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Privatization: McDonnell’s Hangover?

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Jeff Shapiro of the Times-Dispatch is reporting what just about everyone is concluding: Barring some sort of GOPer miracle, Bob McDonnell's linchpin to his bogus "transportation plan," selling off the ABC crown jewels, is DOA in the General Assembly. Or, as Shapiro puts it, "He may have four days, possibly eight, to infuse life into an idea that, for many of his fellow Republicans, is as dead - and delusion-inducing - as the worm in a bottle of tequila."

Evidently, even McDonnell's own Republicans aren't buying a plan that would hit the already comatose General Fund with another $21 million (or worse) revenue cut. If McDonnell closes that revenue gap with an even higher wholesale tax than previously proposed, he will be angering the very guys that were among his biggest donors in 2009, from whom he garnered more than $350,000 according to VPAP.

Roanoke Times columnist Dan Casey tried his hand at some of the wholesale "arithmetic" in McDonnell's "plan" today. To illustrate, Casey used the ABC stores' best seller, Aristocrat Vodka. Right now, a fifth of Aristocrat costs $6.75 at retail. By Casey's calculations, under the Rube-Goldberg-like McDonnell "privatization" plan with all its "fees" and add-ons, that same fifth would cost about $10.00. So much for privatization bringing lower costs to the consumer.

Multiple studies over the years have shown that going from a state-owned system for alcohol sales to privatization results in increased prices for the consumer and lower revenue for the governmental entity. Why should Virginia be different? It's simple math. When producer, wholesaler, and retailer each add on a healthy profit margin to a product, it will cost more. If the government doesn't recoup the profit it made by increasing taxes a like amount, it will have less revenue.

Is McDonnell Smarter Than a Fifth Grader?

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The commission Bob McDonnell set up to justify his heart's desire - privatizing liquor in Virginia - is  leaking out a bit more information about their discussions. According to the Daily Press, four options are being considered for privatizing ABC stores: selling the whole operation to one buyer (creating a private monopoly); auctioning off a limited number of licenses (guaranteed to bring in little revenue); selling ABC stores to several "competing" companies (setting up an oligopoly, compliments of the state); or offering licenses to more than 3,000 businesses that now sell wine and beer. (Note that the number of outlets keeps going up.)

Mark Warner tried to find a way to do the same thing when he was Virginia's governor, but he just couldn't find a way to replace the revenue ABC stores bring in.

"If we were starting from scratch, most of us would agree that the state shouldn't be in the liquor business," Warner said. But "how are you going to replace that revenue stream?" My answer? Sen. Warner, you can't.

The Canadian province of Alberta, the most conservative of Canada's provinces, privatized their liquor sales in 1993 and 1994. The results have been pretty bad, in terms of lost revenue for the province. Alberta ended government retail and wholesale functions and switched from a percentage of price tax system to a flat excise tax on alcohol.

Since then,

the retail industry has evolved into:
monopolistic competition with its inherent excess capacity and high costs. The government has lost effective control of the liquor industry which will likely continue to evolve into an oligopolistic market structure as chain stores get greater control. Against the trends in other [provinces], liquor consumption has increased (with its potential risks of increasing social ills), wholesale costs have risen, and retail prices have increased. Although retail prices have increased, the tax revenues to government have fallen significantly.

Is this what we want for Virginia? A big jump in alcohol consumption and a deep drop in revenue from alcohol sales?