Background

In August of this year, Governor Bob McDonnell began a promotional tour advocating legislation to sell Virginia's liquor stores to private owners, according to Wikipedia.com.    A subgroup whose primary goal was to analyze privatizing the distilled spirits business was formed out of the Governor’s reorganization task force. 

Currently, the state of Virginia is in the distilled spirits business that is purchased from the Virginia Alcohol Beverage Control (VABC) which has a monopoly on the industry.  The VABC does not pay federal or state taxes as it stands.

Under Governor McDonnell’s proposal, the current number of distilled spirit businesses would increase from 336 to 1,000, and licenses to operate these new stores would be auctioned.  No entity can purchase more than 10 percent of the licenses.  The State would raise a projected one-time amount of $500 million from this auction.

Percent v. Per Unit Excise Tax

Robert Cook's (Ph.D., emeritus) latest assignment was to calculate the arithmetic behind the proposed plan to privatize distilled spirits.

“All of the numbers [I calculated] came from the Administration and I took those numbers and made some additional calculations based on what they said,” Cook explained.

In the fiscal year 2010 (this past June), approximately $120 million in profits were generated by the VABC.  Those profits go to the State’s general fund.

“[I]f the Governor decides to ask the State to get out of the [liquor] business….the Governor must come up with a plan that will generate $120 million,” Cook said.

“Currently, in the fiscal year 2010 consumers in the state of Virginia bought 9 million gallons of distilled spirits.  VABC buys distilled spirits from suppliers, brings them to a warehouse, and then they add a case cost of $1 to the price they bought it for, mark it up 71 percent and then apply 20 percent excise tax to it.  Then they put it in the VABC and sell it. If we privatize, we will sell 10 million gallons; we’ll get 300,000 more gallons just by natural growth in the market place,” Cook said of the proposal. That leaves 700,000 additional gallons that still need to be sold for the next fiscal year. 

According to Cook, Governor McDonnell says that Virginia will get the additional gallons from the District of Columbia and Maryland.

“People now are buying products in DC and Maryland and bringing it into Virginia… it’s much less expensive to purchase liquor in those areas,” Cook explained.

The State will also collect corporate income taxes from the people who sell distilled spirits.  Cook said, “The Governor says we’ll get about $60 million in corporate income taxes.  Secretary Ric Brown said we’re going to collect more sales taxes, collecting about $14 million more.”

Even with all of this, it still leaves the State’s balance sheet short $80 million. 

Instead of taxing business owners (as was previously proposed), the legislation dictates a wholesale fee of one percent, which would account for an additional $20 million.  Still, the State would be short of its $120 million mark.

Cook found out that on a gallon of distilled spirits on average, consumers would pay five dollars more in excise taxes. The overall numbers came out to be about a $16 increase in taxes per gallon. “Prices rose, everybody agrees,” Cook said. This complicates the rationale that 700,000 gallons will come from DC and Maryland residents, because liquor in Virginia would be expensive. 

Going from percent tax to per unit tax in this manner is regressive, meaning, people with lower income will pay a higher tax rate.  “With $17.50 per gallon computed tax rates, tax rates will be highest in those communities that are the poorest,” said Cook.

Revenue Associated with the Legislation

The second set of calculations that Cook computed dealt with how revenue will grow.  Under the current tax rate of 20 percent per gallon of liquor, on a $100 gallon of liquor a consumer pays $20.  In one year, that same gallon of liquor rises with inflation and will cost $110 and be taxed $22.  When prices are up, more taxes are collected.

When excise taxes are $17.50 per gallon, it does not make any difference what the price changes to be with inflation.  Thus, even when you sell more gallons of liquor the price of the liquor will not go up like it does in a percent tax model. 

“We’re all working with the same numbers.  The Governor does not refute this; it’s just the nature of changing current practice,” he said.

Cook has also worked on mathematic projects for the Virginia Thoroughbred Industry and retail gasoline industry, to name a few.