Tennessee whiskey, Tennessee Fire

Unless you don’t care at all about whiskey, you’ve probably heard by now about the debate in Tennessee. In brief: Last year the state legislature passed a law officially restricting use of the term “Tennessee whiskey” only to products that meet all the requirements of bourbon and undergo charcoal mellowing. This is the traditional definition of Tennessee whiskey and the law was backed by Jack Daniel’s, the brand owned by Brown-Forman.

On the other side is a new effort to relax the law, such as by allowing distillers to skip charcoal mellowing or age their whiskey in used oak barrels. This effort is pushed by Diageo, owner of the George Dickel brand of Tennessee whiskey, which also complies with the traditional definition.

The debate has divided whiskey enthusiasts and libertarians, two groups with substantial overlap on a Venn diagram. Purists like Chuck Cowdery come down in favor of Daniel’s and against Dickel. My libertarian-leaning friend Doug Winship does too, though with a few more caveats. Elizabeth Nolan Brown at Reason notes that the existing law is a wee bit protectionist.

What’s a libertarian whiskey lover to think? I’m a bit conflicted myself. Below is my attempt at working it out, seen through the lens of a much easier case: bourbon.

Unless one holds that the position that there should be no legally defined standards of identity at all, one is probably OK with the standards for bourbon. (Basically, it has to be at made from at least 51% corn, aged in charred new oak barrels, and distilled and aged within certain ranges of proof.) Whether or not these were ideal standards at the time of passage, it would be a tough case to make that they should be changed now. Any distiller lobbying to do so would rightly be seen as trying to water down established standards.

With that in mind, here are five things I think the bourbon standard of identity has going for it:

1. Clearly defined processes within a well-established tradition among multiple producers.

2. Market recognition of the designation.

3. Long-standing law.

4. Broad geographic application (bourbon can me made anywhere in the US, not just Kentucky).

5. Doesn’t restrict competition from other distillers making other kinds of whiskey (they must simply refrain from using the word “bourbon”).

Now let’s compare this to Tennessee whiskey. Historically, this product is identical to bourbon in all but one essential aspect, the use of the Lincoln County process. This is the filtration of unaged spirit through charcoal, a step that mellows the finished whiskey.

Taking the five points above, how does a “Tennessee whiskey” designation compare to that of bourbon?

1. Clearly defined tradition among multiple producers: Tennessee whiskey definitely has the tradition part down. So much so, in fact, that despite my obsession with liquor laws, it’s easy for me to forget that it wasn’t legally defined until last year. Charcoal mellowing is deeply and historically entwined with Tennessee whiskey. The multiple producers part is not as solid. Until recently, there was only Jack Daniel’s and George Dickel (thank you, Prohibition). Now there is also Collier and McKeel and Prichard’s, the latter of which doesn’t use the process. Score: Daniel’s 1, Dickel 0.

2. Market recognition: This one’s more of a judgement call, but my impression is that consumer association of Tennessee whiskey is very strongly associated with Jack Daniel’s, and by extension with the processes used to make it. Moderately informed whiskey drinkers can tell you about the mellowing process that makes it unique. Score: Daniel’s 2, Dickel 0.

3. Long-standing law: There is no federal standard of identity for Tennessee whiskey. The Tennessee law went into effect less than a year ago. However NAFTA defines Tennessee whiskey as a bourbon produced in Tennessee, which does get at the requirement of using new barrels, but omits the charcoal mellowing. There’s a conservative case for not changing established law without good reason, but it’s weak here. I’m calling this a draw. Score: Daniel’s 2, Dickel 0.

4. Broad geographic application: Bourbon can be made anywhere in the United States. Tennessee whiskey, obviously, can only be made in Tennessee. This presents problems. What do you call charcoal-mellowed bourbon made in another state? What do you call a whiskey made in Tennessee that isn’t mellowed or doesn’t use new oak barrels? It would be nice if there was some other word for traditional Tennessee whiskey that didn’t involve a place name. Instead, non-traditional producers will have to use a work around like “whiskey distilled in Tennessee” (and is that really any less confusing for consumers?). Score: Daniel’s 2, Dickel 1.

5. Doesn’t restrict competition: Bourbon regulations apply equally to everyone. The Tennessee law doesn’t. It protects the three producers who follow the traditional recipe. It also protects Prichard’s, which doesn’t use the mellowing step, but was grandfathered in and is allowed to call its product Tennessee whiskey anyway. Any newer producers making a product otherwise identical to Prichard’s have to call theirs something else. This is a legal mess. Score: Daniel’s 2, Dickel 2.

So the final score is a tie. I’m not saying that’s a definitive measure or that all of these considerations should be weighted equally, but after giving this some thought my reluctant conclusion is that I just don’t care that much. There’s a good case to be made that Tennessee whiskey and its associated processes have a long, well-established tradition worthy of legal protection (at least as worthy as many other standards of identity). There’s also a pretty good case that legal protection is unnecessary and that the existing, extremely young law is too muddled to be worth defending. Keep it in place and Jack Daniel’s will continue to be the best-selling Tennessee whiskey by a mile. Repeal and it and Jack Daniel’s will also continue to be the best-selling Tennessee whiskey by a mile.

The upshot is that unless you’re invested in Brown-Forman, Diageo, or another Tennessee producer, this law isn’t going to affect you. On the merits, I lean ever so slightly to keeping the law as is. But if it’s repealed, I’ll be fine with that too.

