Industry gears up to fight Schwarzenegger wine tax
California wineries and supporters of the wine industry are gearing up for their biggest fight in at least a decade: heading off Gov. Arnold Schwarzenegger’s proposed excise tax hike on wine.
Vintners are speaking out to whoever will listen, predicting the most dire economic consequences if the measure passes.
“It’s like shooting Charles Shaw in the eye,” says Fred Franzia, of his Two Buck Chuck. Franzia worries that the wine’s price could soar by 25 or even 50 cents per bottle.
The tax hike “is insanity,” says Joseph Filippi, of Cucamonga-based Joseph Filippi Winery and Vineyard. His near neighbor, Don Galleano, of Galleano Winery, in Mira Loma, predicts the new law “is going to be detrimental to business” if it passes.
Winery owners, small and large, see doom if they’re forced to raise bottle prices. Greg Popovich, president of Castle Rock Winery, in Sonoma County, says he’s been warned by Beverages, and More!, one of his leading retail accounts, “that if I raise my price by even a penny in this economy I will lose the account.”
The CBS local affiliate in San Luis Obispo quoted Gary Eberle, of Paso Robles’ Eberle Winery, as saying the tax rise “by itself probably could put a few people out of business. There are just so many things aggravating our business right now, I’ve seen a lot of people in serious trouble.”
Robert Koch, president and CEO of The Wine Institute, wrote Schwarzenegger, arguing, “[W]e strenuously object to the singling out of our industry to bear more than our fair share of the burden.” The Governor’s proposal would raise the state’s wine excise tax by 640 percent, sending it from 20 cents a gallon to $1.48 a gallon, and causing the loss of at least 6,756 wine jobs, Koch calculates.
The Wine Institute released this chart representing the effect of the proposed surtax on wine.
The industry is asking consumers to write the Governor opposing the measure. Care2, an online “healthy and green living” website, has launched a petition drive.
The last time California was confronted with the threat of a big sales tax hike, Wine Institute’s then head, John DeLuca, successfully fended it off. It will be interesting to see if Koch can do the same. With California hemorhaging money, Democrats in charge of the State Legislature, and a nominally-GOP Governor who’s been acting more like a Democrat the last few years than a Republican, I’m predicting taxes are going up on wine, regardless of whether anyone likes it or not. When push comes to shove, elected officials will protect the interests of cops, firefighters, prisons and schools over those of wine drinkers. And the truth is, people who buy Two Buck Chuck can shell out another 50 cents.
If it comes to pass that some brands go under it will be due to market over saturation. I’ve heard a lot of talk about an involution and retraction in the wine industry for some time now. In tough economic times, it’s the small fish that have trouble surviving. The tax, in those cases, may be more of the straw that breaks the donkey’s back. On the flip side, it is conceivable that those small “boutique” producers who charge $20 and up for a bottle will be able to split the cost of the higher tax between themselves and their customers.
Good analysis, Arthur. Care to predict how many California wineries might sell, or go out of business, by this summer?
Poor Freddie, our poster boy of persecution. If the world were fair, Franzia would be rotting in jail rather than crying about being taxed $15 million. The unfortunate thing is excise taxes are levied at the producer level. Though the tax can be passed on by the producer, with wholesaler and retailer markups, the impact is exaggerated while the amount of tax is hidden.
You have to give lawmakers their due. A hike in sales tax would have been opposed by voters especially rich ones paying $100 a bottle for wine. A value added tax would have brought opposition from wholesalers as well as consumers. So producers are the safest target. (I love how some politicians claim the money will be spent on alcohol abuse programs.)
While Two Buck Chuck drinkers can afford paying 50 cents more, it would be better if the actual tax of 25 cents would appear as a separate item on the sales receipt so it is clear who is paying for the state’s lack of restraint in spending.
Steve
I certainly did not mean to come off as a Harbinger of doom. But I do think it’s the “boutique”-sized négociants that are most vulnerable. I can think of many of these which may have trouble keeping their heads above water. They are numerous and their brands have not come to prominence yet. I know many of these people personally and so my “analysis” (however banal) is not without knowledge of the human face of those most in peril.
That said, I can’t speculate on the extent of this projected “retraction”. However, I think it’s not summer that should be the milestone. We may be in for a screwy vintage. Although the recent cooling and rain are encouraging, we did have some unseasonably warm days. Additionally, vines go in 3-4 year cycles and 2008’s effects on the vines is yet to be seen. When crush is over, we can better speculate how smaller producers (who are already on the hook for contracts from vineyards they hope will elevate their brands) will fare. That is why I think those following a strictly négociant model but without a prominent brand will probably have more difficulty.
I am not thinking of the Siduris or the Lorings or the Joey Tensleys whose brand equity make them rather firmly entrenched. I think of the smaller start ups who depend on expensive contracts from vineyards to make their 3K-5K cases or less. With little equity beyond must, barrels, finished wine and an AP lease and bottles priced in the $20-$30 and up range to pay for all of that, they may be most exposed to potential losses if the economy continues to spiral down. If their sales slump – as they might when the majority of wine consumers will turn to lower priced wines – they will be sitting on inventory and bills. This is more true for those who may have a following and a wine club but no “clout” and need to distribute the rest of their inventory through other channels.
Of course, I could just be talking out of the wrong end of my digestive tract….
The reality is wineries will bear the burden in any increase in excise tax because the market is not favorable to an increase in wine prices. Most wineries, including some of those famous cult brands you know, are “dealing” this year in order to make sure product gets moved.
Then there’s the rest of us small family wineries who have good pricing to begin with and here’s just an another example of how we will “take it in the shorts” for everyone in California through a reduction in already slim margins.
If this proposed tax goes through, remember it only affects wine sold in California, not throughout the nation. Obviously small wineries that only do business in California will have the biggest impact on their business. Wines that sell for $20.00 or more will have a little affect on their California final shelf price. Saying that I am still opposed to the tax. Schwarzenegger is grasping at straws along with his proposed golf tax because of the inability of the California Legislature’s seeming indifference to pass a budget.
Suck it up people. This is not the first time the state has targeted vintners. Consumers will pay their share if the wines are sound and the winery reputable.
“Good analysis, Arthur. Care to predict how many California wineries might sell, or go out of business, by this summer?”
Just to be fair, Steve, let us also count the new applications for a winery bond during the same arbitrary period. Perhaps good news doesn’t sell any better on the web than it does in the tabloids?
The proposed tax hike on wine will not solve the constantly escalating entitlement mentality of the tax and spend mob currently running amuck in California. Then again, we must be fair so I’ll say that the whole California wine tax idea is just slightly better than outright prohibition.