Bill Aims to Retain Low Tax on Drinks

Armed with a parliamentary maneuver often used to push controversial bills through the Legislature without debate, an Assembly member is pressing to have sweetened alcohol drinks declared the equivalent of beer so liquor companies can avoid the dramatically higher tax on distilled spirits.

If signed into law, the bill would rebuff Atty. Gen. Bill Lockyer, who wants the soda-like beverages to be treated the same as hard liquor, in part because they are especially popular among underage girls.

Sometimes called “alcopop” or flavored malt beverages, the drinks are a hybrid of beer and hard liquor and include Mike’s Hard Lemonade, Smirnoff Ice, Bacardi Silver and Skyy Blue.

Though the alcohol in the drinks comes from both a malt base and the distilled spirit flavorings that are added, California treats these products like beer, taxing them at 20 cents per gallon instead of the $3.30-a-gallon rate for distilled spirits. The products can also be sold at an estimated 24,000 businesses in California, including 7-Eleven and other convenience stores, that do not sell distilled spirits.

Lockyer argues that the products fit under California’s legal definition of distilled spirits. He wrote to the state Board of Equalization and the Department of Alcoholic Beverage Control in May asking them to reclassify the drinks. A recent study by the state Board of Equalization found that such a change would discourage consumption of the drinks and generate an estimated $40 million a year in additional tax revenue.

Studies show the drinks, which contain roughly the same amount of alcohol as beer, are especially popular with teenage drinkers. A December 2004 survey by the American Medical Assn. found that, by age 18, a third of girls have tried flavored malt beverages and that 82% of teen girls who have tried them find them better tasting than beer and other alcoholic drinks.

“Flavored malt beverages are sweet-tasting alcoholic drinks that mimic familiar nonalcoholic beverages like cola, lemonade, iced tea and fruit-flavored water,” Lockyer wrote to the state tax board. “Many ... are ‘branded’ in the name of a distiller ... in the apparent hope that new drinkers will start with these sweet ‘branded’ drinks and move to the distiller’s brand of hard liquor when the drinkers mature.”

To combat Lockyer’s effort, the alcohol industry sought help from lawmakers. Even though the legislative deadline for introducing new bills was Feb. 22, on Aug. 22 Assemblyman Greg Aghazarian (R-Stockton) found a way to submit a bill that would keep the flavored drinks from being reclassified.

Aghazarian did it by performing what in Capitol lingo is known as “gut and amend.” He took a bill he had submitted to let beer companies host tastings for up to 200 people and deleted the contents -- even though it had already been through three rounds of voting in the Legislature.

He then inserted new language that would change California’s definition of beer to include anything that qualifies as a malt beverage under federal law, locking in the lower tax rate for flavored malt beverages.

Aghazarian said he opposes the reclassification Lockyer seeks because it would raise the price on a four-pack or six-pack of the sweetened alcohol drinks by $2 or $3 and make it illegal for many mom-and-pop restaurants and stores to sell the products. According to the Board of Equalization, flavored malt beverages account for roughly 2.5% of the U.S. beer market.

Aghazarian argued that flavored malt beverages, which have been on the market since the late 1990s, aren’t to blame for teenage drinking.

“It’s already against the law to sell [alcohol] to a minor,” he said. “Our concern should be in enforcing the laws that are on the books.”

Lawmakers are rushing to meet Friday’s deadline for passing bills before they disband until January.

Aghazarian’s amended bill, AB 417, passed the Senate Governmental Organization Committee 10-0 on Aug. 25 and is expected in the Senate for a floor vote. If it passes there, it would have to go to an Assembly committee and on to the Assembly floor before reaching Gov. Arnold Schwarzenegger, putting pressure on lawmakers to weigh it in the next four days.

Aghazarian, whose wife’s family sells grapes to the E.&J.; Gallo Winery, said he was not trying to avoid scrutiny by using the gut-and-amend maneuver. He said he worked with the alcohol industry for months on several possible bills, and “this was the one issue everyone agreed on.”

The bill will still get a thorough vetting in legislative committees, he said.

“We’re going out of our way,” he said, “to make sure everybody knows what’s going on.”

The alcohol industry has a well-established presence in the Capitol and spends tens of thousands of dollars a year on lobbyists and campaign contributions to politicians. The official supporters of AB 417 -- Anheuser-Busch Cos., California Grocers Assn., California Retailers Assn., Miller Brewer Co., 7-Eleven and the Wine Institute -- spent a combined $1 million lobbying the Legislature on an array of bills between January and July of this year .

Aghazarian has reported receiving $8,850 from the alcohol industry and California Grocers Assn. since 2003.

The public health activists and concerned citizens opposed to AB 417 simply can’t compete, said Judy Walsh-Jackson, a vice president of the California Council on Alcohol Policy.

“We don’t have the money that the alcohol industry has,” she said. “We can’t pay a lobbyist to be walking up and down the halls like the other side does.

“Part of the problem has been the gut-and-amend strategy the industry is using,” said Walsh-Jackson. “It hasn’t given us enough time to really get the word out.”

Aghazarian argues that his bill would simply put California in step with the federal government. In January, the federal Alcohol and Tobacco Tax and Trade Bureau issued a rule classifying flavored malt beverages as beer so long as no more than 49% of the alcohol in the drinks came from distilled liquor.

But Lockyer’s office said states do not have to follow federal guidance.

“Since the repeal of Prohibition, states have been free to chart their own alcoholic beverage policy,” Lockyer spokesman Tom Dresslar said.

Only Maine regulates flavored malt beverages the same way it regulates distilled spirits, according to James F. Mosher, a lawyer who directs the nonprofit, research-oriented Center for the Study of Law and Enforcement Policy in Felton, Calif. He began researching the issue four years ago and brought it to the attention of Lockyer and other state attorneys general. His work prompted the National Assn. of Attorneys General to send a letter in March to the top lawyers of each state, encouraging them to review the link between “alcopops” and underage drinking before adopting the federal standard.

“The [federal tax bureau] did not consider public health concerns when issuing the 49% rule,” the letter said.

Mosher called the process by which the alcohol industry makes the flavored malt beverages a “charade” designed to ensure the lowest tax and widest distribution.

The drinks begin with a malt base, but brewers strip the beer color, bitterness and taste and add distilled spirits.

“The Legislature shouldn’t be considering helping them with a gut-and-amend,” said Mosher. “They should be holding them accountable for this outrageous marketing deception.”

Anheuser-Busch officials, when asked about AB 417 and the manufacturing methods of flavored malt beverages, issued a statement from Andrew Baldonado, a vice president for government affairs in Sacramento:

“We support AB 417 because it provides a technical change to the state definition of beer to make it conform to the federal Tax and Trade Bureau standard, which includes all malt beverages where the majority of alcohol is derived from brewing.”

A lobbyist for Miller Brewing Co. in Sacramento did not return phone calls seeking comment.

Dennis Clear, assistant director of the state Department of Alcoholic Beverage Control, said his department is still analyzing the bill and has yet to recommend a position to the Schwarzenegger administration.

Clear said he was surprised by Lockyer’s sudden interest in changing the classification of the beverages.

“This has been going on for years, and there was time to maybe weigh in and make it a federal issue,” he said.

“It’s a significant change,” Clear said of Lockyer’s suggestion. “That’s why I think going through the Legislature is the correct way. They’re making it a policy debate.”