The New York State Budget was proposed last week with no funding going towards the New York Wine and Grape Foundation. This is a great blow to the New York Wine Industry.

Here is a reprint of the Wine Press – which is a weekly newsletter from the NYWGF.

Sunday, December 21, 2008

Special Budget Edition and Issues Primer

CAUTION: This is a very long edition of The Wine Press, and so get a big glass of New York wine to help you work through it.

NEW YORK is a mess. The state is in a financial crisis, probably more so than any other state because

Wall St.

is the epicenter of the problems plaguing the national and global economies. This week Governor David Paterson unveiled his budget proposal for the next fiscal year with the intent of addressing a $15 billion deficit with a series of broad-based budget cuts and revenue generators. In terms of those directly affecting the grape and wine industry, the major proposals included eliminating funding for the New York Wine Grape Foundation (that’s us), permitting the sale of wine in grocery stores, and nearly tripling the wine excise tax.

I do not envy Governor Paterson, nor do I blame him. He inherited his position abruptly and unexpectedly when former Governor Eliot Spitzer resigned, and also inherited what has become New York’s worst financial crisis since the Great Depression. He provided accurate early warnings with clear vision and refreshing candor. His overall budget proposal largely spreads the pain among the population and programs, even in areas like education where he has always been a very strong proponent. How would YOU like a job where doing what you think is fair and right basically offends everyone you’re trying to serve?

A budget proposal is just that—a proposal—and there are many steps and several months before a final budget will become law. The Governor has the option to amend his proposal within a certain time frame based on public input. Then the legislature (Senate and Assembly) will offer their versions, and negotiations begin. In Albany, it’s referred to as “three men in a room”—the Governor, Senate Majority Leader, and Speaker of the Assembly—who traditionally shape a budget of well over $100 billion that affects all New Yorkers. Further complicating this year’s deliberations is a Senate in disarray after Republicans lost the majority to the Democrats, who are now fighting amongst themselves for actual leadership to the point where the Republican may in fact retain control. Ah, New York, ya gotta love it. We don’t know where all this will end up, but here are some current perspectives on the key issues affecting our industry.

FUNDING ELIMINATION would likely lead to the end of the New York Wine & Grape Foundation, and our ability to support the industry through research and promotion. Few people understand that the money we receive goes right out the door to Cornell University for a comprehensive research program; a dozen wine trails throughout the state; five regional branding groups; a cooperative advertising program for individual wineries; a wine competitions program; agencies that create promotion programs for Concord grape juice, table grapes and wine in New York City and across the state; a public television series on New York wines and foods; educational programs on grapes and grape products; and much more. We were created by 1985 State legislation as a private, not-for-profit organization to centralize and coordinate research and promotion programs statewide. That’s what we do.

Our core budget since 1985 has been State matching funds requiring equal or greater private sector contributions, and providing the incentive for that. In the past few years we’ve had supplemental funding for several new initiatives including a “Total Quality Focus & Sustainability” research program conducted by Cornell, along with many of the promotion programs cited above. Traditionally, the Governor has included the matching funds in his budget proposal, and the legislature add the supplemental funds. Governor Paterson’s proposal has nothing, for the first time in 25 years. (Our friends in the apple, maple, and other agricultural sectors also got nothing, so we are not being “targeted”). Ironically, this proposal occurred a week after Agriculture Commissioner Patrick Hooker (a great guy and supporter) received the final report of the Wine Grape Task Force he created, which recommended strengthening the marketing and promotion programs.

Zeroing us out seems like a logical way to same money, but in the end it may actually cost the state a lot (as our British friends say, “Penny wise and pound foolish”). A 2005 economic impact study by respected wine economist Barbara Insel showed that the New York grape and wine industry annually generates over $3.4 billion of economic benefits for the State of New York. Our budget request was $3 million—or less than 1/1,000th of that—as a way to help us grow the industry so we can contribute even more investment, jobs, and tax revenues to the state economy. The Foundation was created specifically in response to an economic crisis in the grape and wine industry, which subsequently has become the fastest growing industry in the agriculture and tourism sectors and is one of the few bright spots in New York’s overall economy. A major reason has been the longstanding financial partnership between the public and private sectors, with clear benefits to both. That partnership is now in question.

Unfortunately, our industry does not have a sufficient private sector funding mechanism to sustain our organization and its work on their behalf. (By contrast, our friends in the apple industry have a marketing order self-assessment mechanism ensuring the survival of their organization and its core programs, so state funding on top of that is just icing on the cake, and its absence doesn’t threaten the association’s existence.) That is something we’re working on, but it certainly won’t be in place by the time this year’s State budget is finalized. So The Wine Press may soon become a relic of the past.

