Tuesday, July 19, 2011

Why aren't there more sparkling wine producers? Taxes.

California had 2,347 wineries in 2009.

How many of those make sparkling wine? I think I can count them on my fingers.

There have been new big-money investments all over the state. Napa Valley no longer has the franchise, or even the lead, on $20 million winery projects. But is there a new Schramsberg, Domaine Carneros or J? Not that I know of.

You might think the reason for this is that Americans still don't drink enough sparkling wine. It accounted for only 4.6% of U.S. wine sales in 2010, according to the Gomberg-Fredrikson Report.

But are 4.6% of the wineries in this country bubbly makers? Are there 100 sparkling wine producers in Calfornia? I wish.

Moreover, the category is booming, as 2010 sales were up 10% over the previous year. Maybe all those years of telling Americans that bubbly is great any day with any meal -- or by itself -- are finally paying off.

But are any of the major wine companies -- Constellation, Gallo, the Wine Group, Bronco -- pouncing in to capitalize? Not that I'm aware of. Everybody's into slightly fizzy Muscat; a bottle of Yellow Tail Muscat arrived at my door last week, which means the Muscat boom is about to hit a backlash. But traditional-method bubbly remains the province of a handful of players.

This is stunning when you think about the number of newbie fools optimists who think they're going to make their living on Syrah. In fact, I can name more new wineries making Ribolla Gialla than I can those making sparkling wine.

There's a hidden reason that savvy businessmen like the Wine Group know, but the rest of us wouldn't consider: taxes.

 The irrepressible Adam Lee of Siduri Winery sends along some amazing data on wine taxation levels. Most people realize that still wine is taxed at different rates based on how much alcohol it contains. Wines under 14% alcohol are taxed at $1.07 per gallon, with a $0.90 per gallon credit for wineries that produce less than 250,000 gallons -- a great tax incentive for the little guys. Wines from 14% to 21% alcohol are taxed at $1.57 per gallon, with the same small-producer credit.

Sparkling wines are among the lowest in alcohol. Yet sparkling wines are taxed at $3.40 per gallon (67 cents per 750 ml bottle), with NO small producer credit. In other words, if you're a small wine producer, you would pay 20 times as much tax to make bubbly as you would to make, say, Sauvignon Blanc. Or, for that matter, slightly fizzy Muscat. No wonder there's no Two Buck Chuck Bubbly.

Even compared to small producers making high-octane, DUI-inducing Zinfandel, sparkling winemakers have a heavy tax burden: 5 times as much tax on bubbly as on still wines over 14% alcohol.

Isn't this an issue that should unite wine-loving Democrats with tax-hating Republicans?

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.

But it has turned into a tax that is stifling small business and investment at a time when the country needs them.

A professional riddler, Schramsberg's Ramon Viera, in 2001
The Riddler. Different.
We need dreamers willing to pay construction costs to build wineries.

And making sparkling wine in the USA is not only a good job, it's a job that can't be outsourced. It's a job where a worker with any level of education can eventually learn the skills needed to be a riddler (not The Riddler, of course), which pays well.

We make some fine sparkling wine here this days, and not just in California. Argyle makes nice bubblies in Oregon; Gruet makes excellent values in New Mexico and Chateau Ste Michelle makes decent ones in Washington. I'm sure there's good bubbly in New York too, and Evan Dawson will probably hop on in the comments to tell me which.

But we could make so much more. I'd like to see the Congressional Wine Caucus take on this inequitable tax.

The revenue loss of lowering sparkling wine taxes to still wine levels would presently be tiny, simply because we don't make that much sparkling wine here. And the long-term payoff could be great. It's really true that cutting sparkling wine taxes could be revenue-neutral, because it would result in more bubbly being made. And I can't think of a way to make the country a happier place to be than to have lots more bubbly. Can you?

Republicans, I'm talking to you. Y'all are always saying that high taxes stifle investment. Here's a clear example. Do something about it.


tom barras said...

To give this topic serious credibility, you need Nancy Pelosi and Diane Feinstein to take the lead on your request.

W. Blake Gray said...

Actually I was hoping for John Boehner.

Elizabeth Clark said...

