Iowa: Iowa alcohol laws: Aiding consumers or stifling growth?
Source: Des Moines Register
June 29, 2015
The dawn of the 20th century in America was the age of the saloon – and all the ills that came with it.
Bars had become hotbeds of drunkenness, illegal gambling and prostitution.
That prompted ratification of the 18th Amendment, which in 1920 prohibited manufacture, sale and distribution of alcohol. But vices merely moved underground, proliferating and expanding in unforeseen ways, until the solution to national intemperance became worse than the problem.
After Americans repealed Prohibition by passing the 21st Amendment in 1933, states took up the mantle of alcohol regulation.
“The main policy goal after repeal was to, above all else, prevent the return of the saloon,” said Lisa Jacobson, a cultural historian at the University of California Santa Barbara.
So Iowa and other states adopted a thick regulatory framework around the alcohol industry.
Supporters say the eight-decade-old system has served Iowans well, and that further tinkering would unnecessarily open the door to unintended consequences. But critics say it’s time for change.
Iowa’s laws still privilege beer and wine, with typically lesser alcohol content, over liquor; limit the number of bottles of liquor a distiller can sell; prevent breweries from operating kitchens; and mandate a host of other restrictions that alcohol producers say stifle growth.
“It’s almost as if everything about the way we sell alcohol in the state of Iowa and (the way) we’re responsible for the consumption of alcohol in the state of Iowa is outdated and antiquated,” said Darin Beck, CEO of Barmuda Cos., which operates a number of bars and restaurants in Iowa.
A bill introduced during the last legislative session called for a review of the state’s alcohol code, a move Alcoholic Beverages Division Administrator Steve Larson said he supports.
Tweaks prompt law in Iowa to evolve
The legal framework that most states adopted following Prohibition’s repeal is known as the three-tier system, with manufacturers, distributors and retailers each segregated into a tier.
The idea was to maintain separation between manufacture and sales in an effort to reduce pressure from producers to oversell.
In Iowa, the most vocal supporters of the three-tier system are the distributors, who make up the middle tier.
“The three-tier system is the backbone of the industry,” said Sheila Douglas, the outgoing executive director for the Iowa Wholesale Beer Distributors Association. “Each tier does what it does brilliantly. They should stick with their tier.”
But Marc Sorini, who heads the alcohol regulatory and distribution group with the Washington, D.C., law firm McDermott Will & Emery LLP, said the system has already changed in a number of ways.
“That’s important for both sides to keep in mind,” he said. “It’s important for people who say, ‘Oh, you can’t change anything or the system will collapse.’ The system has evolved already. For critics who say this is all outdated crap, well, not necessarily. It’s an accommodation of public needs and also a competitive desire.”
In Iowa, a few key changes have helped spark growth in craft brewing.
In 1972, lawmakers approved legislation to allow gas stations that sell food to also sell beer for off-premises consumption.
Brewpubs, which operate a kitchen and brew their own beer, were legalized in 1989.
And in 2009, legislators passed a law that allowed craft breweries to produce beer with a higher alcohol content. Previously, they had been limited to beer that was 5 percent alcohol or less.
The 2014 Iowa Craft Beer Economic Impact Report credits that change with increasing the number of small breweries in Iowa. The report found that the number of active Iowa breweries rose from about 20 in 2009 to more than 50 by the end of 2014.
And earlier this year, the Legislature voted to allow gas stations and convenience stores to sell fill-and-go growlers of beer.
Throughout the 1980s, states across the country debated whether legalizing brewpubs, which sell their own beer at their restaurants without going through a distributor, would degrade the three-tier system, Sorini said.
“At the time, there were people saying, ‘Oh my goodness, that’s such a violation’ ” of the tiered system, he said. “And yet we’ve legalized brewpubs now for 30 years, and the sky hasn’t fallen. And in fact, it’s one of the drivers of the reinvigoration of the beer business.”
The wine industry also has undergone a number of changes – many of them spurred by the growth of the Napa Valley wine region in California, Jacobson said. There, proponents argued for change as an agricultural and economic issue.
“So the three-tier system has been eaten away at in all sorts of different ways,” she said. “And certainly the wine industry has eaten away at it, because you can have wineries serve customers who come to the winery.”
System credited with leveling playing field
Bill Owens, president of the American Distilling Institute, takes issue with a number of aspects of alcohol regulation, primarily because liquor is still so much more heavily regulated than other types of alcohol.
“Three tiers? I think it’s the way of the dinosaur,” Owens said. “You have all these laws that are just based on silliness.”
As in Iowa, distilleries in many states can’t pour their product by the glass, can’t sell their product online and can’t sell directly to consumers without going through a distributor.
“The states that have opened up are booming,” Owens said. “It’s so solid for business to have these laws liberalized to allow business and cash to flow.”
But few small distillers and craft brewers argue the remedy is doing away with the three tiers entirely.
“It does allow wholesalers to be independent, which I think is a valuable thing,” said Dave Ropte, president of the Iowa Brewers Guild and owner of 515 Brewing Co. in Des Moines.
He said he appreciates the fact that a mega-brewer like Budweiser can’t come into Iowa and arrange deals with liquor stores or bars to block out competing products. That level playing field is important for small producers, he said.
Sorini also credits the system with creating fair competition.
“But that doesn’t mean it shouldn’t evolve,” he said.
Other states moving to relax regulations
Sorini argued that every alcohol producer should be able to sell its own product at its place of production without going through a third-party distributor – up to a certain point.
He said the state could set limits based on size or market share.
“A reasonable ability to self-distribute for all but the largest players is only going to enhance the ability to get to market,” he said.
Some states allow producers to have a limited number of retail locations outside their place of production. New York allows it for distilleries, and California allows it for vineyards.
“The sky hasn’t come crashing down,” said Richard Blau, chairman of the regulated products practice group at Tampa law firm GrayRobinson PA. “There haven’t been accounts of counterfeit or adulterated product or any scandal over failure to pay taxes.”
Some other states that control the distribution of liquor the way Iowa does are looking to get out of the booze business.
Washington voters chose to end the state’s monopoly on the distribution of liquor.
But because that meant the state would no longer reap a profit from those sales, the state added taxes and licensing fees that ultimately drove up the cost of spirits.
Legislator to renew push to review laws
Rep. Guy Vander Linden, R-Oskaloosa, chaired a subcommittee that considered legislation earlier this year that called for a review of Iowa’s alcohol laws. That was last done in 1990.
“There’s been a lot of changes in the industry since then,” he said. “And if you read some of these sections (of the current law), they’re almost indecipherable because they’ve cut out sentences and stuck stuff in, and it’s not very well-written at the moment.”
Larson, administrator of the Iowa Alcoholic Beverages Division, agreed that it’s time to reconsider Iowa’s laws.
“The three-tier system is important,” he said. “But the marketplace has changed. And there need to be conversations among policymakers and stakeholders …”
The bill did not advance out of the House last session, but Vander Linden and Larson both said they would work to move the conversation forward during the next session.
A statement from Gov. Terry Branstad’s office said he would wait to comment on any legislation until seeing the final wording.
“Gov. Branstad is pleased to see the growth in wineries, breweries and distilleries across Iowa,” the statement said. “In fact, he was recently in Northwood for the ribbon cutting of an expansion to a local brewery. The governor is supportive of these Iowa small businesses that continue to grow, but would reserve judgment on legislation until he saw it in its final form.”