Why Privatizing Liquor Stores in Virginia to Fund Transportation Makes Sense

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