There are, however, a couple thoughts to take away from this. One is that regardless of how this plays out, other states should not follow suit. As the boom in small distilleries continues there is going to be a temptation in other states to impose new legal standards on their own products. I’ve already heard talk from Oregon distillers about the possibility of creating a standard of identity for “Oregon whiskey.” Given the huge diversity of distillers here — we’re at more than 60 now — I can’t imagine a definition that will work for everyone and reflect established traditions, of which there really aren’t any. Trying to define one would be putting the cart before the horse.

As a bartender and spirits writer, I can deal with a special designation for Tennessee whiskey. But if I find myself having to remember 50 different state designations, regret for this sort of thing is going to set in very quickly. If I wanted to memorize a bunch of arcane place-related trivia I would have become a sommelier. I’d much rather see what individual creative distillers come up with, regardless of where they’re located.

Secondly, neither company strikes me as particularly sincere in their efforts to sway consumers, legislators, and the press. It’s hard to believe that Diageo executives are truly losing sleep over the plight of small Tennessee distillers whose creative impulses are being stifled. They’ve already taken plenty of heat for that stance and I won’t pile on here.

But how about Jack Daniel’s? They are pitching their brand as the stalwart defender of the Tennessee whiskey tradition. From their press release:

“When consumers around the world see ‘Tennessee Whiskey,’ they expect it is a premium product representing a world-class standard and utmost quality,” said Jack Daniel’s Master Distiller Jeff Arnett. “What we have here is nothing more than an effort to allow manufacturers to deviate from that standard, produce a product that’s inferior to bourbon and label it ‘Tennessee Whiskey’ while undermining the process we’ve worked for nearly 150 years to protect.” [...]

“Using quality grains, quality water, quality barrels and other natural ingredients has been the backbone of Tennessee Whiskey and, frankly, the bourbon industry for decades. Why in the world would we want to change that now by inserting artificial ingredients into our processes? And why in Tennessee would we willingly give the bourbon industry the upper hand in quality by cheapening the process we use to make our whiskey,” Arnett said.

And that’s all well and good, but I just looked online and there are six different varieties of Jack Daniel’s barbecue sauce, two steak sauces, and four different EZ Marinaders. EZ what now?

If you like marinating, you’ll love Jack Daniel‘s® EZ Marinader®, the country’s first ready-to-use liquid marinade in a flavor-sealed bag. In three EZ steps and without any mess, you are ready to cook! All the flavor with none of the fuss.

But it’s made with genuine Tennessee whiskey, right?

The product contains no alcohol. We use Jack Daniel’s® Tennessee Whiskey flavoring, which keeps the bold, hearty flavor associated with Jack Daniel’s®.

OK then. Jack Daniel’s also makes a honey liqueur. And this arrived in my mailbox this weekend:

This, to be fair, isn’t labeled Tennessee whiskey. It’s a “finely crafted cinnamon liqueur blended with Jack Daniel’s Tennessee whiskey.” Which is fine. I don’t begrudge anyone the right to make liqueurs with their spirits or to make money, the latter of which is pretty clearly the motive here. Cinnamon whiskey liqueur has become immensely popular and the company wants to get in on that. And though I don’t make a habit of drinking the stuff and haven’t done a side-by-side tasting, I can honestly say that Jack Daniel’s Tennessee Fire is better than the others I’ve tried in the category.

The problem is that Jack Daniel’s case for legally defining Tennessee whiskey is that its brand has worked hard for decades to build that standard and establish it with consumers around the world. To a large extent, they’re right. But they’re also willing to slap that brand onto everything from EZ Marinader® to cinnamon whiskey liqueur. And if you can tell me with a straight face that small distillers ageing whiskey in used bourbon barrels are a bigger threat to the pure image of Tennessee whiskey than these heavily marketed items, then the first shot of Tennessee Fire® is on me.

Say “Grrr…” to new growler regulations

Avid beer drinkers are familiar with the “growler,” a big jug used for transporting beer from a tap to one’s home. Filled and sealed properly, they keep beer fresh and carbonated for short-term consumption. (With caveats!) They’re great for when you want to bring home a beer that’s only available on tap or want to entertain guests. Living in Portland, one of the best beer cities in the world, I’ve taken advantage of this convenience many times.

In recent years, wineries have also begun selling their wine in kegs. In some situations — properly equipped restaurants, for example — this can more cost-effective and less wasteful than dealing with bottles. And, naturally, some places with wine on tap have also begun filling growlers. Oregon and Texas have both legalized wine growler sales in various venues and Washington is following suit. Here in Oregon, licensed wineries, restaurants, bars, and retailers are all free to fill growlers with wine.

Last week, however, the Tax and Trade Bureau weighed in on the practice. First the good news: selling wine in growlers is legal under federal law. Although states had gone ahead with wine growler fills, this was apparently ambiguous. It’s good to have it clarified.

Then there’s the bad news: Selling wine in growlers is going to involve a lot more red tape than selling beer. Under federal regulations, filling a growler with beer is considered filling a large glass and doesn’t impose additional burdens. (State laws, of course, may vary.) The TTB’s new ruling [pdf] clarifies that it’s not going to be so simple for wine. Specifically, the agency has determined that filling growlers with wine for off-premise consumption is considered bottling or packing for tax purposes, and that any person engaging in the activity must first qualify as a bottling house of taxpaid wine.

