Spirits Industry Engaging in Special-Interest Manipulation

Utah Attorney General Mark Shurtleff told the Salt Lake City Tribune that a representative of the National Beer Wholesalers Association drafted his recent congressional testimony related to a bill on alcohol regulation. Shurtleff’s admission highlights the key factor driving this debate: special-interest manipulation.

Unfortunately, NBWA’s scripting of witnesses is not surprising. The association has reportedly drafted the bill in question (H.R. 5034), pressed for congressional hearings, and is donating millions in PAC contributions to bill sponsors.

Sponsored by Rep. Bill Delahunt, H.R. 5035 serves wholesalers at the expense of all other players. In particular, it is designed to bolster the “three-tier system” for distribution of alcohol.

This system requires that alcohol producers sell only to wholesalers, who in turn market the products to retailers. Such mandates ensure that all liquor sold must pass through wholesalers — increasing the middle-man’s bottom line.

But recent court cases have begun to challenge this system. In 2005, the Supreme Court ruled in Granholm v. Heald that Michigan and New York State laws violated the Constitution’s Commerce Clause by imposing unjustifiable and discriminatory burden on wineries outside these states. Any such regulations must apply equally to in-state and out-of-state businesses.

Since then, many states had begun to open their markets to direct to consumer wine shipping. As a result, consumers are increasingly enjoying mail-order wine from their favorite wineries around the nation, and small wineries are finding new markets.

While wholesalers might not mind losing sales from these small wineries, they fear the spread of such deregulation. “Direct-to-consumer shipments will never drive a wholesaler out of business, but the deregulation it is fostering will,” noted Craig Wolf of the Wine and Spirit Wholesalers of America in a 2007 of The American.

Indeed, the logic of Granholm should also apply to retailers, which are now fighting in federal courts for the right to skip the wholesaler tier. Costco has gained a partial victory in Washington State and is helping advance a ballot initiative there that would basically break Washington State’s three-tier mandates.

As the nation’s largest wine retailer, Costco is a client wholesalers don’t want to lose. And should Costco succeed in Washington, it will likely take its battle to other states, unleashing opportunities for other large retailers around the nation to skip wholesalers and buy direct.

Accordingly, wholesalers have been spending millions in PAC donations to push H.R. 5034. It would exercise Congress’s constitutional power to regulate commerce by explicitly allowing states to impose regulations that would otherwise violate the Commerce Clause.

As introduced, the bill would have allowed states to pass pretty much any regulation they desired, but a scaled down substitute version that Rep. Delahunt offered at recent hearings remains problematic. Tom Wark of the Specialty Wine Retailers Association points out that this draft opens the door to a host of directly discriminatory state regulations focused on retailers, which could ultimately limit consumers’ online buying options from online retailers.

But consumers who buy direct from wineries or breweries should remain concerned. In addition to curbing freedoms for retailers, the new draft could also bolster state laws that indirectly discriminate against producers.

At the end of the day, wholesalers are not going to disappear even in a fully open market. They compete and thrive in places like California and Washington D.C. that do not have three-tier mandates.

Unfortunately, this bill is likely to be reintroduced in the next Congress, if it is not passed this year during a lame-duck session. But lawmakers should remember that a key reason the founders drafted the Constitution was to prevent trade impediments between states and maximize individual freedom. They never intended that Congress would use its authority under the Commerce Clause to impede commerce simply to serve one special interest.