WINE IN GROCERY STORES will be World War III in Albany, making the 2005 pitched battle over direct interstate shipment look like a neighborhood fist fight. Governor Paterson has proposed it as a way to raise an estimated $105 million to help alleviate the looming deficit. The war will basically be between the grocery stores and the liquor stores, with some “collateral damage” along the way. (In case you haven’t been watching the news for the past several years, collateral damage means innocent victims.)

(The New York Wine & Grape Foundation (that’s us) does not take a position on this issue. We are basically a research and promotion organization, with our promotion program supporting whatever means are available to legally sell New York wines. Our “New York Wine Month” programs have involved our wholesaler partners, as well as liquor stores and restaurants throughout the state who agreed to feature New York wines. If wine were to be sold in grocery stores, funding for the Foundation would be even more critical since this is a new market where New York wines need to become competitive.)

Besides the grocery and liquor stores, other combatants will be the New York State Wine Grape Growers, which represents grape farmers who have advocated this issue for decades as a way to increase the demand for their grapes and sustainability of their farms; New York Farm Bureau and Long Island Farm Bureau, for the same reasons.

A little history is instructive. This is the first time that this issue has had sponsorship by a Governor since 1984, at that time Mario Cuomo who primarily wanted to help solve the state’s grape crisis. He proposed two years of ONLY New York wines in grocery stores, then (if the world didn’t fall apart) all domestic wines, then after another two years all wines. (At that time, this probably would have been constitutional, but now is not due to the Supreme Court’s “Bacchus” decision in June of that year that bans discrimination despite the 21st Amendment.) Governor Cuomo also included incentives for liquor stores like the sale of party snacks and other items to increase their potential sales. They didn’t bite. But what really killed his bill was the greed of the grocery store lobby at that time. I was a registered lobbyist seeking that bill (I’m not now), and one morning met for breakfast at the Hilton (now Crowne Plaza) with the president of the grocery store lobby (Charlie Mack), who said they would have to oppose the bill because they weren’t willing to trade potato chips for New York wines. I choked on my scrambled eggs. Otherwise, there may have been wine in New York grocery stores for the past 25 years. (There are now smarter people there, but this is a good lesson for them to keep in mind during the upcoming negotiations.) Ultimately what happened in 1984 was that “wine coolers” (mixtures of wine with orange and other fruit juices) were allowed to be sold in grocery stores (as well as liquor stores) because they were a new product (the typical California invention by a couple guys in a garage) and it wasn’t clear under New York law where they could be sold. Bottom line: That year, 25,000 tons of New York grapes were sold that otherwise would have left hanging on the vine—5 times as much as forecast—which literally saved many grape farms. Still, it was a pitched battle, with the liquor lobby fighting to the finish

So what has changed in 25 years? The number of liquor stores has declined through attrition (i.e., without wine in grocery stores) from about 4500 to 2400, serving a population of about 19 million. The liquor lobby is no longer represented by my friend and former formidable opponent, Mr. Bill McDevitt, an honorable gentleman who is ailing. The grocery store lobby now has more astute leadership who might let liquor stores sell potato chips. New York’s grape farmers are doing better, but could certainly use a boost in the current surplus condition with lower grape prices. WashingtonState (where wine is sold in grocery stores) has zoomed past New York as the #2 wine state, as has Oregon (grocery sales also) in terms of the number of wineries. And New York is in a financial crisis like none before (Mario Cuomo’s primary concern was the grape economy; David Paterson’s is the whole economy).

In short, this is all about money (surprise, surprise). The Governor needs it, the grocery stores want it, and the liquor stores don’t want to lose it. And all views are justified. Even though this is all about money, there will be many other “moral” justifications advanced by lobbyists on both sides. The Governor’s dilemma is obvious, so let’s focus on the other two (with the standard opposing arguments in parentheses where appropriate).

The grocery stores see this as a way to diversify their product lines, offer new convenience to their consumers like that afforded in two-thirds of all states, and help offset the impact of some negative measures like an expanded bottle bill.

(Opposing views: Grocery stores already sell beer as well as “wine coolers”, along with hundreds of food products, so they don’t need anything else. New York consumers are used to the current system, which has been in effect for 75 years and is working well. Grocers are thriving, and should be responsible for costs to the environment of the products they sell without taking business from liquor stores.)

