By Anita Kumar and Rosalind S. Helderman
Wednesday, September 8, 2010; B04
RICHMOND -- Gov. Robert F. McDonnell (R) will unveil a proposal Wednesday to impose a 4 percent tax on restaurants and bars as he tries to make up for $260 million the state could lose in taxes and profit if Virginia privatizes its liquor system, according to several sources familiar with the plan.
Included in the 4 percent is a 2.5 percent tax imposed solely on restaurants' annual liquor receipts and a 1.5 percent tax imposed on restaurants and all stores that sell alcohol, including grocery stores. Together, they will bring in about $40 million, sources say.
McDonnell's proposal also includes other fees, including a $17.50-per-gallon excise tax and a 1 percent tax on gross receipts, both charged to wholesalers, said Sen. Mary Margaret Whipple (D-Arlington), who was briefed on the plan late Tuesday.
McDonnell said he expects to make $500 million upfront while retaining about $260 million in taxes and profits to the state each year by doing what no control state has done -- privatizing the wholesale, distribution and retail sale of liquor. About $1.4 million will be spent to hire 22 additional ABC enforcement agents, Whipple and others say.
McDonnell will announce Wednesday that he wants to auction 1,000 licenses to the highest bidders. Licenses will be divided into three categories: big-box stores, such as grocery stores and Wal-Mart (600 licenses), package stores (150 licenses), and convenience stores and drug stores (250 licenses), sources say.
He will base minimum bids for retail stores on profits that ABC stores are earning in localities by each tier. A company would be limited to holding 25 percent of the licenses in any one tier. Some licenses would be set aside for small, women-owned or minority-owned businesses, they say.
McDonnell expects Virginia will collect a one-time windfall from a variety of sources after privatization: $34 million from selling off properties, $160 million from wholesale license fees and several hundred million from auctioning retail licenses.
Industry insiders hope restaurants will conclude that the price benefits of privatization will mean they'd come out ahead, even after paying the new tax, but some restaurant owners have already said they are unconvinced.
"Before we heard any details, the idea of privatization was appealing," said Randy Norton, chairman of Great American Restaurants, about to open its 11th eatery in Northern Virginia. "Our minds only went to what good could come out of it. . . . But if our taxes are going to be raised at all, we're going to fight this thing very hard."
A committee of McDonnell's government reform commission was expected to vote on the proposal Wednesday, but its chairman, Del. G. Glenn Oder (R-Newport News) postponed the vote after members did not get details until hours before the meeting.
The committee is expected to meet again the final week of September. The full government reform commission will vote on the proposal Oct. 4.
McDonnell expects to call legislators back to Richmond in November for a special session on privatization and other cost-cutting ideas.
Wednesday's meeting is expected to include various presentations, including those from Eric Finkbeiner, senior adviser for policy; planning and budget officials on how the fees and taxes will work; and ABC officials and Sean Connaughton, secretary of transportation, on how the upfront money will be spent.
McDonnell has his lobbying work cut out for him, even with fellow Republicans. Del. Thomas D. Gear (R-Hampton) who chairs a key legislative subcommittee that will consider privatization, said he received a call from McDonnell on Monday asking for his support. Gear responded that he remains undecided and was eager to see details of the governor's proposal.
Gear said he fears big-box retailers, like Wal-Mart and Costco, will flood the marketplace and prevent new mom and pop liquor shops from opening. He said he also has concerns about taxing restaurant receipts.
"I'm just not convinced this is the right way to go at the moment. But I might be convinced," he said.