This means that before they can sell wine in growlers, businesses will have to apply to and receive permission from the TTB. And once qualified as a taxpaid wine bottling house, additional regulations will come into effect for wine growlers that don’t arise with beer:

1. Proprietors will have to “keep records of taxpaid wine received, bottled or packed, and removed.”

2. Proprietors will be responsible for measuring customers’ containers and ensuring accurate fill level and alcohol content.

3. Proprietors will have to label each container with “the name and address of the premises where bottled or packed; the brand name [...]; the alcohol content; the kind of wine and the net contents of the container.” They will also be required to remove or cover any preexisting labels on containers that don’t accurately describe the new contents.

It’s not clear to me yet exactly how burdensome these regulations are going to be, but the decision does seem to put the kibosh on dreams of making wine growler fills as ubiquitous and easy as they are for beer. With more restaurants and urban wineries offering wine on tap, growler fills were poised to be a new and convenient option. Here in Portland, for example, the forthcoming Coopers Hall announced plans to open with forty different wines on tap for on-premise consumption or take-away.

Assuming they stick with the plan, they’ll have to comply with these new regulations. I’m guessing that large retailers like Whole Foods will also find it worthwhile to qualify. But depending on how much of a hassle it is to do this, I expect many other restaurants with wine on tap may not bother.

The TTB notes that the Internal Revenue Code has different provisions for wine and beer and that this is the justification for the differential treatment with regard to growlers. Absent a change in the law, their hands may be tied. But from a policy perspective, it will be disappointing if this turns out to be an effective obstacle to the further adoption of wine kegs and reusable containers.

[Hat tip to Cole Danehower on Twitter, a great source for northwest wine news. Photo used under Creative Commons license courtesy of Kaitlyn Tierney.]

New at Reason

After a long absence (my previous article was in 2008!), I’m back in the pages of one of my favorite publications today. Over at Reason I take a look at the FDA’s latest actions against tobacco, explain why they accomplish nothing for public health, and spell out what they imply for the future of cigars and e-cigarettes.

The article also updates the case of Hestia Tobacco, whose regulatory tribulations I profiled at The Atlantic one year ago. Unfortunately, they are no closer to coming to market than they were before. See that article for a more in-depth explanation of the laws that allow the FDA to keep new tobacco products in regulatory limbo.

Finally, be sure to check in at Michael Siegel’s blog, where he has been tearing apart the FDA’s action this week from a slightly different perspective.

Nicotine and regulatory capture

horsebrass 021

The FDA is expected to announce very soon new regulations governing chewing tobacco, cigars, and likely electronic cigarettes. If you’ve followed my writing on this, you know I don’t think this bodes well for the quality side of the tobacco market. The law giving the agency authority over tobacco products was brokered by an alliance of Philip Morris and anti-smoking groups, and the new head of the FDA’s tobacco division, Mitch Zeller, came to the job straight from consulting for GlaxoSmithKline on nicotine replacement therapies. The agency’s record so far has been distinguished much more by its anti-competitive effects than by any actual achievement improving public health.

The Boston Globe recently interviewed Zeller to get some indication of where the agency may be headed. As expected, it appears likely that Zeller will pursue mandating the removal of nearly all nicotine from cigarettes:

1. Create a non-addictive cigarette. We have the authority given to us by Congress to reduce nicotine in cigarettes down to nearly zero,” Zeller said. Since nicotine is the addictive chemical in cigarettes, teens who start smoking products that are almost nicotine-free could, in theory, never get hooked in the first place. Researchers now have access to 9 million cigarettes with varying amounts of nicotine to start testing whether products with lower amounts will lead to less addiction among new smokers. But don’t expect an ultra-low-nicotine product for at least a few years, Zeller added, since the studies are just beginning.

A few notes on this:

1) This would obviously be good news for Zeller’s former client in the pharmaceutical industry. Removal of nicotine from cigarettes would leave smokers craving nicotine and many of them would likely turn to patches, gums, and the like. Zeller indicates in the same interview that the agency should perhaps remove warning labels from nicotine replacement therapies that discourage consumers from using them long-term, noting that using these products for life is healthier than smoking.

Even if this is good policy, Zeller’s previous job casts doubt on the FDA’s ability to consider the issue impartially. As many warned at the time of his appointment, his role as lead regulator of tobacco creates a blatant conflict of interest at the agency.

2) Mandated removal of nicotine could be good news for makers of electronic cigarettes, which now include the Big Tobacco companies. But it’s not clear that the FDA will turn a favorable eye to those, either. If the agency’s performance on cigarettes is any indication, e-cigarettes could be caught in a bureaucratic morass that keeps new products off the market with scant scientific justification.

3) Rather than turn to pharmaceuticals or e-cigarettes, at least some smokers will likely switch to cheap, low-quality cigars. Even if the FDA does not initially regulate nicotine levels in cigars, this will provide the impetus to extend the regulation. We’ve seen this before with bans on flavors or changes to tax policy when producers and consumers respond with products that technically qualify as cigars or pipe tobacco. Lawmakers and regulators then attempt to close the “loophole.” Makers of high-quality, traditional cigars would be caught in the crossfire. Whether or not one has any personal interest in cigarettes, if you enjoy an occasional pipe or cigar, then the FDA’s path should have you worried. There may be no way to produce a traditional cigar and comply with the FDA’s demands. This is the road that could lead to the complete destruction of the industry.

