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Why Privatizing Liquor Stores in Virginia to Fund Transportation Makes Sense

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 22 Jul 2009 14:12:00 EDT

Bob McDonnell, Virginia's former attorney general and current Republican gubernatorial candidate, released a major policy proposal yesterday to address the Commonwealth's growing transportation needs and funding gap, and a key element would involve privatizing the state's ABC stores—getting the state out of the liquor retail business and using a portion of the proceeds to invest in transportation. Per the Washington Times:

Republican gubernatorial candidate Robert F. McDonnell on Tuesday proposed privatizing Virginia's liquor stores in order to reap about $500 million in revenue dedicated to funding the state's transportation needs. [...]

"We should get the private sector involved in the distribution of spirits, just like beer and wine," Mr. McDonnell said. "It makes perfect sense to get the government out of this business."

The new revenue would come from selling retail liquor licenses. Virginia is one of 18 states that do not allow private retail sales of alcohol. The state operates 334 liquor stores, which have generated about $1.3 billion in the past five years, said officials with the Virginia Department of Alcoholic Beverage Control.

Mr. McDonnell said the state would continue to collect the taxes on liquor sales and would collect additional money from property taxes paid by store owners, while no longer being responsible for the $115 million annually associated with running the stores. He said the plan could result in $500 million for Virginia "in the near term."

Legislation would determine how many retail liquor licenses would be sold under the McDonnell plan.

The recommendation to privatize state liquor stores has been around for several years. It was made in a 2002 report to Gov. Mark R. Warner by the Commission on Efficiency and Effectiveness - an advisory body led by former Gov. L. Douglas Wilder that was tasked with finding ways to make state government more effective and efficient.

Mandating that the money go toward transportation is innovative, said Leonard Gilroy, the director of government reform for the Reason Foundation, a nonpartisan, nonprofit think tank that is studying the issue of privatization of alcoholic beverage control agencies. Mr. Gilroy said he knows of no other states that have dedicated the profits of privatization to fixing transportation infrastructure.

In January, state Sen. Mark Obenshain, Harrisonburg Republican, proposed auctioning 1,000 retail liquor licenses. The bill, which did not propose directing the funds to transportation, died on a voice vote in the Senate's Rehabilitation and Social Services committee.

Mr. Obenshain said privatization would bring millions of additional dollars to the state, especially if the plan included licensing of valuable liquor distributorships.

As I told the reporter, Sarah Abruzzese, yesterday in an interview, I do indeed find this an innovative and sensible plan. To clarify my statement in the article, it's true that I'm not aware of privatizing an ABC operation and using the proceeds to invest in infrastructure, but in the larger world of privatization, there's certainly precedent for that. For example, Gov. Mitch Daniels privatized the Indiana Toll Road and is using the $3.8 billion upfront payment to fully fund a ten-year statewide highway investment program.

As I wrote here, I believe that fiscal responsbility demands that the proceeds from these sorts of transactions be invested in areas with long-term benefits to taxpayers, such as infrastructure, paying down debt or paying down long-term state pension and health obligations. By doing just that, McDonnell's plan meets the fiscal responsibility test, in my mind.

Also, as the fiscal house of cards collapses around us, is there anyone in their right mind that can argue that there's something inherently governmental about selling liquor? You can walk into a grocery store in Texas, Arizona or Louisiana and buy a bottle of Southern Comfort—can Virginians not be trusted to do the same? As a born and bred Virginian, I have my own personal anecdotes about having to deal with the stupidity of a state-run liquor store system (imagine having a party and then having to deal with the equivalent of the DMV to obtain supplies). But I digress.

Privatizing Virginia's ABC retail operation would benefit consumers through increased choice and lower prices. Private stores have more freedom and flexibility to innovate and be more responsive to the customer. For example, store hours and locations would be driven by market demand, offering more and tailored options than centrally owned and operated entities. Under the current system, some parts of populous Northern Virginia still don't have enough stores to meet demand, a situation that makes no business sense whatsoever. That's why governments need to get out of the business of business—they're just not very good at it.

