By Micah Hanks

In Virginia, Governor Bob McDonnell’s proposition to raise funds for road improvement by privatizing liquor sales has been met with sharp criticism from state lawmakers. In the wake of the controversial measure, some legislators have argued that privatizing the sale of alcoholic beverages will, in the long run, only cost Virginia hundreds of thousands of dollars in annual revenue. Though privatization may afford independent liquor store owners new flexibility in the products they choose to acquire and sell, new regulations paired with the privatization effort may do little to boost the alcohol economy, as well.

McDonnell and his staff, on the other hand, claim that 94 percent of all the revenue being brought in at present will remain. In order to achieve this, an excise tax of $17.50 per gallon has been proposed, which will be levied on the wholesale of distilled spirits to raise what administration officials say will amount to $175.7 million annually. Another alternative will involve a “convenience fee” which retailers can opt to pay, which will constitute 2.5 percent of on-premise sales instead. If retailers opt for the 2.5 percent increase, officials say the resulting annual revenue gains could amount to $19.4 million per year.

The notion of imposing excise taxes, especially in exorbitant amounts, on liquor and beer presents an unusual circumstance which, as history shows us, is seldom preferential to maintaining a healthy wine and spirits industry. Earlier this year, Chris McCollum discussed on this blog a tremendous hike in excise taxes proposed in California, under which taxes on six-packs of beer would rise from 11 cents to $6.08 USD, a 5,527% increase. “With that in place, say hello to $12 six-packs of Yuengling, and a lovely $15 for a six-pack of a good micro-brew,” McCollum wrote of the proposition. Further commenting on small winery operations, McCollum shared the fears of one grape grower in Soledad, California, who had warned that “the most in-demand product on the wine market are mid-range bottles of $7 to $8,” with lingering fears that “raising the price on those hot ticket items by an additional $5.11 will reduce the overall demand and put a tremendous strain on local wineries, eventually leading to job losses.”

Writing for the website Politomatic, I similarly argued against untenable increases in the form of excise taxes on liquor sales:

In spite of the sorts of increased revenue the California State Attorney General’s summary projects under the proposed act, experts warn that this is flawed logic, and in spite of its apparent endurance during trying economic times, alcohol is no more recession-proof than any other product that isn’t a true necessity. Peter Cressy, president of the Distilled Spirits Council of the United States, argues that “recession resilient” is a better term for alcohol’s economic elasticity, which he said in 2009 “is a point (alcohol) industry officials make when cautioning lawmakers about raising taxes.” A word of warning, perhaps, to states like California, as well as Oklahoma, Virginia and Massachusetts; all of which have suggested raising alcohol taxes to achieve budget recoups since last year.

Is Virginia already headed down the road toward levying excessive taxes which, in the long run, may actually harm Virginia’s alcohol industry, while doing little to boost revenue as intended? The economic forecast seems dire; even in spite of the fact that McDonnell’s plan would remove existing excise taxes, the new restrictions placed on wine and spirits vendors could be oppressive. However, is this a reasonable cost to have to pay, with interest in attaining a privatized market for sale of spirits? Arguably, there is good that comes with the bad, considering the wider variety of craft products that may be provided, in addition to a greater degree of control altogether for those who oversee their own liquor operations. Only time will tell, perhaps, what the long term effects would be given such circumstances; hopefully over-taxation would not usurp the potential merits of privatized liquor sales in Virginia.

Image courtesy of Chesapeake Bay Program via Flickr.