WaPo’s Pearlstein: lunacy on liquor stores

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    In today’s Washington Post, business columnist Steven Pearlstein has a piece forthrightly entitled “Privatizing Virginia liquor stores makes sense.”  Having “play[ed] with the numbers” over the weekend, Pearlstein purports to explain how it’s a winning proposition for everybody – or as he puts it, “the rare opportunity of a free lunch.”

    Since the cliche holds that there’s no such thing, Pearlstein’s logic deserves scrutiny.  And when scrutinized, that logic reveals a hole big enough for passage of a Mack truck hauling a big trailer full of lobbyists.  

    It’s one question whether, as a matter of ideology, the state should hold a monopoly position in the retail market for liquor.  But that’s not the question Pearlstein addresses.  He is concerned here only with the revenue projections.

    The budget-based objection to McDonnell’s plan is that the Commonwealth would surrender a steady and practically endless revenue stream (the profits on liquor sales: retail markup over wholesale price) in exchange for a one-time windfall derived from sales of licenses.

    Pearlstein argues that we can have our cake and eat it too, by clever adjustments in tax and licensing policy. Through excise tax adjustments we would capture some of the efficiency that private retailers would add to the market:

    [T]here 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.

    Felling skeptical yet?  There are more “captures” to be made:

    Virginia could recapture some of the liquor sales it is now losing to Maryland and the District by offering more stores in Northern Virginia where you can buy beer, wine and liquor under the same roof. The Distilled Spirits Council of the United States estimates that Virginia loses as much as 20 percent of its liquor business to neighboring states because of inconvenience and higher prices, particularly for more-profitable premium brands. By recapturing some of that — and increasing sales through marketing and promotion — a privatized system could boost sales by 10 percent and generate an additional $25 million in additional profits and tax revenue.

    In other words, the industry says it will sell more booze than the VABC stores can, and will happily pay lots of taxes on those sales!

    Pearlstein acknowledges and finesses the profit motive thus:

    It’s true that those retailers and distributors will expect to earn profits, but thanks to the corporate income tax, they will have to share a portion of those gains with taxpayers. If those firms earn a pretax profit of $110 million — a fairly standard 15 percent of sales — that’s an extra $5 million that can be thrown into the pot.

    Ready to grab some more efficiencies?

    Right now in Virginia, restaurants and bars buy their liquor the same way consumers do, by driving to the nearest state liquor store. They not only pay retail prices but also have to deliver it themselves. In a privatized market, they could expect to buy directly from wholesalers and distributors who charge 25 percent less and deliver to boot. The state could capture some of those savings with a sales tax surcharge on restaurant liquor sales, which could generate as much as $20 million in added revenue.

    This one is particularly stupid (pardon me) because the “savings” the restaurant industry will enjoy are nothing but lost revenue in the first place (remember that retail-level “profits” on liquor sales are 100% state revenue right now).  Pearlstein’s bright suggestion is that “some” of that revenue can be recaptured several steps down the road, through the corporate income tax.

    More bits could be quoted and criticized, but the gist of this should be clear by now.  The private sector will not only sell more booze in absolute terms, but will also be vastly more efficient than the current system.  And the Commonwealth will be able to siphon most of that efficiency back into its revenue stream, by…increasing excise taxes and applying the current corporate income tax.

    In Pearlstein’s world, no restaurateurs or liquor retailers will form associations.  They won’t hire lobbyists.  Those lobbyists won’t spend hundreds of hours stroking and cajoling and wining and dining the delegates and senators whose task it would be to “capture” all those profits in the form of taxes.

    In Pearlstein’s world the Assembly has no bloc of irrational, ideological legislators for whom any tax, of any kind, for any reason, is always a bad idea.  In Pearlstein’s world, I suppose, there is no Bill Howell and no McGuireWoods.  And I suppose in that world there’s also such a thing as a free lunch.

    • Pearlstein’s numbers simply don’t add up. Here’s what I wrote.

      He claims it’s possible to make up $230 million per year to the state treasury, but all he comes up with are:

      *”potential efficiency savings of $60 million a year”

      *”an additional $25 million in additional profits and tax revenue”

      *”If those firms earn a pretax profit of $110 million — a fairly standard 15 percent of sales — that’s an extra $5 million that can be thrown into the pot.”

      *”The state could capture some of those savings with a sales tax surcharge on restaurant liquor sales, which could generate as much as $20 million in added revenue.”

      *”A 10 percent tax could eventually raise an extra $5 million per year.”

      Correct my math if it’s wrong, but doesn’t that add up to only $115 million, or just ONE HALF of the $230 million the state currently earns?  Also, this $60 million a year in “efficiency savings” figure comes from…wait for it…”industry executives.”  Hahahahahahahahahaha.

      I respect Steven Pearlstein a great deal and think he does an excellent job most of the time, but this column is absolute dreck.