For more on how the FDA is getting tobacco regulation wrong, see my articles from the past year:
Who’s killing the electronic cigarette?
How the FDA is keeping new cigarettes off the market
The case against a smoke-free America

GMO labeling: Bad science, good politics

Rally to Support GMO Food Labeling

Over at The Umlaut, I have an essay up today about why mandatory GMO labeling is probably inevitable in the United States, and why that may not be a good thing:

I would be more sympathetic to the cause of GMO labeling if its advocates were not so intent on stigmatizing genetic engineering. Instead, whether for reasons of political expediency, profit, or simply poor judgment, they too often associate with any idea that could bolster their cause, regardless of its scientific merits. Thus we end up with labeling advocates on stage in front of a Whole Foods banner, sowing fear among foodies that exposure to genetically modified crops may cause autism in their children.

Read the whole thing here.

[Photo via CT Senate Democrats.]

The costs of convenience

Abandoned liquor store

Over at Blue Oregon, politico and former pub owner Jesse Cornett argues against liquor privatization, satisfied with the system the way it is:

Bar and tavern owners obtain their liquor almost the same way that anyone in Oregon does: they buy it from a liquor store. It comes with a small discount and can include delivery. When I called in my order, they would ask when I wanted it. Right away? Sure. See you in 30 minutes. At a certain time? Great, we’ll see you then. Run out of a particular product late in their hours? Just pop by. Call on your way and it’s sitting at the counter waiting for you. The system works exceptionally well for Oregon’s pub, bar and restaurant owners. Obtaining liquor was much more convenient than any other product.

Jesse is absolutely right about this. Oregon’s system makes buying liquor simple. To stock the bar I manage, I make one phone call, receive one delivery, and write one check. Easy! In contrast, our wine buyer deals with more than a dozen distributors, taking separate deliveries and writing individual checks for each of them. Pain in the ass!

So yes, the current system is convenient for bar managers. But that’s a terrible reason to keep it in place. It leaves unaddressed, for starters, the cost to the bars. Licensees in Oregon receive only a very small (about 5%) discount off retail. The set price means we don’t spend time bargaining or making deals, or what is known in less regulated states as “doing your damn job.” It also means we pay more for our liquor, making it harder to put quality spirits in our menu cocktails.

The situation is even worse when we want to bring in relatively esoteric spirits from other states. Oregon distilleries benefit from the fact that the state’s monopoly buyer, the OLCC, gives them de facto favorable treatment. The agency is very likely to “list” their products, meaning it will purchase them in bulk and sell them at a lower price. That’s good for local distillers, but not so good for out-of-state producers and the consumers who want to buy their spirits.

As an example, I requested aquavits made in the Midwest as special order items this year. To the OLCC’s credit, they both eventually arrived, but our system renders the prices exceedingly high. The Gamle Ode Dill Aquavit sells in Oregon for $42.45 a bottle. In its home state of Wisconsin, I see it selling for $29.99. The North Shore Aquavit from Illinois? $47.25 in Oregon, $27.99 at Binny’s in Chicago. Shipping costs account for a portion of the difference, but not nearly all of it.

Advantaging local distillers over out-of-state producers shouldn’t be the goal of our distribution laws. It may even be unconstitutional. I have no doubt that skilled local producers will continue to thrive in a private market, just as they do in the privatized beer and wine system. And if there are some producers who cannot survive without the government buying their product in bulk, then maybe they shouldn’t be in the business.

(As a point of contrast, Matt Yglesias notes at Slate today that Washington, DC’s unique openness to importing spirits is part of what has made the city’s bar scene so fantastic. Oregon would do well to follow its lead.)

If Jesse’s argument were correct, there would be no reason not to extend it to restaurants’ other inputs. If a state monopoly on liquor is so great, why not monopolies on beer and wine too? Or on meat and cheese and fish and bread and vegetables? It would be so much easier on the chefs! But no one would take these ideas seriously, because we’ve long since figured out that essentially free markets are the best way to distribute normal goods. Liquor is a mostly normal good – and to the extent that isn’t because of negative externalities, taxes are a far better way of addressing that than inefficient distribution is.

As I never tire of reminding people when it comes to questions of distribution, markets are for consumers. Not only consumers who want local products, but all consumers – even the ones who just want stuff that’s basic and cheap. They would very much like to pick up a bottle for a few dollars less than they pay now and not have to visit a special store to get it. This is why privatization is likely to happen eventually, regardless of how it affects bar managers and local distilleries. Consumers are tired of dealing with a distribution system designed for the 1930s.

And this is where Jesse has a good point: There are going to be winners and losers with privatization, and distributors and large retailers are going to exert their influence to ensure that they get an advantage. This is one reason that Washington state’s privatization measure bars entry to new, smaller stores. If Oregon privatizes via ballot initiative, as appears increasingly likely, then we may end up with similar problems.

The solution to this is acknowledge that getting privatization right is difficult, but doable, and to demand that the legislature write a bill that learns from Washington’s mistakes and puts consumers first. The alternative is to wait for ballot initiatives written by retailers, one of which will inevitably pass.

[Photo by Joseph Novak used under Creative Commons license.]

