Virginia's inner struggle to get off the scotch tax

By Rosalind S. Helderman
Washington Post Staff Writer
Thursday, August 5, 2010

RICHMOND -- For drinkers, a fifth of Jack Daniel's costs about the same wherever they buy it -- about $25 in Virginia and the District, a couple of bucks less in Maryland. But for the governments that regulate that bottle, the difference is as stark as a sip and a chug.

In the District and most of Maryland, just a dollar or two from a fifth of Jack Daniel's goes to government. But in Virginia, where whiskey and every other kind of liquor is sold in state-run stores, more than $13 of the retail price goes to the state.

As Virginia Gov. Robert F. McDonnell (R) prepares to call the legislature into a special session to consider privatizing the state's 76-year monopoly on the sale of hard alcohol, he faces a hard economic fact: The liquor business has been exceptionally profitable for the commonwealth.

Every shot poured and every cocktail downed is another cha-ching for the state, and that translates into hundreds of millions of dollars a year that are used to fund schools, prisons and mental health facilities.

Even after paying all of the expenses involved -- buying millions of cases from distilleries, paying more than 2,680 employees, keeping the lights on and the rent paid at 332 stores -- Virginia's Alcoholic Beverage Control board deposited $248 million in liquor profits, as well as excise and sales taxes, into state coffers during fiscal 2009. And unlike nearly every other facet of government, the liquor business has proved to be essentially recession-proof, taking in $13.7 million more in fiscal 2009 than in 2008.

Regardless of the profits, McDonnell fundamentally believes that running the liquor business ought not to be a government function. He also believes that selling the system's assets and new liquor licenses could bring in a one-time windfall of $300 million to $500 million, which he would use to improve the state's ailing roads. A private system would also mean better selection and more convenient stores for consumers, he contends.

On Wednesday night, McDonnell held the first of a statewide series of town hall meetings in Roanoke, partly to sell the idea.

Legislative challenge

McDonnell and his aides know that to steer a plan through the General Assembly, where one chamber is controlled by Democrats, he will have to convince legislators in both parties that the state will not lose out financially if the system is privatized.

"We're working on a mechanism that would get us as close as possible to the current revenue that ABC generates for the state right now," said Eric Finkbeiner, a senior policy adviser who is leading the governor's privatization effort and plans to unveil a proposal this month.

An examination of the pricing structure for liquor in Virginia, Maryland and the District demonstrates the difficulties involved with coming up with such a plan.

Take, for instance, that bottle of Jack Daniel's, which is the bestseller in Virginia.

Virginia buys the bottle from the distillery in Tennessee for $11.48. The state adds a $1 warehouse processing fee to every 12-bottle case. It also marks up the price by an amount generally set by the ABC governing board with state budget targets in mind: currently 69 percent. Then comes a 20 percent excise tax, one of the nation's highest. After paying the state's standard sales tax, customers plunk down $24.68 for a bottle, whether they live in Lynchburg or suburban Loudoun County.

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