Privatization plan keeps springing new leaks

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Print this page by Robert Powell

Editor’s note: This column originally ran online Oct. 19 at http://www.VirginiaBusiness.com


Each time Gov. Bob McDonnell tries to restructure his plan to sell off the state’s liquor stores, it seems to spring a new leak. Maybe he should borrow an idea from my late Uncle George, who knew how to fix leaks in an emergency.
A longtime federal employee, Uncle George and his family lived in Afghanistan in the 1960s, a relatively peaceful time in that nation’s tumultuous history.  Once when the family was returning from a shopping trip to Pakistan, a rock on a desolate road through the Khyber Pass punched a hole in their gas tank.

My uncle’s solution was to tear open a carton of Bazooka bubblegum and give each of his four children several sticks to chew. Then he collected the gum in one glob and smeared it over the hole. Not only did the patch hold all the way back to Kabul, it proved almost impossible to remove. Uncle George drove around town with the patched tank for some time before finally getting it repaired.

Like my uncle’s predicament, McDonnell’s problem is road related. During last year’s gubernatorial campaign, he pitched the privatization of the liquor sales as a way to raise money for the state’s increasingly decrepit transportation system without raising taxes. His plan, unveiled in early September, called for the state to collect at least $458 million from selling liquor licenses and auctioning off stores and warehouses. That money then would be pumped into badly needed transportation projects.

McDonnell’s proposal would make up the lost state revenue from liquor sales, totaling $231 million last year, with a $17.50 per gallon excise tax on spirits, a 1 percent tax on wholesalers’ annual sales and a 2.5 percent cocktail tax on restaurants that buy their liquor directly from wholesalers.

But the plan had a leak from the outset. The Richmond Times-Dispatch reported Republicans in the House of Delegates forced the administration to replace a 4 percent tax on mixed drinks with the 2.5 percent “convenience tax” on restaurants, leaving a $20 million shortfall. The administration backtracked again three weeks later, dropping the 2.5 percent and 1 percent taxes entirely, opening a $47 million hole.

With each compromise, the administration has won over some of its critics (such as the Virginia Hospitality and Travel Association) but raised more concerns about the plan’s wisdom and feasibility.

In addition to legislators who are worried by the growing revenue gap, some church groups are appalled that the state’s 332 liquor stores would be replaced by 1,000 private outlets. Also, beer and wine wholesalers, commissioned a study showing that the price of liquor in Virginia would soar 16.5 percent. High prices could scuttle attempts to recapture Northern Virginia liquor sales that have been lost to Maryland and the District of Columbia.

And Democrats, who control the state Senate, question whether privatization could raise $458 million for transportation. Despite the assumption that hard times lead to heavy drinking, liquor sales nationally have been flat since 2008. The state might be getting rid of its stores at the bottom of the retail cycle.

More holes in the plan may be found in a Joint Legislative Audit and Review Commission study requested by Democratic state Sen. Edd Houck. The study was scheduled for completion in late October after this issue went to press.
Despite these concerns, a group appointed by the governor to reform state government has endorsed the privatization plan. Its members argue that the commonwealth has no reason to be in the liquor business, regardless of whether privatization would replace all the lost revenue.

But if we are going to make a stand on principle, how does the Virginia Lottery fit the core functions of government, other than raising revenue? Should it be placed in private hands, too?

As the privatization debate continues, the proposal increasingly looks like a campaign promise that wasn’t thought through. Getting the state out of the liquor business and raising funds for transportation are both legitimate goals. Lashing the two together, however, gave the false impression that Virginia’s roads could be fixed through a quick, painless tradeoff.

The privatization proposal obscures the fact that Virginia needs a lot more than a one-shot infusion of $458 million for transportation. It needs a dedicated revenue stream that must produce billions of dollars just to catch up with current needs.
My uncle’s bubblegum patch served him well, but I think it will take more than that to fix the leaks in the privatization plan. This revenue vehicle needs to go back to the shop for an overhaul.

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