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Gov’s excise tax hike on alcohol is needed

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The last time anyone proposed a big tax hike on alcoholic beverages, including wine, was back in the early 1990s. I dont recall all the details, but the industry widely regarded this as an attack by neoprohibitionists (a term that, I believe, Wine Intitute’s then-chairman, John DeLuca, coined), and DeLuca himself led the charge against the “sin tax” hike. He didn’t entirely succeed in eliminating it, but the eventual rise amounted to only a penny for a glass of wine.

I was against a tax on alcohol, especially on wine, at that time, as I believed wine to be a civilizing influence, and things that calm and relax adult humans ought not to be taxed. But here we are, some 17 years later, and once more a serious proposal is on the table to tax wine, beer and spirits. This time, it comes, not from neopros, but from California’s Republican Governor, Arnold Schwarzenegger, who according to what I’ve heard enjoys a little nip of something now and then. Here’s a link you a YouTube that seems to be Arnold in a Japanese drink commercial, and back in his weightlifting days he made no secret of his affection for beer and wine.

That ain’t no girlie-man Chardonnay

Anyway, this time around, I have to reluctantly support the Governor’s proposed tax hike on alcoholic beverages. The particulars, according to Meininger’s Wine Business International, are that the proposed tax increase will amount to about five cents for a glass of wine. If you assume 8 glasses of wine per bottle, that’s a rise of 40 cents per bottle, which doesn’t seem like all that much to me, if it will help bail California out from the enormous fiscal hole we’re in.

Republicans, who never saw a tax they liked, have reacted predictably. Here’s a snippet from former Republican presidential candidate Ron Paul’s website, which contains an official statement by the Sonoma County Republican Party, in which they censor the man they call, without affection, the Governator:

“Governor Arnold Schwarzenegger…has reached across the aisle and found his true niche as just another, run-of-the-mill tax and spend liberal.” The declaration of censorship also says that the proposed excise tax hike “would equate to a tax on wine grape growers of $217 a ton of grapes, more than the average cost per ton for the majority of wine grapes grown in California.” Actually, this isn’t true. According to the 2007 Grape Crush Report, published by the California Dept. of Food and Agriculture, the average price per ton of wine grapes, red and white, last year in California was $565. But, hey, what’s a little exaggeration when you’re making a political point?

Look, nobody wants to see taxes go up just for the hell of it. But anyone who hasn’t been living in a cave knows that California is broke, with all that implies for roads, schools, cops, the environment, fighting fires, hospitals and the rest of the infrastructure and services upon which we depend every day. In my judgment, 40 cents per bottle of wine isn’t too much to pay for keeping our state alive.

  1. I agree 100%.

    It’s 40 cents per bottle and it’s a needed source of tax revenue.

  2. Makes sense to me, too. Those who can afford wine aren’t going to stop buying it because of a low single-digit percent tax increase. Complainers should be happy they don’t live in Brasil, where import duties would triple the cost of that $15 (oops, $15.40) Merlot they might enjoy in Cali.

  3. Hey Steve, I hate to use your comment section to try and contact you, but your e-mail link doesn’t work. http://www.mutineermagazine.com/blog/2008/11/steve-heimoff-arch-nemesis/

    Still awaiting your response…

  4. Jim Lapsley says:

    Steve,

    The “nickle a drink” is a bit misleading. If you go to the state department of Finance and review the proposal, what it really comes to is a $1.28 a gallon increase over the current 20 cents a gallon. Although I agree that this rate probably needs to increase–a 6 fold increase is a lot and at 170 gallons of wine per ton of grapes it does increase winery costs by about $217 a ton.

    Secondly, we need to be clear where the tax will be collected and how it will ripple through the retail chain. Currently, California state excise taxes are paid by the producer or by the importer when the wine enters commerce (i.e. is sold to a wholesaler, retailer, or consumer). Most producers will treat this increased tax as part of their cost of goods and will pass on the tax to their customers, who will also treat the cost as part of their cost of goods. Normally, going through the 3 tier sales system, the FOB price at the winery is doubled by the time it reaches the consumer. So, if the winery simply adds the tax on to its current price, the $1.28 will double and become $2.56 a gallon at retail level–about a 50 cent increase on a bottle of wine. Most wine (70%) retails at below $8 a bottle, so for an $8 bottle of wine, the price increase is about a 6% increase. Consumers (assuming five, 5 oz glasses–your assumption of 8 glasses per bottle is low–if someone offered you a 3.2 oz pour at a restaurant, you’d be pretty upset)) will be paying 10 cents more a glass.

