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To woo more support, McDonnell alters liquor privatization plan

By Rosalind S. Helderman
Washington Post Staff Writer
Thursday, September 30, 2010; 11:01 PM

RICHMOND - Virginia Gov. Robert F. McDonnell offered significant modifications Thursday to his signature plan to privatize the sale of distilled spirits, eliminating a controversial fee on restaurants as he works to build support from wary legislators.

McDonnell (R) wants to close 332 state-owned Alcoholic Beverage Control stores and auction new licenses to sell liquor to 1,000 private retailers, including grocery and convenience stores.

He says that ending the state's 76-year-old monopoly on the sale of hard liquor would generate $458 million that could be used to improve the state's ailing road network without raising taxes.

Since the plan was unveiled Sept. 8, it has been endorsed by a number of industry and interest groups, including a coalition of large retailers, Virginia's wineries, construction industry trade associations and the Fraternal Order of Police.

But he's been less successful with members of the General Assembly, whose support will be necessary to make the plan a reality. Reactions from many legislators in both parties have ranged from scoffing opposition to tepid neutrality.

Changes announced Thursday by Eric Finkbeiner, McDonnell's policy director, could help bolster support from restaurateurs, whose statewide association endorsed the policy in response.

It could also help build support from conservatives who had expressed hesitation about backing a plan with hefty new fees.

But the revision will probably deepen concerns of lawmakers who think privatization will be a bad deal for the state over time. McDonnell's projections show that with the modifications, his plan would result in $47 million less each year to fund such state services as schools and police.

The revisions highlight a central conundrum McDonnell faces as he attempts to sell his complex proposal: Changes he might make to satisfy the concerns of some lawmakers are likely to cost the support of others.

"It's like a Rubik's Cube," said Del. David B. Albo (R-Fairfax). "When you turn one side, you end up fixing that side, but you mess up all the other sides."

McDonnell signaled Thursday that he might call off plans for a November special session to consider the proposal and other recommendations for government reform if he believes legislative opposition to be so strong that the session would be a waste of time.

"We'll do a count here in the near future and see where we are," he said, indicating that he would still like to see the session occur.

Next year, Virginia's ABC system is projected to pull in $324 million in liquor taxes and profits as well as from beer and wine taxes that are already sold by private retailers.

McDonnell's original plan would have imposed a $17.50 per gallon excise tax on spirits, a 1 percent tax on annual sales by wholesalers and a 2.5 percent fee on restaurants that choose to buy their liquor directly from wholesalers. That plan would have resulted in a loss of annual revenue of only $20.5 million.

On Thursday, he eliminated the wholesaler tax and the restaurant fee from the proposal, more than doubling the yearly revenue loss.

Finkbeiner told members of McDonnell's hand-picked Government Reform Commission that other changes the group will recommend to the legislature, including adopting a four-day work week for some state employees, will "more than make up" for the lost revenue.

He also tried to refocus the debate on the philosophical underpinnings of the governor's proposal: That selling liquor is not an appropriate function for government.

To that end, McDonnell's office released a statement of support from former governor George Allen (R) on Thursday suggesting that those who fret about a dip in liquor tax collections are too wedded to big government.

"Worrying about how much revenue the government can keep from liquor sales is a distraction from the larger cost savings of privatization," Allen said.

But state Sen. Mary Margaret Whipple (Arlington), who chairs the Democratic caucus that holds a majority in the Senate, said the change moved the proposal in the wrong direction.

"A basic precept of this whole endeavor was that the general fund would not be affected," she said. "Now that's not happening."

Her concerns are likely to be shared by some Republicans, who also fear that the plan will cost the state money over time, a persuasive argument in an economically difficult time when liquor profits have been one of the state's few budgetary bright spots.

"So far, the numbers just don't work," said Albo, who sits on a key legislative subcommittee that will be the first in the House of Delegates to consider the proposal.

Del. Thomas D. Gear (R-Hampton), who chairs the subcommittee, said it was "ludicrous" that McDonnell had revised his plan only to shrink annual revenue.

"I would not support anything that cuts the general fund $40 million, whether they find other savings or not," he said.

Similar problems abound for McDonnell.

Some legislators have said they are uncomfortable with tripling the number of outlets that sell liquor. But if McDonnell lowers the number of new licenses, the state would get less money to plow into roads from auctioning the licenses, undermining a major selling point.

Some legislators have complained that liquor prices could rise in the new system. But if McDonnell guaranteed that prices would drop, he'd upset others who think prices should be high to discourage alcohol abuse.

"There's so many moving parts to it that it is one of the more complicated things I've done," McDonnell said in a radio interview Thursday.

Finkbeiner proposed two other changes to the privatization plan Thursday, both designed to help mom-and-pop stores compete with big-box and grocery chains.

McDonnell had said that retail licenses should be divided into three categories, with 600 reserved for big stores, 150 for free-standing package stores, and 250 for drug and convenience stores.

He now proposes a fourth category, taking 100 of the 250 licenses reserved for drug and convenience stores and earmarking them for very small stores owned by companies that employ no more than 50 people in Virginia. He also suggested letting small stores finance their bids for licenses over several years.

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