Another benefit of eliminating the government's monopoly on spirits is that independent—but regulated—private sector businesses are forced to compete on price, quality, and choice. Some other key points:

Even if the state isn't running the ABC stores, the revenue stream to the state would not be negatively impacted. Taxes on spirits wouldn't go away with privatization, and you'd be shedding the costs of running stores and paying state employees, so revenues will continue to flow, if not increase, with higher sales. Revenues that are collected from licensing bars and restaurants will also continue to flow into the Commonwealth’s coffers.
You be generating a new form of revenue through privatization in fact: the licensing of existing and new retail stores. Even with privatization, the state would retain its role as a regulatory body, which would include serving as the licensing body for new retail establishments. Further, privately-run stores would also pay income and property taxes, representing new revenue streams to the state and local governments (state stores are currently tax-exempt). This has been the experience of Iowa, West Virginia and Alberta, Canada—the most recent governments to privatize alcohol control operations—where policymakers were able to increase revenues at the same time that they lowered alcohol taxes.
Social do-gooders and MADD types will certainly scream that privatization will lead to more drinking and driving and teen alcohol abuse, but that's just false. We're conducting research on ABC privatization right now that has found no significant differences between "control states" like Virginia (where government controls wholesale operations, retail operations or both) and license states on the key metrics of per capita alcohol consumption, drunk driving and underage alcohol abuse.
Last, there's no reason to stop at Virginia's retail operation. As state Senator Obenshain suggested in the excerpt above, privatizing the wholesale operation could be another huge boon to the state. And again, there's nothing inherently governmental about running a wholesale business for spirits.

McDonnell's proposal will still need to be fleshed out further, but I think its a sensible and innovative idea that Commonwealth policymakers should seriously consider. You've got a state with massive transportation needs, and it just so happens to run a very lucrative business that could be run better and generate more revenue in the private sector. Put those two things together, as McDonnell has done, and you've got something that merits a serious policy discussion.

» Reason's Privatization Research and Commentary

The Catastrophe of What Passes for Alcohol Policy Analysis

info@reason.org (Edward Stringham) — Tue, 12 May 2009 17:06:00 EDT

Is alcohol a good like other economic goods, or is alcohol a "catastrophe" that should be heavily taxed?

Which States Make the Most Beer?

adrian.moore@reason.org (Adrian Moore) — Tue, 21 Apr 2009 18:19:00 EDT

SloshSpot has a cool map and post showing the number of US breweries per capita.

Reason.tv’s “Beer: An American Revolution” video looks how government regulations have protected the big beer companies and how the "microbrew movement gave rise to massive consumer choice."

Hat tip to Governing's 13th Floor

Nothing to Toast in California's Proposed 'Dime a Drink' Tax

info@reason.org (Edward Stringham) — Mon, 20 Apr 2009 17:57:00 EDT

Orange County Register

California's taxes just aren't high enough yet. So Assemblyman Jim Beall Jr., D-San Jose, has introduced a bill that would raise alcohol taxes by a dime a drink. The government figures it can raise $1.2 billion a year by taxing every drink you choose to have.

In a press release, Mr. Beall explained why you need to pay more taxes: "The alcohol industry creates devastating problems – traffic accidents, alcoholism – and walks away with money stuffed in its pockets while the public – including nondrinkers – are left to pay billions for the mess."

And you thought that glass of wine with your dinner wasn't hurting anybody.

Mr. Beall is parroting the Marin Institute's deceptive and inaccurate claim that alcohol "costs" California taxpayers $38 billion a year and that high taxes will somehow reduce high-risk alcohol consumption. Let's look at a few ways the folks at Marin allege alcohol is costing you money.

They contend drinking costs the state "$25.3 billion in lost productivity and reduced earnings."

That claim, simply, is false. My 2006 Reason Foundation study found that drinkers earn 10 percent to 14 percent more money than nondrinkers. Men who drink socially, visiting a bar at least once a month, bring home an additional 7 percent in pay.

A 2005 study sponsored by the National Institute for Alcoholism and Alcohol Abuse similarly found that drinking actually increased the returns to both education and work experience. And a 2001 study, "The Impact of Problem Drinking on Employment," found that even "problem drinking is not negatively related to labor supply."

The Marin Institute says another $8 billion in annual costs to taxpayers stem from alcohol-related crime. Research indicates about one-third of violent crimes involve alcohol. The explicit assumption in blaming these crimes on alcohol is that the offenses would not have occurred without it. There is no proof of that. Just as there is no guarantee that criminals committing violent crimes would be upstanding, law-abiding citizens if they refrained from drinking.