    If wineries raise their price more than the $1.280 a gallon, in order to cover interest costs on the wine, the increase will be greater.

  5. steve christian says:

    Hi Steve,

    A quick review of the differnce between the Mean and the Mode might clear up you thinking on this issue. The Mode is the number that apears most often in a data set (oh say price per ton of grapes) and the Mean is the average of a data set. It is entirely possible and likely that the majority of grapes do sell for less that $217 per ton while the average is much higher.

    By way of illustration consider that 100 tons of grape are sold each year. 51 (the majority)are sold for $200 per ton. 49 are sold at $945 per ton (while below the aveage Napa price) This would mean that the majority of grapes are sold for less that the price of the new tax. It would also give an Average price of $565 per ton.

    One would have to spend 3-4 hours working the numbers of the Crush Report to find the exact numbers, but I think the SCRP’s point is true.
    Another consideration is that the wine business is, at its base a competitive market, they cannot raise prices at will to cover increases in costs, and as such any tax increases are bourne almost entirely by the producer. An increase of $217 per ton decreases the wineries profits by nearly $217 per ton processed Even a small family producer of wine making 5,000 cases a year would feel a severe crunch. Fourty cents per bottle times 12 bottles per case times 5,000 cases comes out to $24,000.00 per year. Quite a hugh price for trying to support a family selling such a wonderful product.

  6. Dr. Horowitz says:

    That’s a sweet pic of Arnold with the tiny glass and lapel pin of something that looks like grapes…

  7. Michael Honig says:

    Steve,
    I wanted to remind you that the proposed $1.28 per gallon increase is at the winery level, so it will double the price to over $.50 per bottle on the retail shelf. Based on a typical restaurant markup, the bottle will increase over $1.00 per bottle. Using the typical 6 once pour or 4 glasses per bottle, the cost will be more like $.25 per glass. The debate about more or less taxes is always diffect and I certainly have a bias. I just wanted to make sure your readers do understand that the true cost is not a “a nickel a drink”.
    Thanks,
    Michael
    Ps

  8. But perhaps California Property taxes need to be changed so that they are fair. Or is it fair that my neighbor, with the same size house and land, pays 1/10th the property taxes that I pay?!

  9. I realize that CA is in a big hole right now…. but why should the wine industry and our customers get hit with a larger share of additional taxes than other industries?

    And in regards to the magnitude of this tax hike… 38% of the current average cost of grapes is still a huge amount.

    In case you didn’t realize, wine is a luxury good… we are already looking at trouble with the current state of the worldwide economy. But an additional tax on top of that pushes wine that much more out of the reach of some of our customers, or it reduces our margins to the point where we just can’t do this anymore.

  10. This post shows the inherent problem with democracy! Folks who don’t have a clue about a law’s effects throwing themselves behind it. Here is my perspective as a small winery owner: If this tax is passed, I will have to pay about $20,000 in the next year in unexpected taxes. If that is the case, I am going to have to let one full-time cellar worker go. Why? Because it’s impossible to raise bottle prices right now, so we will have to eat the cost. So many folks think that wineries are bottomless pits of tax revenue, but the truth is for small wineries, everything, even a ‘nickel a drink’ has an effect. I have heard that the increased revenue will be earmarked for ‘alcohol education programs.’ So I will in effect be laying off an employee to raise money to pay the government to tell people that what I make is bad! What’s wrong with this picture?

  11. I totally agree with Jim Lapsley and Michael Honig here – the “nickel a drink” is a total misnomer. Wineries, especially small ones like us, will just have to pass this 7x higher tax on to wholesalers in other states, who will take the markup on it, and then retailers/restaurateurs will calculate their final price to the consumers ALSO taking a markup on the distributor’s new price. The excise tax gets to perhaps three times its size by the time it hits the consumer.
    Beyond all this, although some tax increase may be called for, 7x the current rate is outrageous and excessive to the extreme. It is also not supportive of an important industry in California. If you go back to the beginnings of the idea for the nickel a drink tax, I think you’ll see that the idea came from the big booze companies to “equalize” alcohol taxes across liquor, wine and beer – at least in their eyes.

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