North Coast Rep. Mike Thompson proposed a series of federal tax breaks Monday for the U.S. wine industry, including a proposal to slash a tax on sparkling wine that has lingered since the aftermath of Prohibition.
The St. Helena Democrat, who owns a vineyard in Lake County, teamed up with Rep. Dave Reichert, R-Wash., to propose a sweeping overhaul of the laws that brought in $1.07 billion in federal excise taxes from the U.S. wine industry during the last fiscal year.
Thompson and Reichert contend the bipartisan legislation will help spur new and innovative products by modernizing federal excise taxes on wine. While the cost of their bill has not yet been calculated, it would provide a major benefit for the North Coast wine industry, which harvested $1.1 billion in wine grapes for the 2015 vintage.
“The tax code should not be an impediment to growth and innovation,” Thompson said in a statement.
The legislation would be especially helpful to producers of sparkling wine. Thompson’s bill would reduce federal excise taxes on sparkling wine to $1.07 a gallon, the tax rate for still wine, down from $3.40 a gallon, where it has stood since 1955.
“We are being taxed at three times the rate. … The only reason is that we have bubbles in the wine,” said Gary Heck, owner of Korbel Champagne Cellars in Guerneville. “It hits your bottom line pretty hard.”
The disparity has been traced back to Congress in the aftermath of Prohibition as lawmakers looked to tax French Champagne, according to proponents of the bill. It was perceived as an imported luxury item; there was very little sparkling wine made in the United States.
But sparkling wine sales have continued to grow, especially in recent years, and represented more than 5 percent of the U.S. wine market in 2014, according to the Wine Institute, the trade group for California vintners. More than 80 U.S. vintners make sparklers, including local producers such as Iron Horse Vineyards in Sebastopol, J Vineyards and Winery in Healdsburg and Gloria Ferrer Caves and Vineyards in Sonoma.
The tax has become more anachronistic as the average sparkling wine today sells for around $10 a bottle, hardly a luxury, said Charles Jefferson, vice president of federal relations for the Wine Institute.
“It was basically created as a luxury tax at the time, as most of the sparkling wine was Champagne and tended to be fairly expensive,” Jefferson said. “You can’t say that about today.”
Even in the premium North Coast wine sector, sparkling wines have tended to range from $20 to $24 a bottle, noted industry consultant Jon Moramarco.
Sparkling wine also has gone from a drink for special occasions to one used more frequently, especially as more consumers use it in cocktails.
“It’s really become an everyday product,” said Heck, whose company has long been sensitive to its pricing. In 2014, Korbel raised its retail price for all brands by $1, the first hike in nine years.
Taxes also are not the only cost these vintners face. Sparkling producers also bear higher production costs because the wine must undergo a double fermentation process to obtain its carbonation.
In addition, many states follow the federal rate when imposing their own taxes on sparkling wines, Moramarco said. For example, Florida tags a $3.50 per gallon tax on sparklers, while Louisiana’s tax is at $2.08. California adds 30 cents per gallon for sparkling wine compared to 20 cents for still wine.
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“It’s part of the cost of doing business,” Moramarco said.
The bill also would increase the allowable carbonation level for still wines to be taxed at the lower rate. The limit would increase from 0.39 grams of carbon dioxide per 100 milliliters to 0.64 grams. That change would help winemakers who want to experiment with still wines that have more effervescence. Currently, they generally abandon such attempts because of cost considerations, Jefferson said.
“It’s one of the things that have kept a lot of products out of the marketplace,” he said.
The bill would expand the alcohol-by-volume level that is taxed at the lowest rate, from 14 percent to 16 percent. The limit was originally established to differentiate still wines from fortified wines. But it has inhibited winemakers, given the progress that has been made in viticulture in recent decades, Jefferson said.
The change would benefit certain wines whose grapes are higher in sugars such as zinfandel, which is the flagship fruit of the Dry Creek Valley.
The legislation also would change a tax credit that small wineries now receive, one which currently phases out at 250,000 gallons per year. The change would allow wineries to receive the credit regardless of size, but its value would decline as more gallons are produced.
Maureen Cottingham, executive director of the Sonoma Valley Vintners and Growers Alliance, said in a statement the bill “makes common-sense changes to our outdated tax code that will help advance growth and innovation in our wine community.”
The cost of the bill has not yet been calculated by the congressional Joint Committee on Taxation, according to Thompson spokeswoman Megan Rabbitt.
The bill comes as other lawmakers have offered legislation to reduce taxes for alcoholic beverages. For example, Sen. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, has legislation that would lower taxes on craft beer, cider, wine and spirits.
“Policymakers have really started to view these producers as real contributors to local economies,” Jefferson said.
Thompson and Reichert serve on the powerful tax-writing House Ways and Means Committee, giving both men a key role in trying to influence tax legislation.
House Ways and Means Chairman Kevin Brady, R-Texas, has not signaled support for the Thompson bill. Thompson, however, wants to set a marker so any future movement of tax bills this year will include items that would benefit the local industry, Rabbitt said in an email.