The overwhelming majority of people who consume alcohol do so responsibly. At some point, personal responsibility has to enter the equation and the choices people make have to receive the blame. But alcohol is such a great scapegoat. When former Congressman Mark Foley was caught in a scandal with an underage page, he blamed alcohol and went to rehab. After Mel Gibson went on an anti-Semitic rant and comic Michael Richards had a racist tirade, they blamed booze and entered rehab centers, too.

The Marin Institute's motives for pushing higher alcohol taxes are clear. Its stated mission is to make "communities free of the alcohol industry's negative influence." And on its Web site frets that "67 percent of adults 21 years of age and older in the United States reported drinking alcohol in the past 30 days."

Funny, I thought adults consuming alcohol was perfectly legal.

Mr. Beall and Marin's whole strategy of taxing people sober (with the long-term goal of eventually going back to prohibition) is fatally flawed. Consider the group of people they say they are most openly targeting: alcohol abusers and criminals. Research indicates that the heaviest drinkers do not curb their drinking in response to higher prices, unlike light-to-moderate drinkers, for whom there can be positive health benefits. This should not surprise anyone. If alcohol abusers are truly addicted, will an extra "dime a drink" stop them? Will a career criminal decide to not get drunk before his next crime spree because of a 10-cent-per-drink tax? Of course not.

What higher taxes do, however, is infringe upon the rights of the millions of Californians who legally enjoy a margarita with a Mexican dinner, a beer with pizza or a glass of wine in the evening. Millions of moderate drinkers are enjoying themselves responsibly. Is that really a reason to tax them?

Edward Stringham, Ph.D., is an adjunct scholar at Reason Foundation and professor at Trinity College. This column first appeared in the Orange County Register. Stringham's study on alcohol and earnings is here.

California's Dime a Drink Tax Proposal

info@reason.org (Edward Stringham) — Fri, 17 Apr 2009 10:07:00 EDT

My new column for the Orange Country Register:

In a press release, Mr. Beall explained why you need to pay more taxes: "The alcohol industry creates devastating problems – traffic accidents, alcoholism – and walks away with money stuffed in its pockets while the public – including nondrinkers – are left to pay billions for the mess."

And you thought that glass of wine with your dinner wasn't hurting anybody.

Mr. Beall is parroting the Marin Institute's deceptive and inaccurate claim that alcohol "costs" California taxpayers $38 billion a year and that high taxes will somehow reduce high-risk alcohol consumption. Let's look at a few ways the folks at Marin allege alcohol is costing you money.

They contend drinking costs the state "$25.3 billion in lost productivity and reduced earnings."

That claim, simply, is false. My 2006 Reason Foundation study found that drinkers earn 10 percent to 14 percent more money than nondrinkers. Men who drink socially, visiting a bar at least once a month, bring home an additional 7 percent in pay.

A 2005 study sponsored by the National Institute for Alcoholism and Alcohol Abuse similarly found that drinking actually increased the returns to both education and work experience. And a 2001 study, "The Impact of Problem Drinking on Employment," found that even "problem drinking is not negatively related to labor supply."

The Marin Institute says another $8 billion in annual costs to taxpayers stem from alcohol-related crime. Research indicates about one-third of violent crimes involve alcohol. The explicit assumption in blaming these crimes on alcohol is that the offenses would not have occurred without it. There is no proof of that. Just as there is no guarantee that criminals committing violent crimes would be upstanding, law-abiding citizens if they refrained from drinking.

The overwhelming majority of people who consume alcohol do so responsibly. At some point, personal responsibility has to enter the equation and the choices people make have to receive the blame.

Full Column at OCRegister.com

2006 Study: Drinkers Earn More Money Than Non-Drinkers

New Documentary Beer Wars and Live Event With Ben Stein On April 16th

Mon, 06 Apr 2009 17:19:00 EDT

Reason Foundation is partnering to bring you the new documentary Beer Wars. The film makes its world premiere in a special live simulcast event in over 400 theaters on Thursday, April 16th. Beer Wars tells the David and Goliath story of the American beer industry and takes you inside the big business of beer - where the big are getting bigger, consolidation reigns and free enterprise often takes a back seat. The evening will feature the debut of Beer Wars, followed by a live discussion led by Ben Stein and featuring some of America’s leading independent brewers and experts.