[Disclosures: In addition to working as a bartender, I consult for several spirits brands and beverage-related products. I have not worked for retailers or distributors.]

Two new cigarettes, now authorized for sale

This week the FDA sent out a press release boasting that its Center for Tobacco Products has finally issued a few decisions on new tobacco products:

For the first time since the Family Smoking Prevention and Tobacco Control Act of 2009 gave the U.S. Food and Drug Administration the authority to regulate tobacco products, the agency has authorized the marketing of two new tobacco products and denied the marketing of four others through the substantial equivalence (SE) pathway. [...]

“Today’s historic announcement marks an important step toward the FDA’s goal of reducing preventable disease and death caused by tobacco,” said FDA Commissioner Margaret A. Hamburg, M.D. “The FDA has unprecedented responsibility to protect public health by not allowing new tobacco products under FDA’s authority to come to market without FDA review.”

To put this into context, when I wrote about the FDA in March the agency had received about 3,500 new product applications. The most reasonable interpretation of the law giving the agency authority over tobacco implies that these reviews should take only 90 days, and certainly no more than 180, yet some of these have languished in a bureaucratic quagmire for years. Issuing only six decisions since 2009, with more than 100 employees at work reviewing them, is hardly an accomplishment worthy of praise.

(If you’re wondering, Hestia Tobacco, the brand I profiled for The Atlantic, remains tied up in the review process with no end in sight.)

It’s also worth emphasizing what these approvals don’t mean. They don’t mean that these two new cigarettes are any safer than products already on the market, only that they don’t raise any new questions of health. In other words, they’re just as lethal — though no more so, we are told to believe — as other cigarettes. New cigarettes like Hestia, which by any sensible standard also raise no new questions of public health, continue to be blocked. It’s difficult to see what good is accomplished by requiring them to go through this lengthy approval process.

And in the midst of this, the future of e-cigarettes remains unclear. As I explained at The Umlaut this week, this product that is indisputably safer than real cigarettes may soon fall under the same heavy-handed regulation that has brought the tobacco industry to a standstill. If that happens, the FDA will have even less to brag about that it does today.

Who’s killing the electronic cigarette?

That’s the topic of my article for The Ümlaut, a new website published by Jerry Brito and Eli Dourado:

Since no one seriously disputes that using e-cigarettes is far safer than habitually inhaling cigarette smoke, allowing them to compete should be a no-brainer. Unfortunately, the law allows the FDA to ban new tobacco products even when they are irrefutably safer than what is already for sale. The agency evaluates applications based not only on the risk to individual users, but also on how they impact smoking cessation and initiation in the population as a whole. If the FDA decides that these effects outweigh the health benefits, it could ban e-cigarettes not because they are dangerous, but rather in spite of their safety.

I feel obliged to make one update to the story. In it I say that the nadir of fear-mongering about e-cigarettes is a doctor from the Mayo Clinic telling journalist Eli Lake that the propylene glycol used in some brands is “similar to antifreeze.” He was recently outdone by a North Carolina doctor who appeared on a local news segment to warn viewers that e-cigarette vapor could be “several thousand degrees” when it hits your lungs. The physics of this would be rather remarkable, as would e-cigarette users’ ability to endure the product if it were true. Michael Siegel has the details and you can watch the segment here.

Don’t be quite like Washington

Today’s Oregonian editorial urges Oregon to make like Washington and privatize liquor:

It’s possible, even probable, that Oregonians will vote on same-sex marriage and marijuana legalization in November 2014, leaving the state one measure short of a following-Washington’s-footsteps trifecta. That spot may — and should — be filled by an initiative privatizing liquor sales. It’s time to drag booze regulation out of the 1930s.

I’m with them on this, but they oversell the case a bit in using Washington as a model. This paragraph in particular seems disingenuous:

Despite the initial price shock, Washingtonians bought more booze than they did the year before. It’s simply far more convenient to buy liquor at Safeway or Costco, as Washingtonians now can, than to make a separate trip to a state liquor store. And consumer choices have increased thanks to the appearance of popular store brands, says Gilliam.

I think it’s fair to say that the appeal of these “popular store brands” lies more in price than in quality. And that’s fine. I’ve said before that we shouldn’t force mainstream consumers to pay higher prices so that booze nerds can buy esoteric spirits. But let’s not pretend there’s no potential trade-off here. The OLCC, to its credit, has become quite good at placing special orders compared to other control states. (Trust me, I used to live in Virginia.) It’s also acted as an incubator for Oregon distillers. This seems at least partly because the agency is not a pure maximizer of profits. Depending on how retail licenses are structured in a successful privatization plan, the state may end up with a less responsive supply side.

The benefit of watching Washington privatize liquor first is that we can learn from its mistakes. So here are two to keep in mind:

Keep taxes reasonable — Washington gave privatization a bad name by packaging it with extremely high taxes, the highest in the nation. As a result, consumers associate privatization with price hikes instead of the lower costs they anticipated.

Allow small retailers — Washington’s initiative generally limits new retail licenses to stores that are at least 10,000 square feet in area. This is a classic “bootleggers and Baptists” dynamic: Temperance-minded voters didn’t want proliferation of liquor licenses, and large grocers didn’t mind restricting competition. This makes it difficult to open boutique stores appealing to consumers that Costco may ignore.

