Tax hike would put Chuck over its famed Two Bucks
Is this the end of Two Buck Chuck?
A proposal to raise the state tax on wine to a level more than six times higher to help close California’s giant 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, of course, is the formal name for the California wines sold since 2002 that are now widely known by their nickname Two Buck Chuck.
The proposal by Gov. Arnold Schwarzenegger would raise the tax on wine to 29.6 cents for a 750-milliliter bottle from 4 cents.
“It’s like shooting Charles Shaw in the eye,” said Franzia, chief executive of Bronco Wine Co., which owns the brand. The profit margin is already so low we will have to raise the price.”
Consumers have differing opinions on the excise tax, which is a levy on a specific good, often at the producer or supplier level and folded into the retail price, rather than a sales tax, which is paid directly by consumers.
But Franzia and the rest of California’s wine industry are fighting furiously to derail the tax increase, which is part of Schwarzenegger’s plan to close California’s budget gap, estimated to reach $41.6 billion by the middle of next year.
With the state treasury expected to run short of cash to pay bills as soon as next month, Schwarzenegger and legislators from both parties are dickering over proposed solutions to the budget crisis. The wine industry’s main trade organization and other business groups have suggested that any tax increases be broad-based and not single out specific 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, president 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.
This wine tax is one of many new taxes or increases proposed by the governor. Others include raising the state sales tax by 1.5 cents on the dollar and charging a 9.9% tax on each barrel of oil extracted in California. Schwarzenegger also would extend sales tax to veterinary care, car repair and other items now exempt from the levy.
Franzia said he wasn’t sure what the new price would be -- it would have to be worked out with retail partner 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 it had a stand on the proposed tax and would not talk about its plans for the wine.
Charles Shaw fans are divided on whether the tax is a good idea.
“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,” Jim Elsten of Long Beach said while shopping at a Trader Joe’s in Long Beach last week. “I think it would still be a good deal at $2.29 or $2.49. Wine is a luxury, and I don’t see an extra tax as a problem.”
But Huntington Beach resident Jamie Kaiser questions 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.”
Although increases are proposed for all forms of alcohol, it is California’s wine industry that feels the most threatened by the proposal. The levy is charged for wine made and consumed in California and wine shipped into the state. It doesn’t affect wine produced in California and shipped to other states or abroad.
Bronco’s tax bill would jump by more than $15 million, mostly from its sales of Charles Shaw in California.
Other large California wine companies would also see big tax increases, according to analysts.
The tax bill at 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 finance officials estimate the higher taxes will raise $244 million in the current fiscal year ending June 30 and $585 million in the following year.
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” and said it would hurt sales and lead to job losses.
Because of the wholesaling industry’s practice of marking up what it pays wineries by 30%, even taxes, consumers could find themselves paying as much as 50 cents more for a bottle of wine by the time it hits retail shelves if the proposal is adopted, Koch said.
That puts winemakers in a bind, said Greg Popovich, president of Castle Rock Winery, which sells more than 400,000 cases of wine annually through Beverages & More, Trader Joe’s, Fresh & Easy Neighborhood Market and other retailers.
“BevMo says that if I raise my price by even a penny in this economy I will lose the account,” Popovich said.
So Castle Rock and its distributor, Young’s Market Co., will have to reach some compromise on how to split up any extra expense caused by the new tax, he said.
The wholesaling industry has been mum on the issue. Southern Wine & Spirits Inc., the nation’s largest distributor, declined to comment on either the tax or its markup policies. Wine & Spirits Wholesalers of America, the national trade group, also declined to talk about the issue.
H.D. Palmer, spokesman for 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 state’s budget problems doesn’t make sense, wine mogul Franzia said.
“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.”