Almost 100 years later, Prohibition’s legacy stifles economic opportunity

January 14, 2016 | By ANASTASIA BODEN

Lips that touch liquor

After the 21st Amendment repealed Prohibition, states regained control over alcohol sales.  Unfortunately, interest groups and angry temperance supporters swiftly harnessed the states’ new power to pass anti-competitive laws in their favor.

100 years later, the alcoholic beverage industry is still notoriously tricky to get into, and for all the wrong reasons.

One of the most problematic restrictions is the antiquated requirement in many states that all alcohol sales go through a third-party distributor.  This requirement artificially drives up prices and disproportionately harms small producers.  Moreover, it means that on-site sales at places like wineries or breweries are banned, unless the producer can get some sort of exemption.  Where producers have lobbied for an exemption, they have done so in self-serving ways—further distorting the free market.  For example, some in-state wineries have lobbied for an exemption that allows them to ship directly to consumers, but that requires out-of-state retailers to continue to find an in-state distributor.

Prohibition-era laws have been followed by modern equivalents.  In California, wineries can’t offer unpaid internships to people interested in learning about winemaking.  Small wineries that can’t afford paid interns suffer the most, as do all individuals who want the opportunity to enter the industry but can’t find a paid internship.  In Tennessee, a large whiskey-maker successfully lobbied for a law that limited the use of the term “Tennessee whiskey” to its own recipe.  This means that, even if a distiller makes whiskey in the state of Tennessee, it can’t label it’s product “Tennessee whiskey” unless it complies with the official, more expensive, process.  In Florida, large beer producers enjoyed a law that prohibited breweries from selling beer in industry-standard 64-ounce growlers, and that therefore put the small, craft breweries that use growlers at a disadvantage.  (The legislature overturned that law following a PLF lawsuit).

Fortunately, California will soon change one of its Prohibition-era laws, marking a win for economic liberty. Under current law, California spirit distilleries are limited to selling up to six, quarter-ounce samples to customers (a quarter-ounce is roughly 1/4 of a shot glass) on-site.  But if customers like what they taste, tough luck; the distilleries are barred from any further on-site sales.  The most a burgeoning distillery can hope for is that a customer will later recognize their brand in a store and purchase a bottle—that is, if the distillery can find a distributor who will sell their product to a retailer, a difficult feat for most small distilleries.

Distilleries currently can rent on-site space to a retailer.  But those requirements are even more ridiculous.  The distillery then must contract with a distributor, who will pick up the spirits from the distillery, drive them to a warehouse, unload the spirits, let them sit overnight, re-load them the next morning, and drive them back to the on-site retailer for sale.  Worse, distilleries must pay both the distributor and retailer to be a part of this ridiculous process.

Under the Craft Distiller Act, distilleries will be able sell up to three bottles per customer in their tasting rooms, and keep an on-site bar and restaurant.  While the law is admittedly limited, it is an improvement in an overly-regulated, anti-competitive industry.