Even if the national anthem of the US – the ‘Star-Spangled Banner’ – was written to the tune of a drinking song, the United States has its own restrictive alcohol laws. In 1920, Prohibition was introduced. Yet, Prohibition-era laws that govern alcohol sales, production and distribution continue to shape wine culture and commerce.
Before Prohibition, the U.S. had several viable grape-growing regions that included New Jersey, Pennsylvania, Ohio, Missouri and Mississippi, among others. Winemakers in these areas grew Vitis labrusca varietals like Niagara, hybrids like Catawba, and various Vitis vinifera varieties reflective of the European communities that settled in these regions. Today, most domestic wine is made from European-born Vitis vinifera, with production concentrated in California, New York, Washington and Oregon. According to The National association of American Wineries, in the top 10 wine-producing states, these areas account for 98% of domestic wine production, with 85% coming out of California alone.
Among those states that did not choose to maintain prohibition, some chose to become alcohol monopoly states. That is, to impose government monopolies over the sale of alcohol beverages. The other non-prohibition states chose to follow the traditional American practice of free enterprise regulated by laws. Over one-fourth of the U.S. Population lives in monopoly jurisdictions. Customer choice is limited in monopoly stores, which have no competition.
Virginia was the first state to create a monopoly system after Repeal. Local-option laws allowed voters to decide if their communities would be ‘wet’ or ‘dry.’ The Anti-Saloon League, under the guidance of the Reverend James Cannon, Jr., campaigned long and hard against the evils of drink. Then, a statewide prohibition law closed all the saloons in Virginia in 1916. However, it allowed every household to import from outside the state one gallon of wine per month. National prohibition followed. Compulsory abstinence proved unpopular and impossible to enforce. In 1933 Virginians voted to ratify the Twenty-first Amendment repealing prohibition and to devise a plan for liquor control. Governor John Garland Pollard, a loyal prohibitionist, warned “Now that prohibition is doomed, the supreme question of the hour is this. What new weapon shall we adopt to combat this age-old evil?”
Tax and Regulatory Agencies
Prior to Prohibition, “as much as 40% of domestic revenue for the federal government came from the tax on alcohol,” said Daniel Okrent, author of Last Call: The Rise & Fall of Prohibition. To generate that revenue during Prohibition, the government enforced the 16th Amendment, which created an income tax. Passed in 1913, it was intended to address wealth inequality. The decision to repeal Prohibition was also economically motivated, Okrent says. He says that alcohol provided tax income and job creation in the wake of the 1929 stock market crash.
The government used alcohol to generate income during World War II. According to the website for the Alcohol and Tobacco Tax and Trade Bureau (TTB), taxes on wine and distilled spirits were raised as much as 50% between 1941–1942, and again from 1942–1944.
Some wine professionals link today’s hugely divergent tax rates on still versus sparkling wines to Prohibition, too. Currently, the United States tax code 26 U.S.C. 5041 (b) states that wine with 0.5–14% alcohol by volume (abv) is taxed at $1.07 per gallon. Artificially carbonated wines are taxed at $3.30 per gallon, and sparkling wines are taxed at $3.40 per gallon. “This tax must have been slapped on bubbly just after Prohibition, perhaps to wean rich Americans from the illicit Champagne that had been smuggled from Canada and to get them to buy California wine instead,” writes W. Blake Grey in a blog post titled, “Why Aren’t There More Sparkling Wine Producers? Taxes.” For new U.S. winemakers, these bubbly taxes can be prohibitive.
Distributors: Barriers to entry for smaller wineries
In 1933, when Prohibition was repealed, a three-tier system was created. It required that a third party, like a distributor or importer, stand between alcohol producers and consumers. The intent was to give states greater control over alcohol sales, generate tax revenue and encourage moderation. In practice, this means that, still today, there is always a distributor between alcohol producers to restaurants or retailers. Distributors may partner with importers or directly import their goods. This system is enforced in all states that do not have a state-run control board.
According to the National Alcohol Beverage Control Association, a group that represents state control boards, due to the three-tier system, “tens of billions of tax dollars are provided to federal, state and local governments by manufacturers, wholesalers and retailers in the alcohol industry.”
Unfortunately, some producers say this limits their incomes. Three-tier market creates barriers to entry for smaller wineries. As a result, some small-scale winemakers struggle to distribute bottles beyond their home states. It might not be financially viable for a large distributor to take on a small-batch winery.
Securing an Importer is Far from a Given
The top 30 wine companies represent more than 90% of all domestic wine sold in the US
More than 50% of US wine market supplied by three companies
The top 10 distributors represent 70% of the market
Differing laws by state
The top 10 distributors represent 70% of the market
In 1995, there was 3300 wine distributors. In 2020, there was 935 distributors.
Top 3 Distributors control well over 50% of the market
Total market US$67.3 billion (includes DtC):
Southern Glazer’s (45 states)
RNDC (32 states)
Breakthru Beverage Group (15 states)
Johnson Brothers (23 states)
Empire Merchants (1 state)
Martignetti (5 states)
Allied Beverage (1 state)
Fedway Associates (1 state)
Winebow (20 states)
Horizon Beverage (5 states)
Sources: Shanken’s Impact Newsletter, April 1 & 15, 2020 and bw 166