You can purchase tickets to the LIVE premiere event here.

The Beer Wars Official Website

Reason.tv's Beer: An American Revolution Video

An American Beer Revolution

Mon, 09 Mar 2009 00:00:00 EDT

In 1980, there were less than 50 breweries in the United States. Today, over 1,400 craft breweries help the U.S. produce more styles of beer than anywhere else in the world. A new Reason.tv video explores the history of beer in America and shows how deregulation paved the way for the recent American beer revolution.

European immigrants brought beer to America, building breweries wherever they settled. By 1870, there were more than 4,000 breweries in the U.S. But in 1920, prohibition decimated the industry. When prohibition ended, home brewing was still a crime punishable by five years in prison or a $10,000 fine.

In 1979, consumer choice and freedom finally returned when President Jimmy Carter signed a law allowing individuals to brew small batches of beer at home. Innovative home brewers became entrepreneurs and opened craft breweries across the country. The craft brewing industry generated over $6 billion in sales and produced over 8.5 million barrels of beer in 2008.

“The American Revolutionaries were beer drinkers who fought for a free society,” says Reason.tv editor Nick Gillespie. “Here’s to freedom, choice and great American beer.”

Full Video Online

The Drew Carey Reason.tv video, Beer: An American Revolution, is online at: http://reason.tv/video/show/683.html

An archive of Drew Carey’s Reason.tv videos is online at:
http://reason.tv/featuredvids/

Report: Drinkers Earn More Money Than Non-Drinkers

Thu, 14 Sep 2006 00:00:00 EDT

Numerous studies have shown moderate alcohol use can have important health benefits and now a new report finds drinking can help your wallet too.

Drinkers earn 10 to 14 percent more money at their jobs than nondrinkers and men who drink socially, visiting a bar at least once a month, bring home an additional 7 percent in pay, according to a new Reason Foundation report by economists Bethany Peters, Ph.D., and Edward Stringham, Ph.D.

"Social drinking builds social capital," said Stringham, an economics professor at San Jose State University. "Social drinkers are networking, building relationships, and adding contacts to their Blackberries that result in bigger paychecks."

The study finds that men who drink earn 10 percent more than abstainers and women drinkers earn 14 percent more than nondrinkers. However, unlike men, who get an additional income boost from drinking in bars, women who frequent bars at least once per month do not show higher earnings than women who do not visit bars.

The study, published in the latest edition of the Journal of Labor Research, suggests that the growing wave of anti-alcohol legislation at state and local levels will have harmful effects on local economies and individual finances. Efforts to impose massive tax increases on alcohol, to restrict alcohol sales through zoning laws, and prohibit alcohol advertisements have all been stepped up in recent years.

"We're quick to ban beer at sports stadiums and festivals. The legal blood alcohol level is dropping everywhere, and we're barraged with overhyped warnings about binge and underage drinking," Stringham said. "Instead of fear mongering we should step back and acknowledge the proven health and economic benefits that come with the responsible use of alcohol."

Full Study Online

The full report, Why Drinkers Earn More Money Than Nondrinkers, is available online at http://www.reason.org/news/show/127594.html.

About Reason Foundation

Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. Reason produces respected public policy research on a variety of issues and publishes the critically acclaimed monthly magazine, Reason. For more information, please visit www.reason.org.

Contacts

Edward Stringham, Economics Professor, San Jose State University, (408) 924-5419
Chris Mitchell, Director of Media Relations, Reason Foundation, (310) 367-6109

No Booze? You May Lose

info@reason.org (Bethany L. Peters) info@reason.org (Edward Stringham) — Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

A number of theorists assume that drinking has harmful economic effects, but data show that drinking and earnings are positively correlated. We hypothesize that drinking leads to higher earnings by increasing social capital. If drinkers have larger social networks, their earnings should increase. Examining the General Social Survey, we find that self-reported drinkers earn 10-14 percent more than abstainers, which replicates results from other data sets. We then attempt to differentiate between social and nonsocial drinking by comparing the earnings of those who frequent bars at least once per month and those who do not. We find that males who frequent bars at least once per month earn an additional 7 percent on top of the 10 percent drinkers’ premium. These results suggest that social drinking leads to increased social capital.