No New Taxes?

Virginia politicians who have promised "no new taxes" are not being candid with us.  They say a general tax increase is a "new" tax, yet hidden taxes are being raised without our input.  While I am using Virginia as an example, the issue is rampant in all 50 states.

Remember the sales tax increases for hotels and restaurants, supposedly meant get extra cash from tourists?  Well, they have crept into localities with little or no tourism.  Sales tax in many localities now adds a quarter to the price of a kids meal at your favorite fast food joint and fifty cents to your daily lunch tab if you eat out.  I would submit that a lot more kids meals and restaurant meals are sold to local folks who don't have time to cook or pack lunches than to tourists.  (Shouldn't locals be able to show a local ID and be exempt from the "tourist" taxes?)

While politicians proclaim publicly they want no new taxes, the budgets show increased taxes and fees and manipulation of dedicated funds on a routine basis.  Semantics?  Is raising the annual registration fee for a small utility trailer from $7.50 to $18.00 a new tax?  It's more money out of the resident's pocket, so like an increase in the income tax, I would submit it is a new tax.

Is taking millions from supposedly dedicated funds to supplant (replace) general funds a new tax?  It does mean the "user fees" placed in the dedicated fund have become "taxes" supporting the general fund instead being used for the original dedicated purpose.  It also means the original dedicated purpose of the funds goes undone or is done to a lesser extent that expected.  To add insult to injury, the user fees on dedicated funds are being increased, then raided to supplant general funds.  How is that not a new tax?

A good example here in Virginia is the Salt Water Fishing License.  Sales of licenses generate over 2 million dollars per year.  These funds are supposed to be used to enhance recreational fishing opportunities, research related to recreational fisheries, and other user centric purposes.  The only general fund use specified in the law is "enforcing the provisions" of the license laws. Since enforcing the license only entails looking at decals on the side of  a boat as the officer cruises by or asking to see a fishing license while checking fish numbers, sizes, and species for legality; it is not real expensive.  It is more an additional checklist item than an enforcement activity requiring dedicated staff and equipment like it takes to catch poachers and criminal conspirators who catch and sell fish illegally and under report catches to evade quota restrictions.  Yet the state budget manipulators have reallocated $800k of the fund for "enforcement", basically to avoid layoffs in the face of dwindling general funds.  (To the credit of the state, a large portion of the 2009 allocation was slated to be restored to the fund due to fuel and other operational savings.)  However, the point is the fund was deliberately manipulated to supplant general funds.  A license fee increase is slated for 2011 which will  provide as much as another million dollars to raid. 

Previously, the state has also used the recreational fund as a source of money to fund research required by regional and federal fisheries regulations.  That sounds good, except the fish being monitored are also caught by commercial fishermen, and in greater numbers.  Yet there is no corresponding commercial contribution to the costs.  Another zinger:  anglers pay federal excise tax on fishing tackle and that money is apportioned to the states based upon the number of recreational fishermen in the state.  The state is required to pay a match in order to get the federal funds.  What does Virginia do?  They take almost 50% of the the match from the recreational fund and the rest is "deducted" from research grants to VIMS and ODU, the primary recipients of the federal grant money (and the recreational match.)  So the anglers pay the excise tax on the tackle, then pay the state an additional amount to get the grant money.  And the anglers never see the grant money for any purpose they approved.  This is big money --- over 2.6 million dollars a year and a partial match of over $320K is paid by the recreational anglers.  See the details at http://www.mrc.state.va.us/vsrfdf/pdf/0608-03App_C.pdf.  The federal law says the money must be spent in certain ways, including access improvement, artificial reefs and other "angler friendly" uses.  A table showing the required allocation is found at http://www.asafishing.org/government/wallop_breaux.html  Virginia uses all the money from salt water anglers for ongoing fisheries research, callously ignoring that the research benefits commercial fisheries, too. 

Before you get the impression that I am against commercial fisheries, let me emphasize that I am not.  Most of us, myself included, want seafood in markets and restaurants, and it would not be there without commercial fisheries.  So I am 100% OK with commercial fishing when it is managed sustainably.  What I am ranting about is the unfair burden placed on the recreational sector to support research which benefits commercial fishing, too.  The state has chosen to subsidize commercial fishermen in several ways  The main subsidies, apart from the funding of this required research, is that their equipment, boats and vehicles are exempt from property tax; and, they are not required to have business licenses.  As a businessman, I am envious of those perks!  If the general assembly wants to subsidize the research required for commercial fisheries, they should use general funds, not money taken from recreational fishermen which was originally earmarked for uses exclusively beneficial to the recreational sector.

I may have digressed a bit.  However, the license fund example illustrates the effrontery of our political leadership in telling us no new taxes while manipulating the tax and fee structure in ways that are not readily apparent to the general public.