Both of these concerns will be a factor in Oregon’s eventual privatization, which may be broadly popular but will be driven by particular interests. The state will want to retain its revenue. Retailers and distributors will want to shape the law to their benefit. To get this right, voters and legislators will need to keep in mind that privatization is a means to the end of competition, not an end in itself.

Defining “craft” distilleries

Eastern Washington Wheat Fields

Following up on last week’s post about Oregon’s new craft distillery law that potentially violates the Commerce Clause, it’s worth mentioning that Washington may not be doing any better. But first, a couple articles that have come up recently about definitions of “craft” distilleries.

At The Atlantic, Wayne Curtis notes that right now anyone can call themselves a craft distiller, regardless of whether there is much craft to what they do:

It’s a little-known fact, but you don’t actually need a still to call yourself a distiller. The vodka makers I visited had adopted a simple and surprisingly common business model: buy a large quantity of potable alcohol from an industrial supplier (one vendor of neutral spirits offers it “in drum, truckload and railcar quantities”), run it through a tall charcoal filter to remove any trace impurities, cut it with water, decant it into bottles, and then slap on a label touting it as a local craft product worthy of its premium price.

At his excellent whiskey blog, Chuck Cowdery examines the so-called “problem” of non-distiller producers (NDPs), brands that simply repackage spirits under a new label with varying degrees of transparency. His suggested solution is a voluntary certification program:

Hence this modest proposal. The industry has several voluntary trade associations: the Distilled Spirits Council of the U.S. (DISCUS), the Kentucky Distillers’ Association (KDA), the American Distilling Institute (ADI), and the newly formed American Craft Distillers Association (ACDA), to name a few. Several universities, such as Michigan State, have distilling programs. One of those entities, or a new one established for this purpose, could create a certification program. It would establish criteria, and a monitoring and enforcement system, and award certifications to producers who apply and meet the requirements. It would all be voluntary and funded by the participants. Then it is up to the participants to promote and support it, to imbue it with sufficient credibility so that concerned consumers will learn to look for and trust that designation.

I’m glad to see that both articles express some skepticism about using government regulations to address the issue. Washington is one state that has tried, and not surprisingly the state gets it wrong.

Washington law designates a special license for craft distillers. Qualified applicants pay a reduced fee, $100 per year instead of $2000. They’re also allowed to offer on-premise tastings to consumers. But there’s a catch: They cannot produce more than 60,000 gallons of spirits per year, and at least half of the raw materials used in producing their spirits must be grown in Washington. (Details on Washington’s various license types can be downloaded here.)

Like Oregon’s new law, the requirement that craft distillers use locally grown ingredients raises obvious Commerce Clause issues. It’s also an exceedingly narrow definition of craft. It practically* excludes the NDPs and instant vodka brands, which is at least arguably desirable. But it also excludes producers that most people would consider worthy. For makers of gin, aquavit, absinthe, or various liqueurs, the origin of the base spirits is often far less important than the distiller’s skill selecting and incorporating botanicals. And if a distiller wants to specialize in rum, forget about it: The banks of the Puget Sound are not known for their fields of sugar cane. (Washington absinthe distiller Gwydion Stone argues the same case.)

Craft distillers in Washington are making interesting, quality spirits from local ingredients, like Washington wheat whiskey or gins and vodkas distilled from local grains. But I wouldn’t say that they’re more deserving of the craft designation than an Oregon producer making quality gin from neutral grain spirits. How to source one’s base ingredient is a creative decision that should be left to the distiller, not codified into law to promote local agricultural interests.

Fortunately the advantages provided by Washington’s craft distiller license are not overwhelming, allowing distilleries that don’t meet the definition to still go into production. But it demonstrates the perils of letting regulators and legislators define craft instead of leaving it to the rapidly evolving market for spirits.

If the beer market, which has had more time to mature, is any guide in the matter, maintaining a meaningful definition of craft is going to get increasingly difficult anyway. Volume of output can be objectively measured. “Craft” means different things to different people. Beer writer Jeff Alworth offers a different list of brewery classifications that he finds useful, with no place for the c-word: “There’s really no use for the term and I am going on a personal campaign to eliminate it from my own vocabulary.” Legally speaking, at least, that may be the best advice going forward.

*Edit: Added the word “practically” to be more precise. As Gwydion notes, it may be possible to buy NGS or other spirits that comply with the local requirements. I’m not sure how this would be addressed.

[Photo: Field of Washington wheat, by Jimmy Emerson on Flickr, used under Creative Commons license.]

Craft distilleries and the Commerce Clause

A new law in Oregon will allow the state’s distilleries to open additional tasting rooms and retail sales centers:

The bill allows distillers to offer tastings and sell their products at their distillery and five other locations. Current law allows distillers to perform tastings and sell their spirits one other location in addition to the distillery.

Distillers still must purchase their liquor from the Oregon Liquor Control Commission, the same way liquor store owners do now. And distillers must enter into a contract with the OLCC to sell bottles of their craft spirits.

The goal is to help the increasing number of craft distilleries continue to grow, though as it currently stands only two of them (McMenamin’s and Rogue) have enough locations to take advantage of the new opportunities. Spirits produced in Oregon now account for about 12% of the state’s liquor sales. That’s really impressive, and some of the spirits made in Oregon are fantastic. I hope this trend continues.