The liquor stores see this as their death knell. Since the Repeal of Prohibition 75 years ago, they have had a monopoly on the sale of spirits and wine, based on a classic New York “deal” at that time, and can sell very little else. (My footnote: Recently a major liquor/wine store in the Rochester area was cited for selling wine carafes. Good grief: Why not?! So many of the laws and regulations in this state are truly stupid.) Many stores are located in or near shopping malls with grocery stores which would put the liquor stores out of business if they could sell wine. New York wineries would be hurt because the grocery stores would carry only the big California and imported brands. Kids would be buying wine illegally in grocery stores, and it would increase drunk driving. New Yorkers are used to the system, and are not clamoring for change.

(Opposing views: Just because the system is old doesn’t mean it’s right, smart, or good for New York’s economy. In states like California where wine has been sold in grocery stores for 75 years, liquor stores which know their niche and customers continue to thrive, often near grocery stores which also sell wine. The number of New York liquor stores has steadily declined without any competition, and New York consumers deserve more options and convenience. California, Washington, and Oregon wineries of all sizes have thrived with grocery store sales because there is a diversity of wines mirroring that in liquor stores, but with far greater volume. Grocery stores already have effective systems in place to prevent underage purchase of alcohol. Just across the border from Albany, Vermont has sold wine in grocery stores for decades, with no noticeable effects on underage drinking, drunk driving, or a culture of derelicts. New Yorkers may be used to the system, but that doesn’t mean they like it, especially those that travel to other states and witness the more expansive purchasing opportunities.)

These, and many other, arguments and counterarguments will fill the halls of Albany during the next few months, destroying forests for paper used for memoranda of opposition or support. Having been through this before (but not this time), it will be interesting for me to see if anyone comes up with anything new as a rationale, one way or the other.

EXCISES TAXES is a simpler, and shorter, subject. Governor Paterson proposes to raise the excise tax on wine from 19 to 51 cents per gallon as a way to raise about $53 million.

Basically, this is a “sin tax” for making a “sinful” product, and a simple political target on both federal and state levels. Excise taxes are levied on all beverages containing alcohol (wine, beer and spirits) at different levels, with the spirits industry always trying to achieve “equivalency” and in this year making some progress. (Governor Paterson has proposed major increases in wine and beer excises taxes, but not spirits.)

Excise tax increases ultimately hurt grape farmers. The best example is from 1991, when the first President Bush, after vowing “Read my lips, no new taxes”, raised wine excise taxes (but not beer) from 17 cents to $1.07 a gallon. Literally overnight, that killed the category of “wine coolers” which had rescued many New York grape farmers due to Mario Cuomo’s initiative. All of the major “wine cooler” manufacturers—such as Bartles & Jaymes (Gallo) and Seagram—and others connected with wineries immediately switched to a malt-based formula, drying up the market for grapes.

For New York wineries, the near tripling of the excise tax in budget would be devastating. It means a multiplied cost for something which provides no value or return, compared with winemaking equipment, employees, or actual wine production. Despite common perceptions, the wine industry is not wealthy. And with this year’s economic ups and downs, especially with gas price fluctuations, leading to a downturn in growth already, this proposed increase would multiply their “sin tax” for a product that is not only not sinful, but actually healthful to the state economy and to individuals.

Hundreds of scientific and medical studies from around the world have shown that regular moderate wine consumption has significant health benefits for most people. So decreasing consumption caused by higher taxes would ultimately lead to increased health care costs.

This is one issue where all segments of trade—grape growers, wineries, wholesaler, retailers, and restaurants—actually all agree, as would consumers if they really understood that it’s going to increase the prices they have to pay for wine. Excise taxes are paid by the wineries (or wholesalers representing them in a state), but by the time the product reaches the shelf, the base tax has essentially doubled. The wineries, wholesalers, and retailers are in no position to absorb the new tax, which means it will be passed on to consumers.

In addition, like the elimination of Foundation funding, it is truly counterproductive for the State of New York, despite the initial assumption that it would increase revenues. In a study commissioned by Wine Institute relative to California Governor Arnold Schwarzenneger’s proposed wine tax increase, wine economist Barbara Insel of Stonebridge Research showed that it would have a negative effect on the state’s coffers by decreasing the sales of wine, creating job losses at wineries, and reducing revenues for the State and local governments.

For the last word on this topic, at the end of this Wine Press I will leave you with a couple thoughts from Thomas Jefferson, who is turning over in his grave at the concept of excise tax increases.

CONCLUSION (on the budget): Foundation Funding Elimination…Wine in Grocery Stores…Excise Tax Increases…2009 will certainly be an interesting year in Albany. One thing we know for sure is that, however much most of New York suffers, it will be a banner year for lobbyists. .

Finally, in case there is not another Wine Press before the end of this year or thereafter, I want to wish you all, regardless of what or how you celebrate, the most wonderful holidays and a very Happy New Year.