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McDonnell unveils plan to privatize Va. liquor sales, but skeptics question taxes

By Anita Kumar and Rosalind S. Helderman
Washington Post Staff Writer
Thursday, September 9, 2010; B01

RICHMOND -- As Virginia Gov. Robert F. McDonnell unveiled his signature proposal to privatize the state's 76-year monopoly on the sale of distilled spirits Wednesday, he presented the plan as a fulfillment of a campaign promise to find money for transportation without raising taxes.

But if he wants to win approval for his plan, McDonnell (R) will have do more to convince legislators, including some skeptical members of his own party, that the package of new fees -- including a 2.5 percent tax on restaurants and bars that choose to buy liquor directly from wholesalers instead of retailers -- does not represent tax increases.

McDonnell said his plan, which will provide a one-time windfall of $458 million for transportation and then recurring revenue of $229 million a year, will not result in more annual money for the state than the current government monopoly.

"It's not a tax increase, and people who say that are simply misrepresenting the facts," McDonnell told reporters at a news conference at the state Capitol. "It's obviously a new point of collection. Thirty-two states that already have a private-sector system obviously have to collect taxes and fees at nongovernmental stores because there are no government stores."

The plan also includes a $17.50-per-gallon excise tax -- which would be well above the national average for privatized systems -- and a 1 percent tax on gross receipts, both charged to wholesalers, to help partially replace the $260 million the state would lose in taxes and profit if Virginia privatizes its liquor system.

"There's three things that are called taxes in the plan, but they're going to say it doesn't raise taxes?" said Del. Brenda L. Pogge (R-York), who opposes the plan. "That's going to be a hard sell to the public. We recognize taxes when we see them."

McDonnell's staff unveiled his plan -- one of his notable campaign promises -- Wednesday afternoon at a packed committee meeting of his government reform commission.

If the plan succeeds, Virginia would be the first state since Prohibition to privatize the wholesale, distribution and retail sale of liquor.

McDonnell expects to make a minimum of $458 million upfront that would be deposited in a new "transportation infrastructure bank," available for grants and loans for transportation projects, with priority given to work that would relieve congestion. He also expects to collect $229 million annually to be spent on core services such as education, though some money will be earmarked for substance abuse prevention and 22 new Alcoholic Beverage Control enforcement officers.

He announced that he will allow the number of stores selling liquor to almost triple -- to 1,000 -- although a majority of new licenses would be auctioned to the more than 6,600 stores where Virginians can already buy beer and wine, such as grocery and convenience stores. Currently, the state has 332 stores that sell liquor.

Licenses would be sold to the highest bidders: 600 big-box stores, such as grocery stores and Wal-Mart; 250 convenience stores and drug stores; and 150 package stores.

McDonnell expects Virginia to collect a one-time windfall from a variety of sources after privatization: $33 million from selling off properties; $160 million from wholesale license fees; and a minimum of $265 million from auctioning retail licenses. Businesses would have to renew licenses annually at a cost of $500 to $2,000, depending on the size of the store.

Minimum bids for retail licenses would be based on a formula that takes into account the size of the proposed store and the current profitability of ABC stores in different geographic regions. 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.

At $17.50 a gallon, Virginia's excise tax would exceed both the national average and the tax imposed in neighboring states. In the District and Maryland, wholesalers pay the government $1.50 a gallon, building the tax into the price they charge retailers to buy liquor for their shelves. According to a liquor trade group, states with private liquor markets, on average, impose $5 a gallon in excise taxes on distilled spirits. States that control liquor sales, on average, impose $10.

After spending months in close negotiations with industry officials, McDonnell's staff members think that their proposal sets tax rates at a level at which liquor interests will still profit, even without raising prices for consumers.

McDonnell said the tax on restaurants would be optional because those that choose to continue paying retail prices for liquor -- as they do under the state-run system -- could avoid the levy. He also said that his plan would not short the state's general fund, a leading concern of privatization skeptics in recent months.

Multiple sources, including state Sen. Mary Margaret Whipple (D-Arlington) said they were briefed late Tuesday on an additional 1.5 percent fee that the governor was going to propose for restaurants and retail establishments -- for a 4 percent total on restaurants. However, the final proposal unveiled Wednesday did not include the 1.5 percent fee.

GOP delegates briefed on the plan in a conference call Tuesday night expressed strong concerns about anything that might even look like a tax, according to a source familiar with the call.

"That'll be an almost impossible sell," Del. Robert G. Marshall (R-Prince William) said. "Especially if you're a Republican and you say you don't like taxes. But then you're toying with taxes."

Representatives of the alcohol, retail and restaurant industries who packed the meeting said they are looking over the proposal. But the Virginia Wine Wholesalers Association came out against the plan, in part, because small businesses would not be able to afford the licenses, spokesman Jim Babb said.

The Virginia Privatization Coalition, a consortium of major retailers including Wal-Mart and Costco, called the plan a "responsible and balanced approach" that would bring new convenience for customers. And the Distilled Spirits Council of the United States said that while its members would remain neutral on McDonnell's proposal, they believed there was "a significant opportunity to modernize the system," including by increasing the number of outlets.

Former governor L. Douglas Wilder (D), a strong proponent of privatizing state-run liquor stores and an ally of McDonnell, said the governor faces a tough task in remaking a state system that residents have had 76 years to get used to.

"He's in a difficult situation," Wilder said. "Can it be done? Yes. Will it be done tomorrow? No."

McDonnell's staff proposes a quick transition to a private system. They say licenses could be auctioned in a year and new stores could start to stock their shelves in September 2011.

McDonnell's hand-picked government reform commission is scheduled to vote on the proposal Oct. 4. McDonnell plans to call legislators back for a special session in November to address privatization of liquor stores and other government reform measures.

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