Well, that should give the editorialists at the Times heartburn. Not that it'll make any difference. Expect them to continue to claim that they support privatization while, at the same time, crapping on any plan that McDonnell comes up with to do just that. They are, after all, Democrats first and journalists second. And businessmen a distant ninth.
Privatizing Virginia liquor stores makes sense
By Steven Pearlstein, Business Columnist
When I first heard Virginia Gov. Bob McDonnell boast that by privatizing the state's liquor system he could generate the same amount of revenue and raise $500 million from auctioning off liquor licenses while holding liquor prices where they are now, I assumed this was just a free-market conservative peddling another cockamamie scheme for spinning straw into gold.
But having spent some time this week playing with the numbers, I've come around to the idea that privatization offers Virginians the rare opportunity of a free lunch. The logic goes like this:
Last year, Virginia's 332 state stores sold $675 million of liquor to consumers and restaurants, for which it paid $330 million to distillers. It spent around $130 million running the stores, earned a little extra selling lottery tickets and sundries and at the end of the year delivered about $230 million to the state treasury -- $110 million in excise taxes and $120 million in profits. Because of those monopoly-size profits, along with a higher-than-average excise tax and the lack of retail competition, Virginia liquor prices are somewhat higher than those in the District and Maryland, where there are private markets, but about the same as in neighboring North Carolina, where liquor is also state-controlled.
So how can it be that moving to a private system will make everyone better off -- taxpayers, consumers, and a new crop of retailers and wholesalers that will need to earn a reasonable profit? How is it possible that an anticipated network of multiple distributors and 800 retail outlets operate at a lower overall cost than a monopoly system with one distributor and 332 outlets?
To begin with, it turns out that the larger network of private outlets will be able to operate more cheaply, because most of the liquor will be sold through grocery stores, convenience stores, and private wine and beer stores that are already in operation. They already have most of the infrastructure needed to sell liquor, from stores to cash registers to back-office operations, and can handle the new liquor sales with a relatively modest increase in operating costs. Overall, however, there are potential efficiency savings of $60 million a year over the current system, according to industry executives. Rather than allow those savings to flow to consumers, in the form of lower prices, or to retailers and distributors, in the form of higher profits, the state could capture them by increasing the current excise tax.
There's also no question that Virginia could recapture some of the liquor sales it is now losing to Maryland and the District [jf: as well as to West Virginia] by offering more stores in Northern Virginia [jf: and Southwest Virginia] where you can buy beer, wine and liquor under the same roof.
Add it all up -- the operating efficiencies, the increased sales, the additional tax revenue -- and it's not hard to construct a scenario in which sales increase to $740 million, the state gets its $230 million, and the retailers and distributors earn $75 million to $100 million in after-tax profits. And for the right to earn that recession-proof stream of profits, or sell the license to someone else, a well-run auction should be able to generate bids of somewhere between $400 million and $500 million -- money that the governor plans to earmark for badly needed transportation projects, particularly in Northern Virginia. [link]
Everyone else is on board now. And now it's time. To end the last vestige of Prohibition, for God's sake.
Crack that Black Jack. Let's party.