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Why Is Congress So Afraid of Mail Order Wine?

The quest by wine and beer wholesalers to maintain their “middleman” role within the liquor industry is simply bad news. A bill making its way through the House (H.R. 5034) sponsored by Bill Delahunt (D-Mass.)  supports wholesalers' promises to limit consumer choice and disadvantage retailers, wineries, breweries, distilleries, and importers.

The topic is the subject of hearings before the U.S. House Judiciary Committee today. Not surprisingly,  wholesalers hope this legislation will protect the "three-tier system" for distribution of alcohol, which nearly all states impose. The system requires that alcohol producers (wineries, distillers, brewers, and importers) sell only to wholesalers, who in turn market the products to retailers.

It thereby bans any mutually beneficial sales between retailers (wine shops, restaurants, etc) and wineries or other producers that could enhance product selection and save money for consumers.

H.R. 5034 strikes back against market liberalization that the Supreme Court fostered with its ruling in Granholm v. Heald. In that case, the Court ruled that laws in Michigan and New York violated the Constitution’s Commerce Clause. The laws essentially banned shipments from out-of-state wineries to New York and Michigan residents, but allowed the wineries in those states to ship wine. The court held that any such regulations must apply equally to in-state and out-of-state businesses.

Since then, many states have begun allowing direct-to-consumer wine shipping. Richard Mendelson, wine lawyer and author of "From Demon to Darling: A Legal History of Wine in America," notes: “Within two and half years of 'Granholm,' eleven states had leveled up, and none had leveled down completely … Those states had to open their borders to all direct shipping or close them entirely.”

This increased freedom has been a boon to consumers who otherwise would have fewer options. It also helps wineries who have trouble marketing specialty products in a world of increasing competition and consolidation among wholesalers.

But the logic of "Granholm" should also apply to retailers, who are now fighting in federal courts for the right to skip the wholesaler tier. The nation’s largest wine retailer—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.

Wholesalers 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 issue of The American.

Accordingly, wholesalers have been spending millions in PAC donations to members of Congress, pushing them to pass H.R. 5034. The bill would exercise Congress’s constitutional power to regulate commerce by explicitly allowing states to impose regulations 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 is expected to offer today 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.

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. In other words, it might allow discriminatory tax policies or other regulations that would make direct shipping less viable.

Not only is this legislation bad for consumer freedom, it isn’t necessary to “save” the wholesaler business. Wholesalers will not disappear without a mandated three-tier system. In fact, wholesalers do well in places like California and Washington, D.C. where there are no such mandates. Wholesalers exist because they provide a valuable service in getting products to market—but they should have to compete for their place like everyone else.

A key reason the founders drafted the Constitution was to prevent trade impediments between states and maximize individual freedom. Using Congress’s authority under the Commerce Clause to impede commerce simply to serve one-special interest is pure folly.

Angela Logomasini, Ph.D. in American Politics, is a Senior Fellow at the Competitive Enterprise Institute.

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