However this new law might not be the best way to help craft distillers. It may be nice in the short-run, but is it constitutional? I think that it’s vulnerable to legal challenge by out-of-state producers as a violation of the Commerce Clause, following the arguments that allowed wine producers to strike down discriminatory direct shipping laws in Granholm v. Heald. (I have no formal legal training, so take this as a layman’s reading. The case isn’t too complicated.)

Granholm explicitly addressed the balancing of the Twenty-first Amendment, which gives states broad authority to regulate alcohol, and the Commerce Clause, which generally forbids states from discriminating against out-of-state producers.

The Twenty-first Amendment reads in part:

The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

This has been interpreted to allow states great flexibility in deciding how to regulate alcohol, including the power of outright prohibition. The Court’s ruling in Granholm made clear, however, that these regulations must treat in-state and out-of-state producers evenly, not giving undue favor to the former. As Justice Kennedy wrote in his majority opinion:

The mere fact of nonresidence should not foreclose a producer in one State from access to markets in other States. [...] States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses.

The Twenty-first Amendment does not exempt states from this requirement:

The aim of the Twenty-first Amendment was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use. The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time.

In Granholm, the question at issue was whether states could allow their own wineries to ship directly to consumers while denying the privilege to wineries from other states. The Court ruled that they cannot. States can choose whether to ban or to allow direct shipping of wine, but they must treat in- and out-of-state wineries consistently.

The case doesn’t address liquor directly, but it’s easy to extend to the logic. Oregon’s new law allows in-state distilleries to open up to five retail stores, a privilege denied completely to distilleries from anywhere else. The law’s supporters say explicitly that its purpose is to promote local businesses:

“It takes advantage of Oregon agricultural products, it promotes tourism and it promotes small business development,” said Sen. Elizabeth Steiner Hayward, D-Beaverton, who is one of the bill’s sponsors.

The law clearly discriminates in favor of Oregon distilleries. For this to be permissible under the Commerce Clause, the discrimination must be necessary to achieve some other legitimate purpose. In Granholm, the states argued unsuccessfully that their laws were necessary for the collection of taxes and to keep alcohol out of the hands of minors.

It’s difficult to imagine either of these arguments faring any better for Oregon. All of the spirits sold in Oregon, including those in the new tasting rooms, retail at a set price through the Oregon Liquor Control Commission (OLCC). The state has no sales tax. Collection of revenue, then, is not a concern.

As for sales to minors, it would be hard to argue with a straight face that local distilleries are uniquely qualified to sell only to adults.

So if Oregon distilleries can open tasting rooms and retail centers anywhere in the state, why not distilleries from across the river in Washington? Or from Kentucky? Or anywhere else, for that matter? It’s easy to imagine an out-of-state distillery suing for access to Oregon’s market on equal terms,

This hypothetical case may be strengthened by the fact that through its monopoly on liquor distribution, the OLCC can grant de facto preferential treatment to Oregon producers. Though the agency doesn’t explicitly do this, there’s good reason to believe that it has this effect. From a recent article about the state’s craft distillery boom:

OLCC officials stopped short of saying the agency shows a preference for stocking Oregon-made products at its warehouse — but it hasn’t created many obstacles for start-up distilleries.

“We make it easy. They get a listing,” said Brian Flemming, director of retail services for the OLCC.

The makeup of the Court seems favorable to extending the Granholm interpretation. As Garrett Peck notes in his book The Prohibition Hangover, dissent in the case was associated with age, with all of the justices who were alive during Prohibition siding with the states. Dissenters Rehnquist, O’Connor, and Stevens have all since retired. If a new case involving distillers does reach the Court, they may get a sympathetic hearing.

That’s a big “if.” Even if a case is brought, it may never go that far. And lower courts may decide that since Oregon’s law presents a different set of facts, the ruling in Granholm doesn’t apply.

Nonetheless, promoting craft distilleries through laws that discriminate in favor of local producers is a risky strategy that may backfire when and if they are challenged in court. There are other ways to open up the market for craft distillers that would rest on more secure legal footing.

[Photo: Still at Grand Traverse Distillery in Michigan, 2008.]

[Disclosure: I do contract work in the spirits industry, often with brands not based in Oregon.]

Liberating Libations

The other podcast I recorded in DC is now up, “Liberating Libations” on the American Enterprise Institute’s “Banter” podcast. Dan Rothschild, Brandon Arnold, Stu James, and I discuss three-tier distribution, beer purity, homebrewing, and other drink related topics. Listen here.

Cato podcast on FDA tobacco regulation

While in DC this week I recorded a couple podcasts. Here’s the first, with the Cato Institute’s Caleb Brown. In it we cover FDA regulation of cigarettes, e-cigarettes, and cigars.

One minor correction: We were only discussing these inhalable products, so I misspoke when saying that current FDA regulations only cover cigarettes. The agency regulates smokeless tobacco too.

Update 5/30/13: Or if you prefer video…

Culture of Competition at AEI

I’m excited to head back to Washington, DC this month to be on a a panel discussion hosted by Tim Carney as part of the American Enterprise Institute’s Culture of Competition project. The details:

Free beer: Liberating libations from ‘Bootleggers and Baptists’

For centuries, the manufacture and sale of beer, wine, and spirits has been a highly profitable and highly regulated enterprise. And where profit and regulation meet, cronyism and rent-seeking frequently follow.

