The Economist calls it America’s weirdest government monopoly. I don’t know about that, but this analysis does seem a bit weird:
Ever since the end of prohibition in 1934, to buy a bottle of Kentucky bourbon in the state of Virginia, you’ve had to go to a government-run ABC (Alcoholic Beverage Control) store. Republican Governor Bob McDonnell is trying to privatise the system, but is running into opposition in the legislature, because the state liquor monopoly is an important source of government revenue. (Just like in Soviet Russia!) The state makes at least $230m a year from the ABC stores, $110m from taxes and $120m in profit. For a sell-off plan to stay revenue-neutral, it would have to sharply raise taxes on alcohol, including a new tax on alcoholic drinks in restaurants and bars. Mr McDonnell says the sell-off of licenses to wholesalers and retailers would net a one-time revenue of $300m to $500m, which could be invested in transportation infrastructure. But legislators don’t think he’s driving a hard enough bargain.
“If you want more milk, you don’t sell the cow,” said [Democratic delegate Albert] Pollard, the great-grandson of the governor who created the ABC system, John Garland Pollard, who served from 1930-34.
“Any business person knows you ought to sell a business for five to seven times the yearly earnings,” Pollard said, meaning the state should be taking in more than $1 billion in franchise fees. “I don’t see that kind of return there.”
Some experts think it’s impossible for the state to make as much from taxes as it does from its sales monopoly, the Washington Post‘s Rosalind Helderman reported last month. Maryland has liquor prices nearly as high as Virginia’s, but made just $25m in excise taxes last year. A study by the Distilled Spirits Council of the United States found liquor taxes in Virginia would have to reach five times the average in privatised states to keep the revenue stream at current levels.
If the state makes $230m a year from the ABC stores — $110m from taxes and $120m in profit — then it should be able to do one of two things:
- It could double the excise tax on liquor. Normally this would drive up the price of liquor and reduce the quantity demanded — and thus tax revenues would not double — but in this case the state is already charging monopoly prices and making monopoly profits. This would simply shift money from state-store profits to state tax revenue — which would leave the state’s finances intact but would leave the about-to-be-privatized liquor stores with low profit potential. They thus would not sell for a high multiple of their current monopoly earnings.
- It could leave taxes as they are and sell off the profitable liquor stores. The liquor stores are currently quite profitable and might sell at a decent multiple of earnings — but they’d really sell at a premium if the state credibly promised to restrict liquor licenses. Then buying a store would mean buying a low-risk stream of cash flows — which would be worth far more than five to seven times earnings.
So, if you’re a politician, you threaten to hike excise taxes, sell state stores to your cronies at depressed prices, wisely come to see that excise taxes are regressive and thus bad, and then decide to restrict liquor store licenses instead, to make sure the scourge of liquor does not run wild — and to drive the value of those newly private liquor stores back up.