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States’ Wrongs

Friday, October 7, 2011

Prohibition may be long gone, but the overregulation of the adult beverage industry at the state level remains.

Ken Burns’s new PBS documentary “Prohibition” had me flabbergasted all over again that this country could have banned alcohol at all, let alone for 13 years (the five-and-a-half-hour series premier finished Tuesday but will be rerun through next week, and is online too). It’s hard to imagine government being so intrusive and overbearing today. Or is it?

Prohibition is a useful example of government overreach and failure, and of unintended consequences—it led to organized crime, widespread disregard of the law, political corruption, and public health problems from bootlegged alcohol (and even from when government-poisoned alcohol found its way into public consumption).

While various reviewers have drawn oversimplified comparisons of the Prohibitionists to the pro-life, anti-drug, and even Tea Party movements, both The Washington Post and New York Times find the message of the Prohibition series is that the Constitution should not be used to limit freedom. “An amendment based on restricting rights (rather than on guaranteeing them, as the others do) was doomed to fail,” says the New York Times. The 18th Amendment, “in the opinion of ‘Prohibition’s’ many historians and cultural critics, [is] the only time the Constitution was used as a way to limit freedom instead of promote it,” seconds the Washington Post. The documentary series’s “lone and oft-repeated take-away” is that “Americans don’t like being told what to do,” it adds.

The notion that the Constitution has at no other time limited freedom is a bit of a stretch. Consider the Sixteenth Amendment, allowing the government to tax personal income (certainly a curb on freedom).

Oh, for the days when government was so limited we could fund it mostly by drinking!

As the PBS series points out, it was the Sixteenth Amendment, ratified in 1913, that paved the way for ratification in 1919 of the Eighteenth Amendment, banning “the manufacture, sale, or transportation of intoxicating liquors.” Indeed, “The Anti-Saloon League had helped bring [the Sixteenth Amendment] about, shrewdly allying itself with progressives and populists who favored the redistribution of wealth,” according to the documentary.

Until the Sixteenth Amendment, the federal government was too reliant on alcohol taxes to ban alcohol. In the 1860s, one third of the federal budget came from taxing alcohol; later, such taxes comprised 70 percent of federal internal revenues, according to Burns’s film. Oh, for the days when government was so limited we could fund it mostly by drinking!

Prohibition was repealed by the 21st Amendment—politicians at the time argued that the government needed the tax money, among other reasons. But while the federal government retreated from the regulatory arena, individual states assumed new authority to regulate alcoholic beverages. Today, those state regulations do little to prevent alcohol abuse; they are far better at frustrating enterprise, filling state coffers, and rewarding state bureaucrats.

I know this from experience, as I manage (full disclosure and full-on self-promotion!) my family’s New Zealand-based wine business, called Ten Sisters. I have personally handled the registration of our wine in ten different states.

To give you a sense of the mess of regulations requires getting into some detail. The first barrier we faced as a foreign wine producer was the months-long wait for a federal license to import alcohol (we preferred not to pay the large fee for another, already licensed importer to do it). We needed an importer before we could apply to get our wine label approved. This step requires meeting a vast array of very complex, interlocking requirements (you’d never know from just looking at a wine label)—and of course, more waiting.

Once the label is approved, individual states then take their turns rubberstamping the federal approval. Even when a producer already has federal approval of the label and product, individual states require permits before wine can be sold there.

State websites often don’t provide clear enough information to be able to complete required paperwork without personal assistance. This often necessitates a phone call in an effort to clarify requirements, more waiting for a callback, and, after all that, often a rejected application requiring resubmission.

I once had an important application mailed back to me because it was not printed on legal-sized paper, even though all the required information fit on regular paper and the website detailing necessary protocols didn’t list that requirement.

The notion that the Constitution has at no other time limited freedom is a bit of a stretch.

One state cashed the licensing fee check that went with our application even though it rejected the application the first time; another state simply lost our application; still another had only one part-time, semi-retired worker who understood the state’s regulations enough to process our application; and another wouldn’t prorate an application, so we had to pay for an expensive, year-long license just for a month’s use.

Another state required I get a whole new federal license to import to their state, even though seven other states were just fine with the federal license we had.

And it’s not just one-time hassles, either. One state requires me to get new permits every month—the agency issuing the permits gets to charge more money that way.

I'm currently waiting for the licenses to import to two states—both applications were made more than a month ago.

The United States has a “three-tier” distribution system requiring producers to sell to wholesalers, who then sell to retailers and restaurants. The system was designed to prevent breweries from owning their own saloons and encouraging overconsumption, as they did prior to Prohibition. But the system has little practical application today.

The alcohol industry epitomizes how once a government regulation is created, it’s difficult to abolish it because groups that benefit from the regulation develop an entrenched interest.

For example, wholesalers and retailers each mark up their products 20 percent or more. This may be good for them, but it raises prices for consumers.

The three-tier system also creates an opportunity for government taxation at multiple levels. Some states also require producers to commit to only one wholesaler and make it difficult for producers to switch should a wholesaler underperform. I’ve had some wholesalers warn me to avoid other wholesalers who will take on a producer only to keep them from competing with their existing brands.

Producers, such as the nation’s many smaller wineries and breweries, have to navigate this patchwork of state regulations that restricts their direct sales in various states. Consumers pay more due to less choice and competition.

The bureaucrats’ jobs appear to be mostly to justify their own paycheck.

The situation is so bad, several New Zealand wine companies I spoke with were wary of the U.S. market and chose to export to other countries because of the U.S. reputation for regulation. American consumers are worse off without the competition.

It’s difficult to see how most of this regulation does the public any good. The bureaucrats’ jobs appear to be mostly to justify their own paycheck.

In fact, the New York Times reported earlier this month that cash-strapped states have recently been increasing taxes on alcohol to make up for budget shortfalls:

Since the recession started in earnest in 2008, dozens of states and cities have tinkered with laws that regulate alcohol sales as a way to build up their budgets … Because there is not a good substitute for alcohol, state officials are banking on the fact that people will simply pay more or drink cheaper brands.

“These are kind of antitax times, so it’s tough to raise any kind of tax, but this is one they might have more success with,” said Mark Stehr, an associate professor of economics at Drexel University in Philadelphia who has studied the effects of taxes and other regulations on cigarettes and alcohol.

“Legislators can say it’s to protect health and reduce drunk driving, and that’s what can draw support, but the real motivation is revenue,” he said.

The nation’s states and local governments take in $17 billion year from alcohol taxes.

That’s no small beer.

Eleanor Bartow is managing editor of THE AMERICAN, and manager of Ten Sisters Wine.

FURTHER READING:  Kevin R. Kosar covers the three-tier alcohol system at The Enterprise Blog. Scott Shane discusses "Small Business, Big Regulatory Burden," and Kenneth P. Green and Hiwa Alaghebandian add, "Industry Has Spoken… Will the President Listen?


Image by Rob Green | Bergman Group

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