TUESDAY, FEBRUARY 4, 2025.  BY STUART SPENCER, LODI WINEGRAPE COMMISSION.

In the past two years, hundreds of thousands of tons of California winegrapes have been left on the vine unharvested. Across the Central Valley this winter, farm workers are going door to door, desperate for employment. Work is scarce. Banks are refusing to lend without contracts in place. Multi-generational family farms, once symbols of perseverance and tradition, are being placed up for sale.

The US wine industry has faced three consecutive years of declining shipments, driven by a combination of economic, regulatory and demographic challenges. For decades, market growth masked systemic issues, including regulatory loopholes, tax subsidies, import incentives and public policies that have favored large multinational alcohol corporations. These measures have often come at the expense of local producers and rural communities.

This disparity has undermined the core of domestic wine production, eroding its authenticity and straining the agricultural communities that support it. Achieving a fair, transparent and competitive industry requires meaningful regulatory changes and collective efforts to elevate all stakeholders—farmers, workers and vintners. The following discussion outlines six key regulatory and tax policies that have disproportionately benefited large alcohol corporations, often to the detriment of American farmers and rural communities.

AMERICAN APPELLATION

The Alcohol and Tobacco Tax and Trade Bureau (TTB) permits wines labeled with an “American” appellation to contain up to 25% foreign wine. This regulation allows wineries to blend domestic wines with up to 25% imported wine while still labeling the product as “American.” This consumer deception is supported by the federal government and undermines domestic winegrowers by allowing wineries to import cheap foreign wine to lower their cost of goods sold.

“American” appellation wine labels.

Under European Union labeling laws, the country of origin must accurately reflect the source of the grapes. This ensures that wines labeled with “France” or “Italy” cannot include any components (grapes, must, or wine) from outside the country. These rules are designed to ensure transparency, authenticity, and protection of the reputation of French, Italian, Spanish wines.

Apparently, the US government doesn’t share the same sense of responsibility for American-grown wines and is content to offshore American farms and their workers. And/or vested winery (lobbyists) interests have prevented regulatory reform necessary to ensure integrity of “American” wine.

WATERING BACK WINE

In 2002, the TTB revised federal regulations to allow wineries to add water to grape must during fermentation. This change was introduced as a “corrective measure” to reduce high sugar concentrations, enabling more controlled fermentations and lower alcohol levels in the finished wine.

American Association of Wine Economists sugar levels report, 1975-2023.

Over the past 40+ years, the rolling 10 year average Brix level of California Cabernet Sauvignon has increased from 22.7 to 25.3 degrees, according to the American Association of Wine Economists. In 2002, when the regulation allowing water addition was implemented, the average Brix level was 23.7 degrees. This shift toward greater ripeness has led to reduced vineyard yields, as grapes naturally dehydrate on the vine as they approach these higher sugar levels. The new rule effectively enabled wineries to purchase less grapes at higher ripeness levels, then dilute the must with water to manage alcohol levels and increase yields.

This issue has been further compounded by stringent regulations from the California Air Resources Board (CARB) and the San Joaquin Valley Air Pollution Control District. These agencies require an expensive and time consuming permitting process for wineries to add fermentation tanks, with approvals often taking years. Moreover, wineries are burdened with carbon offset fees that make expanding fermentation capacity financially unfeasible. Consequently, grapes are frequently left to shrivel on the vine as growers face delays in harvest due to insufficient fermentation tank space during critical periods. These regulations have also incentivized wineries to source cheaper foreign bulk wine instead of investing in local fermentation infrastructure and purchasing California-grown grapes, effectively negating any environmental benefits by increasing emissions associated with transporting bulk wine from halfway across the world.

VINTAGE DATING RULE CHANGES

In 2006, the TTB supported a Wine Institute petition and amended the vintage date requirements for wines labeled with state or county appellations. Previously, to carry a vintage date, 95% of the wine’s content had to be derived from grapes harvested in the labeled year. The 2006 amendment reduced this requirement to 85% for wines labeled with state or county appellations.

It was asserted that the amendment would benefit both US winemakers and American consumers because of the advantage derived from being able to use either a younger or older wine in a blend. The petitioner explained this advantage as follows: “For instance, 15% of a wine from an older riper vintage will assist in achieving a style target when the current vintage has produced thinner, more acid wines.”  Apparently, this was all “talk” as thousands of tons of contracted grapes were rejected by wineries for too low of sugar (2023) and too high of sugar (2024).

