January 25, 2009 in Business

Proposed California wine tax bump could herald Three Buck Chuck

Los Angeles Times
 

Is this the end of Two Buck Chuck?

A proposal to raise the state tax on wine to a level more than six times as high to help close California’s budget deficit would kill the $1.99 price for Charles Shaw wine, said Fred Franzia, who created the famous label sold by the Trader Joe’s grocery chain.

Charles Shaw is the formal name for the California wines sold since 2002 that are now legendary for the Two Buck Chuck nickname.

The proposal by Gov. Arnold Schwarzenegger would raise the tax on wine from 4 cents for a 750 milliliter bottle to 29.6 cents.

“It’s like shooting Charles Shaw in the eye. The profit margin is already so low we will have to raise the price,” said Franzia, chief executive of Bronco Wine Co., which owns the brand.

The excise tax, a levy on a specific good, often at the producer or supplier level and folded into the retail price, differs from a sales tax, which is paid directly by consumers.

But Franzia and the rest of California’s wine industry are fighting to derail the tax increase, which is part of Schwarzenegger’s plan to close California’s $41.6 billion budget gap. The wine industry’s main trade organization and other business groups have suggested any tax increases should not single out industries.

“If there are going to be tax increases, revenue sources need to be spread as much as possible to minimize the economic harm,” said Allan Zaremberg, of the California Chamber of Commerce.

The governor wants to raise alcohol excise taxes by 5 cents a drink beginning Feb.1. The revenue would be used to fund substance abuse and prevention treatment programs. The state defines a drink as 1.5 ounces of distilled spirits, 12 ounces of beer or 5 ounces of wine.

Franzia said he’s not sure what the new price would be – it would have to be worked out with Trader Joe’s – but $2.29 or $2.49 Chuck would not be a surprise, according to industry analysts.

Trader Joe’s, which introduced the wine seven years ago and has never raised the price, declined to say whether the company had a stand on the proposed tax.

“Two Buck Chuck is a nice wine and the price is wonderful. You can drink it or use for cooking and it’s not very expensive. I think it would still be a good deal at $2.29 or $2.49,” Jim Elsten said while shopping at Trader Joe’s in Long Beach, Calif. “Wine is a luxury, and I don’t see an extra tax as a problem.”

But Jamie Kaiser questioned the wisdom of placing an extra tax on wine.

“I would still buy it,” Kaiser said as she loaded a case of Charles Shaw Chardonnay into her car, “but it seems like they are just taxing everything now and nothing with the state budget ever changes.”

Trader Joe’s has 13 stores in the Puget Sound area and seven in the Portland area.

Although increases are proposed for all forms of alcohol, California’s wine industry feels the most threatened. The levy is charged for wine made and consumed in California and wine shipped into the state. It doesn’t effect wine produced in California and shipped elsewhere.

Franzia’s tax bill would jump by more than $15 million, mostly from his sales of Charles Shaw in California.

Other large California wine companies also would see big tax increases, according to analysts. The tax bill at the Wine Group, maker of Almaden, Inglenook and Corbett Canyon, would jump by about $22 million, based on estimates of its California sales. E&J Gallo Winery, the state’s largest winemaker, would pay an extra $18 million in state excise taxes.

State officials estimate that the higher taxes would raise $244 million in the current fiscal year and $585 million in 2009-10. About a dozen states are looking at raising alcoholic beverage taxes as a way to raise revenue.

Robert Koch, chief executive of The Wine Institute, the main trade group for California’s industry, called the tax proposal “devastating.” He said it would hurt sales and lead to job losses.

H.D. Palmer, of the California Department of Finance, noted that any one of the proposals to raise revenue in the budget could have negative economic effects, yet “when you have to close a historic $41.6 billion budget gap, you can’t do it by cuts alone. In a perfect world we might not do this.”

But looking to the wine industry to solve the budget problems doesn’t make sense, said wine mogul Franzia.

“It is ludicrous to put an extra tax on a home-grown product,” Franzia said. “Wine is California’s signature product, and if we do it, every other state is going to do it too.”

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