Washington, DC, USA. While running for governor of Virginia, Bob McDonnell promised he would raise money by handing over the state-run liquor stores to private interests. Once elected, the pledge made its way into his state of the state address.

“As I travelled this great commonwealth over the last year, I didn’t run into anybody who thought selling Jack Daniels whiskey or Grey Goose vodka was a core function of government,” he told lawmakers on January 18th.

The basic idea had traction.

With legislatures thirsty for revenue, getting states out of the booze business has its appeal. Advocates say states could generate millions by auctioning off licenses to sell alcohol. Breaking up state monopolies will also encourage more stores to open, bringing with them higher sales and income tax revenues, advocates argue.

“When states look at it, what they find is a system that returns a good revenue, protects public health and meets consumer needs,” says Steve Schmidt, vice president at the National Alcohol Control Boards Association.

But barely a few weeks later, many of those proposals have died quietly. In Virginia and Mississippi, they were withdrawn by their sponsors. In Washington and Vermont, they are bottled up in committee.

How could these heavily-touted revenue streams dry up so suddenly?

The answer varies by state. But a combination of labor and business opposition, concerns over possible higher alcoholism rates and uncertainty over anticipated financial benefits seems to be driving the bills’ demise.

After the repeal of Prohibition in 1933, 18 state governments chose to remain in control of their states’ alcohol sales. Over time, some of them sold off their wholesale or retail operations or contracted out the warehousing of liquor, while still controlling liquor licenses within their boundaries.

Legislation to sell off alcohol licenses is not uncommon when purse-strings are tight. But states have been slow to adopt changes. The last state to sell off its liquor stores was West Virginia in 1991, although Maine privatized the wholesale distribution system in 2004. The state had already sold off its retail liquor stores in the early 1970’s.

Last month, a Mississippi House bill to get the state out of the wholesale wine business failed to get even a vote in the Ways and Means Committee. The bill’s sponsor, Rep. Percy Watson, chairs the committee but decided to abandon his proposal when he realized its odds were slim.

“There was more opposition than support for the bill,” says Watson, a Democrat. “Those people who are actually out there who own various package stores in the state, they were opposed to it.”

Mississippi allows private businesses to license with the state for retail sales of alcohol but state officials control the wholesale side. That means the state buys alcohol then resells it to private companies. Had Watson’s bill passed, stores would have had to deal with private wholesalers.

In Virginia, Republican Sen. Mark Obenshain offered a privatization bill that would have sold off state liquor stores. In February, he withdrew it saying it would be rolled into a more comprehensive package of government reform ideas expected later this year. Virginia faces a $4 billion deficit for the next biennium. Fellow Republican McDonnell has predicted that privatizing state liquor stores would generate $500 million.

In Washington, supporters blamed labor unions for driving opposition to the proposals. Employees at state-run liquor stores there are state employees, as are the workers in the Seattle warehouse that distributes alcohol to stores throughout the state.

“Government jobs are very important to the legislature,” says Sen. Tim Sheldon. “I’m a Democrat, but my party wants to stay away from privatization.”

Sheldon has introduced bills to close state-run liquor stores and turn the business over to the private sector for 13 years. This year, the fiscal crisis gave him hope that he could finally get rid of the state’s monopoly in alcohol sales.

Another Democratic state senator, Sen. Rodney Tom, introduced a similar privatization measure this year. His proposal went nowhere too.

“It’s a sad statement in that it shows that we have a very difficult time making actual reforms or reductions in the scope of government,” he says. “We shouldn’t be in the retail business. We don’t sell shoes, we don’t sell clothing and we shouldn’t sell alcohol.”

In a January report, Washington State Auditor Brian Sonntag found that the state could raise up to $350 million more over five years if it auctioned off retail store licenses and privatized the distribution center. Under the current system, Washington expects to raise $2.36 billion over five years from the sale of alcohol. The state also has the highest per-gallon tax rate in the country.

William Kerr is skeptical. Kerr, a senior scientist for the Alcohol Research Group, a public health think tank, says the 18 control states raise more on a per-gallon basis than their counterparts. In a report for the National Alcohol Beverage Control Boards Association, Kerr found control states receive $53.07 per gallon while the others get $15.47.

“These control systems bring in a lot of money and that money comes in every year forever into the future,” he says.

Any state that is considering a private model should proceed with caution, says Lynn Walding, administrator of the Iowa Alcoholic Beverages Division. Iowa turned over retail sales to the private sector in 1987 but maintained control of the wholesale side. The state also tried hiring a contractor to run its warehouse but later found it was more cost-effective to let state employees run it, Walding says.

“I think the danger in these types of times is for the states to look for short-term solutions and in the process sell off the goose that lays the golden egg,” he says. “You may fix the short-term problem and create a long-term issue.”

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