Amidst all the talk surrounding the upcoming congressional elections, the stagnant national economy and flavor-of-the-week issues such as mosque building and Qur'an burning, one of the most important state policy proposals in recent Virginia history has been largely overlooked. The initiative in question is Gov. Bob McDonnell's plan to privatize Virginia's state-run liquor stores to raise money for much-needed transportation projects. McDonnell hopes privatization will produce a pareto optimal outcome in which consumers benefit from increased competition in the liquor industry, entrepreneurs gain access to a lucrative new opportunity for profit and the state obtains additional revenue from the sale of liquor licenses and increased tax collections. Unfortunately, when one considers the results of past privatization schemes and the political constraints surrounding McDonnell's proposal, it becomes clear that, at best, only the first two potential gains can be realized. Regardless of the philosophical merits of privatization, it is likely that McDonnell will be the latest in a long line of governors who have failed to address outright the state's need for long-term transportation funding.
Before analyzing McDonnell's proposal, however, it is necessary to understand the practical implications of state involvement in the retail of liquor. Although it allows private institutions such as supermarkets and convenience stores to sell beer and wine, Virginia has maintained a state-controlled monopoly over the sale of liquor since Prohibition ended more than 70 years ago. This means the state's Alcoholic Beverage Control stores are the only places in Virginia one can legally purchase liquor - a restriction that artificially reduces supply but pushes price to above-market levels.
McDonnell's proposal would indeed make life better for consumers in those respects, but by allowing private firms to sell liquor, the state would facilitate competition to lower prices and improve the overall buying experience. Furthermore, McDonnell's plan entails that the state will auction off 1,000 liquor licenses - thus tripling the number of liquor stores and further reducing prices, yet increasing the availability of liquor. Privatization would also result in a more efficient allocation of the state's commercial resources. For example, rather than having an adjacent ABC store to Kroger in Barracks Road Shopping Center, it would be possible for the supermarket to sell liquor alongside its beer and wine. Such a situation would allow Kroger to exploit economies of scale in its sale of alcoholic beverages while simultaneously giving another business the chance to make better use of the adjacent retail space.
Despite these positive aspects of privatization, it is entirely unrealistic for McDonnell to think his plan would produce the revenue needed to support future transportation projects. Although McDonnell's staff estimates the state would net around $500 million from the auctioning of liquor licenses, this would amount to a one-time windfall that would be rapidly spent on a backlog of transportation projects. It would not, therefore, provide the continuous stream of revenue the state needs to compensate for the $100 billion transportation funding shortfall that is projected to arise over the next two decades.
McDonnell, however, has countered that his plan would boost annual revenue by allowing the state to levy additional excise taxes upon the sale of liquor in bars and by pulling in greater sales tax collections from increased liquor sales. Yet past experiences in other states have shown that the actual revenue generated from privatization almost never lives up to expectations. Iowa, for example, saw a decrease in its annual alcohol-related revenue for 16 years following privatization. West Virginia, meanwhile, received about 33 percent less funding from post-privatization taxes and fees than it did when liquor retail was publicly managed. By privatizing its liquor stores, Virginia would lose out on approximately $250 million of annual revenue from its state-run monopoly - money that is currently used to fund education, health care, and public safety programs. Thus, before any revenue generated by McDonnell's plan could be used to fund future transportation projects, it would have to fill that gaping hole in the state's general fund. Only a net tax increase would ensure funds for transportation, but passing such a plan through the tax-averse General Assembly would be nearly impossible.
In any case, McDonnell's proposal is almost certainly doomed once it enters the General Assembly. While Democrats are unlikely support privatization for fear of losing revenue for the general fund, many Republicans have expressed reservations about the plan since it would involve vastly increasing the quantity of liquor sold within the state. This implication has led them to question the ethics of raising state funds by encouraging alcohol consumption. Whether or not lawmakers are able to overcome this prejudice against alcohol to implement a policy that would genuinely benefit consumers, the reality is that Virginia's long-term transportation funding problem will remain unsolved until its leaders have the courage and sensibility to enact a long-awaited increase in the state gas tax.
Matt Cameron is an associate editor for The Cavalier Daily. He can be reached at m.cameron@cavalierdaily.com.
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