The Interstate Wine Shipment Case

The Interstate Wine Shipment Case

Seven economists - three Nobel prize winners - have filed an amicus brief with the Supreme Court in the interstate wine shipment case. You can find it here: Economist's amicus brief.

The brief includes an analysis of the economic foundations of state rules restricting imports of wine. Does the evidence suggest that these rules are meant to advance public welfare objectives or the economic objectives of powerful interest groups? The analysis is based on a paper by Gina Riekhof and Michael Sykuta, "Politics, Economics, and the Regulation of Direct Interstate Shipping in the Wine Industry" (CORI Working Paper 03-04, April 2004). The abstract for this paper reads in part:

"In 1986, the State of California passed legislation restricting the direct importation of wine from another state by California residents unless the originating state allowed the reciprocal privilege of direct shipment from California wineries to residents in that state. This proved to be the opening salvo in a series of legislative and judicial battles across the country. State direct shipment regulations that were uniform across 47 of the 50 states prior to 1986 now constitute a patchwork of regulations. This raises unique interstate trade questions due to the special treatment of alcohol in the U.S. Constitution. While the Commerce Clause forbids states from discriminating against interstate commerce, the 21st Amendment affords states the right to regulate alcohol within their borders. Courts are divided in their opinions on direct shipment regulation; some find that prohibiting direct shipment unconstitutionally restricts interstate commerce while others find the regulations consistent with the public interest rationale of the 21st Amendment..."

The economist's brief picks up the story:

"In the decades following the enactment of the Twenty-First Amendment, virtually all states adopted a three-tier system [the three tier system refers to separation of producer, wholesaler and retailer, enforced by state regulation - Ben]. Most states enacted direct shipment prohibitions to protect that system, but those restrictions played only a small role, as the technologies of those times rendered remote transactions between producers and consumers uneconomic. In 1986, however, California limited direct shipment to imports from states that would permit, on a reciprocal basis, the direct shipment of California wines to their citizen-consumers. The economic logic is not hard to fathom: by limiting direct shipment rights to reciprocity states, California�home to the nation�s largest wine industry�sought to open other states� markets to its domestic producers.

California�s move prompted a change from a relatively homogeneous state regulatory environment to the current patchwork of state alcohol regulation. Some states responded relatively quickly in the manner hoped for by California; there are now 13 reciprocity states. Many other states loosened their restrictions and allowed direct shipments from out-of-state, often under a permit system. A few states, however, Michigan among them, tightened their direct shipment regulations...

The variegated state responses to California�s unilateral adoption of a reciprocity regime in 1986 suggest an obvious question: why did formerly homogenous state regulatory regimes generate such disparate responses? Riekhof�s and Sykuta�s sophisticated analysis directly addresses that question and finds �that economic interests play a significant role in determining a state�s adoption of direct shipment [regulations], but no evidence supporting a general public interest motivation.� Riekhof & Sykuta at 4. That finding is highly plausible even at an intuitive level: �If direct shipment prohibitions prior to 1986 were in place solely for public interest reasons, it would be difficult to explain why California�s decision to adopt reciprocity would have its intended effect of opening up access to no-shipment states.� Id. at 12. Unsurprisingly, the authors find that the size of a state�s wine industry (number of wineries relative to state wine consumption) is positively related to the adoption of reciprocity laws. Conversely, the size and concentration of the distributor industry are negatively correlated with the likelihood that reciprocity legislation will be enacted. Id. at 22. Riekhof & Sykuta found that public sector interests (such as tax collections) also affect state responses. In contrast, none of the authors� proxies for public interest considerations appeared to have a significant effect on state policy responses. Id. These results are highly consistent with well-accepted general economic theories of regulation. They directly affect the present case: �To the extent that public welfare interests are required by courts to justify states� restrictions on interstate commerce, our results cast a shadow of doubt on public interest arguments in the area of direct shipment of wine.�

I learned about the brief from Lynne Kiesling: "Economist Amicus Brief in Interstate Wine Shipment Case".

Revised Oct 20