In Virginia, the Budget Bill essentially can override any other law.  That is how the money from dedicated funds can be shuffled in defiance of the spirit and intent of the original legislation.  A state constitutional amendment to prevent such manipulation would be appropriate.  In that way, the original legislation would have to be revisited before the funds could be taken to supplant general funds.  This would add some transparency to the proposed diversions. 

As far as fee increases, most are reasonable and are in line with inflation.  Even so, they are new taxes, largely excluded from the scrutiny that a general income or sales tax increase would generate.

Rather than manipulate funding like this behind the scenes and with little or no public input, why can't the politicians just be honest about the needs and take the issue to the public in the form of a general income tax increase?  I would rather see a highly visible 1% increase in the income tax rate than to have to pay it with increased fees or to have dedicated funds diverted from their intended purposes.  With a general tax increase proposal, we would find out if the people are willing to fund the services, and if not, the state should curtail them.

Privatization of Virginia's State Owned Liquor Stores

This post is not about the morality or public safety issues related to privatization of liquor sales. It is simply a discussion of the financial framework for evaluating the idea.

Virginia currently owns and controls the liquor distribution and retail package stores in the state.  That means all restaurant and bar owners serving liquor have to buy it from the state as do the citizens.  Sales in 2009 from the state’s 332 stores were over $665 million.  Profits were 17%, or $111 million and tax revenues of $109 million were generated (about $3 for every liter sold).  Projections for 2010 are somewhat higher, forecasting $120 million in profit.  It is not clear whether the $109 million in taxes includes sales tax or is just the liquor excise tax.

Governor Bob McDonnell has proposed that the state get out of the liquor business, citing four scenarios to consider:

1.  Sell all stores to one buyer;  
2.  Allow private companies to operate the stores as agents of the state;
3.  Allow all 3000 presently licensed beer and wine outlets;
4.  Auction of a limited number of licenses.

My opinion is that all these ideas have serious drawbacks.  One buyer means another monopoly and continuing high prices, encouraging Northern Virginians and those who travel to buy their booze in less expensive locals.  (Example:  1.5 liters of my favorite whiskey is $54 in Virginia, I can find it for at least 20% less elsewhere.)  Agency operation means the state is still in the business, just using proxies.  Plus, I doubt the sale of the businesses would bring as good a price.  Issuing liquor licenses to every drug store, convenience store and grocery store currently selling beer and wine for off premises consumption just sounds like overkill.  Most states that have privatized liquor sales require liquor stores to stand alone.  Auctioning off a limited number of licenses does not sell the current stores and inventory, nor does it get the state out of the 332 leases it is obligated to pay for store and warehouse rental.  There is also the matter of limited licensing creating a government supplied windfall.  A Florida retail liquor license that costs a few hundred dollars annually from the state sells for over $70,000 on the resale market because of limited entry.

In these tough economic times, the legislature is understandably concerned about losing the income from this state monopoly.  Discussion of the subject invariably includes the tax revenue, but the state can and will collect that regardless of who does the selling.  So the only relevant revenue to consider is the profit.  That is somewhat complicated by what costs are included in the current operations that will still be required to license and regulate the 3000 beer and wine retailers and the distributors that supply them and the restaurants.   Then whatever is required to license and regulate the liquor package stores and wholesalers must be considered.  These figures are not readily available, so I am going to assume that the licensing fees and taxes will take care of those costs with no gain or loss from the present structure. The chance of a bureaucracy really shrinking is always small.

Now we are left with the problem of replacing $111 (or 120) million dollars in the state budget representing the liquor store profits.  If the state businesses are sold according to typical business valuations (and there is no reason they shouldn’t be), they will bring 3-10 times cash flow, plus assets and inventory.  The cash flow in this case is just the profit since there is no interest, depreciation, tax, or owner compensation to add back.  So that is $360 million to $1.2 billion plus inventory, trucks, cash registers, shelving and other leasehold improvements.  I’m going to estimate the leasehold improvements at an average of $12,000 per store which is conservative.  I estimate the stock on the shelves represents 2.5 months sales, or 20% of $665 million.  That is $133 million at retail or about $70 million at cost.  To recap:

        Value of cash flow            $360-1200 million
        Value of inventory            $  70 million
        Value of improvements   $    4 million

I believe some of the high volume stores would sell for 8-10 times cash flow and the smaller ones 3-4 times cash flow.  My assumption is that the average would work out to about 6 times cash flow, or $720 million.   So the state could realize a one time cash injection of over $700 million, or 6 years of the foregone cash flow at today's level of profitability.

However, the state should look at the $720 million as a return of capital and a return on investment for the business it has built.   That means the legislature still needs to be convinced there is over $100 million a year somewhere in the equation, at least beginning in the year after the sale.  Where could that money come from?  I see several sources that can be considered.

