonnell team just realized it was a matter of sound policy. Just about a year later, the Washington Post reports that the administration will soon release the details of its plan.
The ABC system came about during post Prohibition in an effort to limit liquor consumption. It was decided that Virginia would become a “control state” where all liquor sales would be conducted through a state-run system.
For years this system has managed to escape reform because of an unholy alliance between the “Baptists and bootleggers.” The “Baptists” on both the left and right have wanted to restrict alcohol consumption on moralistic and social grounds while the “bootleggers” have been special interests looking to limit competition.
However, it is clear now that after over 70 years of such a system, that alcohol related social harm is not reduced by having the state control sales. According to data from the National Institute of Health, there is no difference in consumption between states with government run systems and those with private sales.
The only parties left to benefit from such a system are the various “bootlegger” special interests who profit from it. The current batch includes beer and wine distributors, who are trying to shield themselves from competition. It is no surprise that they donated heavily to legislative campaigns last cycle.
Scrapping the current system would seem like a no brainer. Why not get rid of an ineffective Prohibition era relic? Private sales would result in lower prices, greater convenience and broader selection for consumers. We already do this with beer and wine sales. In addition, the windfall from the sale of assets would be put towards badly needed transportation improvements. This seems like an idea that everyone would be able to get behind. So what’s the hold up?
The biggest obstacle revolves around the budget. Currently liquor sales bring in about $220 million per year in taxes and profits to the state general fund. Most of the opposition to the governor’s initiative has come from Democrats fearful of losing this revenue stream.
These fears however, are unfounded. A private system can be designed so that annual revenues to the state remain neutral. Over half of all state revenue generated from liquor sales comes from taxes, not profits, and the loss of current retail profits would be made up for in a number of ways:
-Private stores would be subject to income taxation, yielding new revenue for the state. Because privately-run stores have lower operating costs, the potential tax base would be higher than it is currently at the state-run stores.
-Lower prices and greater convenience would allow Virginia to recapture (and generate new tax revenue from) the estimated 10-15 percent of sales that the state currently loses to its neighbors.
-The private system will likely involve auctioning liquor sales licenses, which in addition to the initial cash infusion would be a long-term revenue stream.
-State employee pension costs and other overhead expenses would be eliminated.
We can also look to examples of other states. West Virginia and Iowa each privatized their systems in the last two decades, and their experiences show how a state can switch to private liquor sales without a loss of revenue to state coffers.
In fact, both states saw net-revenue increases. After the first six years of the new private system, the Iowa Legislative Fiscal Bureau conducted a review and found that even with the wholesale markup rate cut by a third, state revenues were $65 million higher than they were under the state-run system. The results were similar in West Virginia. In the first year of the new system, even with retail prices falling 10 percent, state revenues from sales went up 23 percent.
Following Iowa’s privatization, Dennis Mitcham the Products Director of the Iowa Alcoholic Beverage Division at the time, stated “[w]e found a lot of pluses to privatization, and we really can’t find any minuses. Iowa will never change back to control.”
Rona Moats, then-Deputy Commissioner of West Virginia’s alcohol control board concluded, “[w]e’re really pleased with the new system. It took the state out of retailing, where we didn’t have the expertise. And we’ve had no problems with sales to minors or increased crime rate.”
In addition, both states benefitted from millions of dollars in windfall from asset sales that were used to help get through funding shortages elsewhere in their budgets.
Virginia isn’t the only state currently looking at these past experiences with interest. Pennsylvania and North Carolina are now looking at getting rid of their state run systems, and voters in Washington State will consider a ballot referendum on this issue in November.
And this issue need not be a partisan battle. In all three of these states, the legislatures and governors mansions are held by Democrats. In Washington, neither of the two chief sponsors of the effort are Republicans. Details will have to be worked out to see the best way towards privatization; however, moving in this direction is clearly the smart policy decision.
The Democrats in Virginia, particularly those in the State Senate, will have a choice to make. Are they going to join the side of progress and work with governor? Or are they going to pick up the banner of an obsolete moral crusade and entertain the “Baptists and bootleggers?”
