Richmond, Va. -- By pulling the cork on the state's 76-year-old liquor monopoly, Gov. Bob McDonnell says it'll be easier for Virginians to buy their booze.
But greater convenience in the form of more stores would not guarantee what cost-conscious drinkers thirst for: lower prices.
"For the most part, the customer experience, as it relates to prices, will not change," said Eric Finkbeiner, the McDonnell aide shepherding the privatization initiative, which the governor envisions as providing a one-time windfall for transportation of $300 million to $500 million.
"Overall, it's going to be more about choice and convenience."
In the budget year that ended June 30, profits and taxes from liquor sales produced for Virginia $231 million on gross sales of $675 million.
For skeptical legislators who support their pet programs with a reliable stream of cash from the government's liquor network, McDonnell must provide a guarantee that a change to private sales would prove as lucrative as the state-run system, if not more so.
"I don't think that it's a slam-dunk that it can," said Del. M. Kirkland Cox of Colonial Heights, the ranking Republican on the House Appropriations Committee.
Beyond that, McDonnell aims to preserve distilled spirits as a cash cow by assuming that wider availability potentially translates to more robust sales, and, by extension, heftier tax revenues.
McDonnell says the quick fix for roads and rail from privatization would be partly accomplished through the auction of liquor licenses to selected wholesalers and retailers.
The Republican administration acknowledges that this means Virginia would have to maintain its excise tax of 20 percent on liquor, which ultimately is absorbed by consumers. It equates to $20.13 per gallon, according to the Tax Foundation, a nonpartisan Washington-based research group, putting the state third in the nation to two others with monopolies on spirits, Washington and Oregon.
Also, Virginia would have to take steps to recover the markup, typically 69 percent, that it now imposes on liquor sales at the counter, ensuring a profit for the government -- most recently $120 million, according to the Virginia Department of Alcoholic Beverage Control. A possible solution: require wholesalers to pay the state the equivalent of the markup.
Finkbeiner likens this proposed arrangement to the so-called rack tax on gasoline. Virginia imposes that tax on the wholesale price of fuel, but it is typically passed along at the pump to motorists.
Lobbyists for potential liquor vendors acknowledge that such an approach would not leave much flexibility for lowering prices.
"If the commonwealth is going to continue to receive its revenue, it's going to impact the price," said Theodore F. "Trey" Adams III, representing Country Vintner Wine Co., a wholesaler based in Ashland.
But Adams said the private sector would be able to deliver that product at a lower cost than the state, which spent $121 million on store and other expenses in 2009.
"To distribute liquor, I don't need to invest in brand-new business," Adams said.
. . .
Recession is forcing cash-strapped governments with liquor franchises to consider liquidating what once seemed the equivalent of the family silver -- a treasure to be protected for all time.
Washington voters decide on privatization in a November referendum. New Hampshire is considering selling its stores. Ontario, Canada, too, may turn over its package stores to private business.
Cox, among the General Assembly's most reliable conservatives, said privatization "fits in nicely in the reform movement" that he and McDonnell have long advocated. But reconciling that with the state's dependence on alcohol profits requires that Virginia "smartly privatize," said Cox, who, nonetheless, worries about the consequences of a "liquor store on every corner."
Currently, ABC operates 334 stores -- an average of one per 23,260 people and eight stores per 1,000 square miles. The agency acknowledges that those figures are less than half the density of states with private stores -- a reflection of Virginia's below-average per-capita consumption of distilled spirits.
"Random surveys of Virginia citizens by Virginia Commonwealth University indicate citizens overwhelmingly support Virginia's current liquor distribution model and do not wish to see liquor available in grocery, drug and convenience stores," states ABC's strategic plan for the current, two-year spending cycle.
For foes of privatization, particularly those in the General Assembly, which would have to approve dismantling Virginia's post-Prohibition alcohol-sales system, change is risky because there is no guarantee it would be more profitable.
Those critics also say that as a source of road and rail funds, it would cover only a sliver of the $7.8 billion in transportation needs over the next six years.
McDonnell's most prominent opponent, Senate Majority Leader Richard L. Saslaw, D-Fairfax, an operator of gasoline stations and convenience stores, also worries that privatization would augur an assault on liquor taxes, with a nascent industry claiming that it can't be competitive unless rates are cut.
"They'll hire all these lobbyists to get rid of it," said Saslaw, who, fellow Democrats suggest, may be using his public resistance to an ABC sell-off to pressure McDonnell to back a broader transportation-financing program that could rely on higher fuel taxes.
McDonnell ran for governor last year, vowing to block new taxes.
. . .
For McDonnell, however, the issue now shaping the state's politics is whether it is appropriate for Virginia, a state with a long free-enterprise tradition, to be a retailer.
"We believe government shouldn't be in the business of alcohol distribution in any rate, but to generate [$300 million] to $500 million for transportation is something I think people ought to embrace," McDonnell told WWBT-12 on Friday from Germany, the last leg of his European trade trip.
"I think we're going to slowly take away the criticism people might have because they haven't looked fully at the proposal."
Virginia and 17 other state liquor monopolies generate far more cash than is produced in the 32 states in which the private sector sells alcoholic beverages.
According to the Distilled Spirits Council of the United States, an industry group that has participated in McDonnell administration talks on a possible privatization model here, control states average nearly twice as much revenue as license jurisdictions.
"It's very difficult to replace that revenue unless you greatly increase the taxes or availability," said James M. Sgueo, president of the National Alcohol Beverage Control Association, who also has conferred with McDonnell aides.
Nearly all of the 300-plus storefronts at which Virginia sells bourbon, scotch, vodka, gin and other spirits are rented. The state owns only 19 stores and the sprawling red-brick distribution warehouse near Richmond's Diamond baseball park.
McDonnell envisions expanding perhaps to 1,000 the number of outlets at which liquor could be purchased. This would include existing retailers, such as grocers and big-box and convenience stores, as well as privately operated liquor stores.
Worried about competition, Virginia's beer and wine industries -- their products are available through 7,800 retailers -- are closely following the privatization debate.
Beer dealers -- they collect better than 50 cents of every dollar Virginians spend on alcoholic beverages -- are politically muscular, with a presence in nearly every corner of the state. Their opposition to privatization could slow, if not doom, McDonnell's initiative. But for now, the industry is taking a wait-and-see approach.
"We want some reliable, credible data," said Dennis P. Gallagher, president of the Virginia Beer Wholesalers Association. "Show us the numbers."
. . .
David Trone, an owner of Total Wine & More, a 12-state chain, wants to sell spirits at his Virginia stores. Trone predicts privatization will promote sales and tax revenue to the state, largely because of competition.
"It will increase as time goes on," Trone said.
Trone said Northern Virginia, the state's richest region, will be crucial because, for years, it has lost business to cut-rate liquor stores in Washington. The Distilled Spirits Council several years ago estimated that Virginia loses 20 percent of possible sales to surrounding states.
Capturing those sales might depend on how, where and to whom distilled-spirits licenses are sold.
Another prize would be wholesale licenses, because the state would no longer distribute liquor.
Both, McDonnell staff members said, could become political decisions, largely left to legislators, who harvest thousands of dollars in donations from the alcoholic-beverage and related industries.
This year alone, they have steered more than $412,000 to state elective officials and candidates, according to the Virginia Public Access Project, an online monitor of money in politics.
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Contact Jeff E. Schapiro at (804) 649-6814 or jschapiro@timesdispatch.com.
Contact Michael Martz at (804) 649-6964 or mmartz@timesdispatch.com.
Staff writer Olympia Meola contributed to this report.
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