1.  If the state doubled the tax on a liter of liquor, that would raise another $110 million or so; however, it would lessen the benefits of competitive pricing.
2.  Competitive pricing may prevent Virginians from shopping across state lines, increasing overall revenue and the state’s liquor excise and sales tax revenue.
3.  Competitive pricing may result in higher sales because consumers buy more expensive brands because they are priced lower.
4.  The state could realize a couple of million in increased license revenue and more tax revenue by licensing more than 332 stores.  

Florida has a store for every 8,500 residents, Maryland has one  per 7,300 residents, and  Virginia has one for every 23,000 residents.  These numbers suggest Virginia could support about 1000 stores ---- one for every 7,700 residents.

5.  The private owners will have to pay state (and federal) income taxes on what they earn.

I believe a combination of all these revenue opportunities will provide the best approach.  A preliminary calculation follows; however, I am keeping an open mind because there are so many things I don’t know about the current financial structure of the state’s liquor business.  

All the figures relate to liquor taxes, sales taxes, income taxes and license fees.  Due to competitive pricing, gross sales may fall slightly.  While this will affect sales taxes, license fees and liquor taxes are not impacted.  I believe any loss in sales tax on liquor will be more than offset by additional sales of snack foods, non-liquor items like wine bottle openers, gift baskets, and other merchandise not currently sold by the state stores.  

    1.  Decreased out of state shopping (add 5% in revenue)               $   7.35   million
    2.  Competitive pricing up-sell and volume increases (10%)              14.70   million
    3.  Increased license revenue from 700 stores at $2500 per                1.75    million
    4.  ABC manager licenses (avg. 4 per establishment at $250)            1.00    million
    5.  Increased volume due to wider distribution (25%)                          36.75    million
    6.  Business income taxes (4% of $120 million)                                     4.80    million

                                             Total from business changes                      $ 66.35   million

As you can see, it would be hard to project over $100 million in revenue without making some pretty unlikely sales assumptions or adding almost $2 to the per liter alcohol tax.  If that much tax is added, it would tend to block the effects generated from more competitive pricing, making the goal harder yet to meet.  Based upon this preliminary analysis, I won't hold my breath waiting for privatization.

Inagural Post: The Introduction

The Pride Report is a journalistic blog. I am Bob Pride, the journalist, and the topics posted are of interest to me and, hopefully, many others. I found in recent years that I spend a lot of time writing and responding to emails on controversial or interesting topics, often in a role of setting the facts straight. A soapbox with a broader audience appealed to me because I could share the information, ideas and opinions with a far larger audience.

This blog is USA centric. I may touch on other parts of the globe, but my main focus will be the US and the Mid-Atlantic region, especially Virginia. I will research my facts and not deliberately post incorrect information. I will clearly separate my opinions from the facts so there will be no illusion about my stance or spin on a given topic.

I will occasionally be crude or irreverent, although that is not my general nature. If I offend some people and please others, I am probably striking the right balance.

My intent is to post regularly, but life will certainly interfere at times.  Topics will include politics, tax reform, illegal aliens, salt water fisheries management, and human events; but, as the lawyers say, not necessarily limited to just those.

About me. Born in Virginia, I have also lived in PA, MD, TX, GA, FL, and NJ. I have visited all the states except Alaska, New Mexico, Arizona, the Dakotas, Wyoming and Montana for business or pleasure. I am an entrepreneur. I've started 4 businesses and haven't finished yet. I have also consulted to many start-ups and hundreds of established companies, governments and non-profit organizations. I've worked for a Fortune 50 manufacturer, a national consulting firm, a billion dollar media company and a defense contractor. My expertise is business strategy and the application of technology to strategic business processes. I am also comfortable with accounting and finance --- I have an MBA from the Darden School and CPA certificates from Maryland and Virginia.

I have a lot of interests and, like most of the men in my family, can easily be distracted by anything interesting to me. My brother says "shiny things" distract us, although he and I both know that "shiny" really means "new", "not routine" or "not what I'm doing right now".  However, I can focus on a single goal and concentrate for hours when I am truly interested and engaged.  So I suppose I don't really have ADD, I'm just a person with a lot of interests.

I have a lovely wife, Pat, who has been by my side for more years than she likes me to say. We have 1 living grown sons and three grandsons. We lost a son to vascular disease in 2009, and a second to drug addiction in 2010.  We were blessed with a new grandson in 2009 and a great granddaughter in 2010. Yin and yang, I guess.

My home is in Poquoson, a little community on the Chesapeake Bay in Southeastern Virginia; but I have traveled all over the US. I also have traveled internationally, but not often. My body does not tolerate long flights well. I'm over 30 and under 65, so I am old enough to be sensible and young enough to be far from senile. So, I take 100% responsibility for my postings and the opinions contained therein.

Well, enough about me. I don't want this blog to be about me. I want it to be about the controversies and issues of our time. If I can just get a few hundred, a few thousand, or a few hundred thousand Americans wanting to learn more about the topics I post, I will be delighted and proud of my work.