In 2012, based on a European Commission petition, the TTB further revised the regulations to allow wines labeled with a country as an appellation of origin to bear a vintage date. This change provided greater flexibility to importing wineries in sourcing grapes and labeling wines. In supporting comments, the National Association of Beverage Importers (NABI), a US-based trade group, states that “the proposed revision may impact the market for bulk wine shipped to US wineries from supplier nations. Allowing vintage dating on country appellation wines will elevate the value of these wines to their importers (California wineries) and to consumers.”

In both cases, the California Association of Winegrape Growers (CAWG) and the Lodi District Grape Growers Association (LDGGA) have pushed back only to be ignored by regulators. Apparently, the US government is more interested in elevating the market for cheap foreign subsidized wine, than protecting the interests of tax paying American farmers.

Thousands of containers of subsidized foreign bulk wine arrive annually in California.

DUTY DRAWBACK

Over the last six years, the federal government has spent more than $204 million subsidizing imported wine. In the first 10 months of 2024 alone, over 30 million gallons of inexpensive foreign bulk wine entered California — part of a five year total exceeding 1.4 billion bottles. This duty drawback loophole has primarily benefited the largest companies at the expense of domestic production.

Under standard duty drawback rules, US importers who pay duties on foreign goods — including bulk wine — can claim refunds when they export a “like” product. Known as substitution drawback, the mechanism does not require the exported wine to be the exact same type of wine that was imported, only that it be deemed “similar” or “commercially interchangeable.”

In 2004, under this program, the government began refunding alcohol taxes paid on imported wine. Today, over 99% of the drawback refunds are coming from the alcohol taxes paid; taxes that domestically produced wine must pay. In many cases, the tax subsidy exceeds 50% of the value of the imported wine. This loophole in the duty drawback program is unique to products paying excise taxes and puts domestically produced goods at a competitive disadvantage.

Imported bulk wine/grape pricing index 1996-2023 by author. Imported bulk wine values sourced from Gomberg Fredrickson; grape pricing sourced from Crush Reports.

This tax subsidy encourages the import of low-cost foreign wine rather than sourcing grapes locally, which has resulted in significant harm to domestic production and agricultural economies and communities.

EXPANSION OF DUTY DRAWBACK

The US Customs and Border Protection (CBP) has recognized the loophole and urged Congress to correct it. In 2009, CBP and TTB proposed rulemaking to eliminate the duty drawback loophole. After public comment, including intervention from 18 legislators, the proposed amendments were withdrawn in 2010.

Several years later, in 2018, CBP proposed rules to implement changes to the drawback regulations as directed by the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA). This time, after public comment, the proposed regulations with amendments were adopted, prohibiting the loophole.

However, in 2019, the National Association of Manufacturers and The Beer Institute filed lawsuits against the updated regulations in the United States Court of International Trade. After a series of appeals, in 2021 the court ruled in favor of the National Association of Manufacturers and The Beer Institute, invalidating the regulations that would have ended the drawback loophole.

Not only did that ruling allow the drawback loophole to continue for wine, but it opened the door for beer, spirits and tobacco producers to import “interchangeable” foreign products virtually tax free, putting domestic production at a competitive disadvantage and potentially costing taxpayers billions of dollars annually.

In the first full year this loophole was open to spirit companies, over $285 million in federal alcohol taxes was refunded. And since 2022, over $529 million in taxes have been given back, allowing millions of gallons of foreign spirits to show up on store shelves, restaurants and bars virtually tax free. Due to the higher tax rates for spirits ($13.50 proof gallon vs. $1.07 wine gallon), and their much lower costs of production, this subsidy gives spirit companies and imported spirits a distinct advantage over domestically produced wines in the US market.

Source: Customs & Border Protection.

5010 TAX CREDIT ON CANADIAN BULK “WINE”

In 2023, the United States imported 60 million gallons of “wine” from Canada at a cost of $1.07 per gallon. However, Canada does not produce 60 million gallons of what most people would traditionally consider “wine.” Instead, this product is being leveraged by the spirits industry to exploit the federal 5010 tax credit. This credit allows spirit producers to apply the lower wine tax rate to the portion of alcohol derived from wine. The imported Canadian “wine” is primarily used in the production of cordials and liqueurs, which are sweetened, flavored alcoholic beverages.

