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Less Filling?

Gov. Bob McDonnell says privatizing ABC stores would generate millions. But some say marked-down booze will undercut state revenue.

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As in the rest of the United States, the story of drinking alcohol in Virginia has as many twists as the lemon garnish in a dry martini.

Prohibition in 1919 brought on speakeasies, stills, corruption and gangsters. Its repeal created the Alcoholic Beverage Control system in which the state controls the wholesale and retail sales of distilled spirits with $6 billion of the sales proceeds going to the state's general fund during the past 75 years.

Gov. Robert F. McDonnell wants to start a new chapter in the booze story by privatizing the state's 330 ABC stores and taking many of the agency's 2,685 workers off the state payroll and benefits system.

Selling off ABC could bring the state from $300 million to $500 million in one lump sum that could be used to ease transportation shortfalls, McDonnell says. It also would help achieve his goal of limiting government. McDonnell hopes to generate $179 million or so a year in licensing fees.

Key state Democrats such as Senate Finance Committee Chairman Charles J. Colgan and Senate Majority Leader Richard L. Saslaw are dead set against the idea, calling it “terrible” and “horrible.” One of Saslaw's complaints is that the one-time sale of ABC stores would net, at most, $150 million, which far less than McDonnell's estimate and would be peanuts considering that the state's transportation needs exceed $20 billion.

Questions abound: But what would privatizing liquor sales really do? What model could be used as a template? Will the state continue to get revenue from liquor sales? Will tipplers get a break on prices?

The problem is that no one knows because McDonnell, despite almost six months in office, has provided no details on how privatizing ABC would work, how much revenue would actually be generated, how much revenue a new excise tax on liquor might bring and whether privatizing really means more or less variety in stores and cheaper prices.

“You don't know the model so how much you generate is a guess,” says Robert Grey, a lawyer at Hunton & Williams who was ABC board chairman from 1983 to 1985.

The ABC system, created after Prohibition ended in 1933, is still used in some form in 18 states, yet there are various degrees of privatization. The rest of the states have private wholesale and retail although there's some form of federal and state oversight in all liquor sales and to some extent in beer and wine sales.

Grey notes that comparing how stores in noncontrolled states operate with controlled states is like comparing apples and oranges. “Take Maryland,” Grey says. “It has been a noncontrolled state for a long time. It may offer cheaper liquor prices but the state gets considerably less revenue from its stores.”

One example that McDonnell may have in mind is Michigan and its Gov. John Engler, a fellow Republican who won election in 1990 after campaigning on limiting and streamlining government and selling off its ABC stores. Privatization started in 1997 with state liquor-control employees cut from 800 to 164. “Downsizing has eliminated expenses such as employee medical benefits, workers compensation and other ancillary costs when the government is involved,” according to a 1998 report by the Michigan Department of Consumer and Industry Services.

Wholesale and retail distribution was turned over to private concerns; retailers were allowed to sell limited quantities of product directly to restaurants and bars; and a backlog of liquor violations was eliminated, the report says. The study, however, doesn't say how much revenue the state gained or lost, and a Michigan Liquor Control Agency spokeswoman didn't know.

In Virginia, McDonnell expects that after the state's 330 or so ABC stores are sold, the number of stores eventually will grow to about 800 to meet demand as the state's population grows. While that's bound to boost some state stake in profits, excise fees and states taxes, it's still impossible to predict any outcome because McDonnell hasn't presented any clear model. He's expected to come up with one by late summer.

Another option is for the state to maintain a mixed state-private model with the state controlling alcohol wholesaling while privatizing retail. States such as Alabama have this type of arrangement while New Hampshire and North Carolina retain complete state control, says one man who helps distillers bring new products to various markets, including Virginia's.

“What happens in Virginia really depends on the model,” says the man, who spoke on the condition of anonymity. “If the state privatizes completely, it gives up its yearly income,” he says, expressing doubt that McDonnell will get as much as he expects if he sells off Virginia's ABC stores.

Grey says Ohio is probably the best model for Virginia to follow in terms of keeping healthy and steady revenues annually while adding the benefits of private operators. The Buckeye State has a system of liquor agencies in which retail stores operate privately under license from the state, which continues to control wholesale sales.

The benefits of Ohio's system are that the retail stores can be more responsive to the tastes in their particular neighborhood and market products accordingly. Since the state still controls the wholesale side it has a say in how much alcohol is sold and is guaranteed a certain amount of income, Grey says. Curiously, Ohio liquor stores cannot use credit cards for hard liquor but can for beer and wine.

If Virginia's stores are privatized, will customers get a price break and have a bigger selection? Not necessarily, industry experts say.

As it is, state ABC stores tend to supply a wide variety of products even if a particular brand doesn't sell as well the bestsellers, which include Jack Daniel's Tennessee Whiskey, Grey Goose Vodka and Jim Beam bourbon. An industry official notes that some stores may carry fewer brands rather than carry inventory that doesn't sell. “They'll note what the neighborhood likes and keep it,” adding that stores in metropolitan areas are more likely to carry many products, perhaps larger selections than what ABC stores do now.

Also in question is whether customers will get a break on prices. Virginians pay top dollar for booze. A 1.75-liter bottle of Marker's Mark bourbon, for example, can run about $53 in the Old Dominion. Drive across the Potomac River Bridge on U.S. 301 into southern Maryland and you can find the same bottle for about $44 in one of the garishly painted private liquor stores along the roadside.

Comparing prices in such a way isn't kosher, Grey says, because Maryland is a noncontrolled state. “But you know that the state is getting less per bottle of that Makers Mark,” he says. Therein lies the rub for McDonnell. No matter what model he chooses, the more consumers get a break, the less the state makes in revenue.

Will nearly tripling Virginia's liquor stores create a state of alcoholics? Many experts say no. While some vagrants might be more inclined to buy and drink more cheap booze, most purchases are driven by personal habit and not by price. “If you drink only on weekends,” Grey says, “you'll probably continue to do so, regardless of how much it costs.” S

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