Having literally just finished bottling my first and possibly only vintage of sparkling wine - approx. 200 cases - I feel I have a little perspective and forget the taxes. The labor and specialized equipment alone means it will never pay for itself. So far I have been able to borrow everything I need but have yet to decide how we will disgorge. Today we were dosing and putting the crown seals on and I did use an encapsulated yeast so that we don't have to riddle. (I think I just heard some die hard bubble makers gasp in scandalous outrage.) We made this wine in 2010 to try and recover something from a vineyard full of unripe grapes and to give me something to play with. I'm happy with the results so for but would be surprised if we tried it again. Sorry!
Elizabeth - Airlie Winery, Oregon

W. Blake Gray said...

Elizabeth: There's a big difference between trying to turn unripe grapes into something usable, and a new company trying to make bubbly from the start.

I'm glad to hear the details on how difficult it was, but it's not really what I'm writing about.

Ernie Pink said...

Be carefull what you ask for.

You may see a new "carbon tax" on that bubbly CO2.

Both parties are always on the look out for "drive by" revenue pick-ups.

Tom Stutz said...

Although the tax rate is burdensome, the real problems of methode champeoise are the massive overheads Elisabeth alluded to and relative returns. When I worked in the Cellars at Chandon 30+ years ago, the then cellarmaster who was not generally known for his insights said to me something along the following line: "I don't know why anyone would make this stuff. You have all the costs of making regular wine, except the barrels, and you move up all your other costs, especially bottles. Then you hold on to it for a couple of years with additional losses. You then put on the most expensive package together. Finally you sell it for less than you'd get for a good still wine version from the same fruit." He knew that great sparkling is made from excellent fruit sources and not a salvage operation from a bad season. I was completely in love with the vision of great local sparklers and dismissed his comment. Well after another 10 years or so, I had to pretty much agree. Thirty years ago Chandon had a $12 shelf price - uncertain where it is now, but doubt it's even kept up with inflation.
Certainly some vineyards will produce fruit for serious Blanc de Noir and be very limited in their ability to supply fruit for equally serious Pinot Noir. I'm still in love with sparklers and we make one from such a vineyard. We only sell it out of our tasting room and don't make the margin we'd like, but hey it's an excellent wine and sometimes you just need bubbles.
Now, why Chandon first came here is another interesting story...

Fred Z said...

The true economics of the matter go beyond taxes. Agreed, taxes are unjustly higher on sparkling wines. I would love to see an even playing field there. The other reality is that everything else about sparkling wine is much more expensive. Granted the barrel costs are a fraction of still wine producers, however, labor costs more than make up for this fact. A bottle of sparkling wine is handled approximately forty times during production. Labor is dramatically expensive when loaded with payroll taxes, benefits and workers compensation costs. Holding costs (aging) are significant, as the wines are typically aged en tirage for three or four years, some as long as ten years. Packaging materials are significantly more expensive. Still wines do not have a wirehood. Most do not have a neck label either. The glass bottles are significantly heavier and larger. It requires more warehouse floor space to store the same number of cases of wine. A case of sparkling wine weighs 48 pounds compared to the average still wine, which weighs 35 pounds. Translation; sparkling wine requires more trucks to move the same volume of wine as a still wine producer. Every aspect of sparkling wine production is more expensive.
But, back to your original point, yes excise taxes are higher without good reason. We would love to see parity. Thanks for your perspective.

Pam Strayer said...

Hmmmm....it doesn't seem fair and thanks for bringing this up.

I myself have been following the organically grown wine arena and am pleased to announce that there is a lovely pocket of sparkling wines that are very good and somewhat affordably priced coming out of Mendocino. Most are being made at Rack and Riddle in Hopland. Here's eight organic sparklers I've counted from Mendocino organic grapes.


Pete said...

Good column, bringing to light an issue I for one had never considered. Curious to dig in a little deeper, I asked a very successful domestic sparkling producer, an old friend of mine, why so few have joined him in making bubbly. High taxes, yes, that gets in the way, he said - but there are bigger impediments. For instance: "major investment in inventory, machines, and know how." And, even more important, he said, is that "Americans want always to pay significantly less per bottle than they would for lesser quality nonvintage Champagne."

G.E. Guy said...

There's more East Coast bubbly than just NY... we did a comparative tasting of about a dozen Virginia sparkling wines this past winter with a few ringers thrown in. Talking to winemakers here, it seems like the cost to produce it is just really difficult to get back at the register. Great post about the taxes, though - I had no idea.

Unknown said...

How do we change this law!?