The 5010 tax credit was established under Section 5010 of the Internal Revenue Code (IRC) as part of the Tax Reform Act of 1976. In 2005, to align with international trade agreements, US law was amended to allow imported wine to qualify for the 5010 tax credit. Since this change, there has been a dramatic increase in bulk “wine” imports from Canada.

Apparently, a specialized industry in Canada has developed what some suggest is a fermented sugar solution — often derived from cane sugar — that apparently meets the Canadian regulatory definition of wine. Not only does the importation of Canadian “wine” allow the spirits companies to reduce their alcohol taxes, the production of “wine-based” cordials and liqueurs allows them to expand where they can legally sell their products. It is estimated that it opens 170,000 establishments across the US that only have licenses to sell beer and wine.

Canadian bulk wine imports 2005-2024 report by author.

One challenge with trade agreements is that they depend on mutual adherence to agreed upon rules. Under these agreements, the US must accept the definitions and regulations of its trading partners, with limited mechanisms for ensuring compliance with US laws.

The 5010 tax credit and the 2005 legal amendment have created two significant problems for domestic grape producers:

  1. Unfair Competition: The product being imported from Canada and classified as wine is produced at an extremely low cost. There is no sustainable way for US farmers to grow grapes, produce wine, and sell it profitably for $1.07 per gallon. This has harmed domestic brandy production and the market for California winegrapes used for distilling materials. Although at a low price, historically, growers have been able to sell excess grapes for distilling material. The impact became evident in 2023 and 2024, as thousands of tons of grapes were left unharvested, without a home at any price.
  2. Market Disadvantage:  In today’s competitive environment, market share is critical. Spirits, cordials and liqueurs are significantly cheaper to produce. By allowing these industries to exploit loopholes in US trade laws to reduce their tax burdens, both through 5010 tax credit and duty drawback, we are providing them with an unfair advantage in the US marketplace. The significant subsidies give these companies outsized influence in an already crowded and dysfunctional wine and spirits wholesale marketplace.


TIME TO SUPPORT LOCAL FARMS, NOT CHEAP IMPORTS

For decades, flawed public policies have placed domestic winegrowers and craft producers at a significant disadvantage. US growers must compete against heavily subsidized European wines — estimated at €2 billion annually — and with imports from countries that do not adhere to California’s stringent and costly environmental and social standards. These challenges extend beyond wine, affecting all small scale producers of craft spirits, beer and wine, who are struggling to stay competitive in an increasingly skewed marketplace.

Despite persistent advocacy from groups like CAWG and LDGGA, which have fought tirelessly to address these systemic regulatory flaws, their efforts have often been ignored or overshadowed by larger corporate interests with deeper lobbying budgets. The voices of local growers and rural communities have been drowned out in favor of policies that benefit multinational corporations and foreign producers.

The solution lies in meaningful reform. The US government and the wine industry must address these systemic flaws by:

  • Closing Regulatory Loopholes:  Enforce stricter labeling standards to ensure transparency and protect the integrity of “American” wine.
  • Promoting Fair Trade:  Address the impact of foreign subsidies and duty drawback abuse on domestic markets, ensuring fair competition.
  • Supporting Local Producers:  Prioritize policies that incentivize domestic production and make compliance with environmental and social standards more economically viable.

Growers, vintners and our larger agricultural communities can help. There are three things you can do now:

  • Investing in Advocacy:  Support the efforts of organizations like CAWG, ensuring their voices are heard in policy debates. Engage your local organizations and get them involved in these issues.
  • Reach Out to Congress:  Call your local Congressman and state Senators and let them know how damaging these policies are to domestic production. Several of these issues require direct congressional action.
  • Engage with Local Retailers:  Visit your local grocery store and ask to speak to the manager. Let them know how insulting it is to local farmers that shop in their stores to see floor stacks of cheap subsidized foreign wine while local grapes rot on the vine.

The future of American wine depends on embracing fair, transparent and sustainable practices that ensure the success of all stakeholders. It is vital to the economic stability and well-being of rural communities such as ours in Lodi that rely on the wine industry for jobs, investment and growth. Now is the time to take meaningful action and invest in a future that supports not just the global alcohol companies, but the entire wine industry.

 


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