From moonshiners buying off politicians during the Prohibition era to liquor stores trying to ban supermarkets from selling beer today, regulation has been used to keep start-up brewers, winemakers, and distillers from manufacturing alcohol; to preserve inefficient distribution systems; and to restrict choices available to consumers. Frequently, this regulation has been used for “noble social goals” — hence the famous public choice example of “Bootleggers and Baptists.”

Can markets and consumers win? Join us for a discussion of the history and future of federal and state alcohol regulation and competition, followed by a reception with beer, wine, and spirits.

The event takes place at 5:00 pm on Tuesday, May 21. Drinks will follow. Check the site for all the necessary information.

And since I know a lot people in the industry read this site, I’d love to get your feedback as well. How do existing regulations help or hinder competition? What laws would you most like to see changed? Feel free to leave a comment or send me an email.

Tobacco news roundup

New FDA Center for Tobacco Products director Mitch Zeller tells Bloomberg to expect action from the agency soon and that he seeks to craft a “comprehensive nicotine policy.” What could that mean? Unmentioned in the article are Zeller’s ties to producers of pharmaceutical nicotine replacement products or his interest in reducing nicotine levels in cigarettes to near zero, a proposal he brings up in the most recent issue of Tobacco Control.

My friends the Stogie Guys have a couple recent posts that are worth reading. In the first, they explain how Big Tobacco has become the enemy of small, premium tobacco through its lobbying efforts. In the second, they examine what a new bill requiring online merchants to collect sales taxes may mean for the cigar industry.

Hestia Tobacco, the brand whose struggle to navigate the FDA’s approval process I documented for The Atlantic, is finally in business. Not selling cigarettes, of course, but rather filtered little cigars. Sale of their cigarettes must await greater competence at the agency. If the product interests you, go check them out.

Christine Quinn, a leader in polls to replace Bloomberg as New York City’s next mayor, appears to have embraced Bloomberg’s nannying legacy. She has proposed raising the legal age to purchase cigarettes within the city to 21. As J. D. Tuccille notes at Reason, this would be good news for black market sellers, who already claim more than 60% of the state’s cigarette market.

Tobacco tax skepticism

My latest article for The Atlantic provides four reasons to oppose the new tobacco taxes proposed in the White House budget.

New taxes on pipes and cigars?

According to Bloomberg, President Obama will be proposing new tobacco taxes to fund pre-kindergarten programs:

Obama’s 2014 budget proposal, to be released April 10, would finance a pre-kindergarten program for 4-year-olds with higher taxes on cigarettes and other tobacco products. The president outlined the program in his annual State of the Union speech to Congress. He’s seeking to increase spending in areas such as education while Republican lawmakers are pushing for additional budget cuts as a way to reduce the federal deficit.

White House spokesman Jay Carney declined to elaborate on the proposed tobacco-tax increase. “Wait for specifics,” he told reporters at a briefing yesterday.

Never mind for now that cigarette smokers already suffered a more than doubling of the federal tax in Obama’s first year in office. The “other tobacco products” part of this proposal is reason to worry for those who enjoy pipes and cigars.

The 2009 tobacco tax increases to fund the Children’s Health Insurance Program created some significant disparities among similar products. Pipe tobacco was taxed at a far lower rate than roll-your-own (RYO). Large cigars sometimes get much more favorable treatment than small cigars. As a result, producers and consumers shifted to pipe tobacco instead of RYO and added just enough weight to small cigars to qualify as large. The distorting effects of these taxes were immediate and striking:

These changes are almost entirely a matter of legal classification. Actual consumption patterns haven’t changed in the way the chart suggests. Neither pipes nor premium cigars have enjoyed an explosion of new consumers as a result of these taxes.

Nonetheless, the government wants to fix this disparity. A report from the General Accounting Office, the source of the chart above (PDF), estimates that in the first two years of new taxes these substitution effects may have cost the treasury up to $1.1 billion.

One way to fix the disparity would be to lower taxes on RYO and small cigars, but that’s not going to happen. So don’t be at all surprised if the proposal from the Obama Administration includes tax hikes on pipe tobacco and large cigars, imposing substantial new costs on consumers and retailers.

For more, read Michael Siegel’s take on the tax proposal. And for a longer explanation of how smoking bans, higher taxes, and FDA regulation threaten the premium cigar industry, see my December article in The Atlantic.

Update 4/10/13: Via International Premium Cigar and Pipe Retailers on Facebook, this is apparently the language in the budget proposal:

Increase tobacco taxes and index for inflation

Under current law, cigarettes are taxed at a rate of $50.33 per 1,000 cigarettes. This is equivalent to just under $1.01 per pack, or approximately $22.88 per pound of tobacco. Taxes on other tobacco products range from $0.5033 per pound for chewing tobacco to $24.78 per pound of roll your-own tobacco.

The Administration proposes to increase the tax on cigarettes to $97.65 per 1,000 cigarettes, or about $1.95 per pack, increase all other tobacco taxes by about the same proportion, and index the taxes for inflation after 2014. The Administration also proposes to clarify that roll-your-own tobacco includes any processed tobacco that is removed for delivery to anyone other than a manufacturer of tobacco products or exporter. The rate increases would be effective for articles held for sale or removed after December 31, 2013.

As predicted, all loose tobacco would be treated equally, resulting in a huge tax increase for pipe smokers. Details on cigars are lacking, but it looks they would be hit too.