Grapes of Wrath (Short Version)

(Editor's note: This is an edited version of an article that appears in the January/February issue of Michigan Capitol Confidential.)

A new state law prohibits Michigan connoisseurs of wine and beer from purchasing these products and having them shipped directly to their home from out of state retailers. Instead, all such purchases will be allowed only from a state-endorsed wholesaler. Introduced in November 2008 as House Bill 6644, the new law was quickly passed during the final days of the 2008 legislative session. It was overwhelmingly supported by 134 of the 148 members of the Michigan Legislature, and became Public Act 474 of 2008 upon being signed by the governor and then enacted on Jan. 9, 2009.

Michiganvotes.org notes that the purpose of this law is to "avoid complying with a federal court ruling that held state restrictions on such shipments from out-of-state retailers to be a violation of the U.S. Constitution's commerce clause." The majority opinion in this case, Granholm v. Heald, relied in part on a July 2003 report from the United States Federal Trade Commission which concluded that prohibitions on interstate alcohol shipments should be abolished because they result in increased prices and restricted choice while failing to produce any measurable benefit.

The Specialty Wine Retailers Association, a national trade group representing out-of-state retailers, and groups representing legal-age wine drinkers all opposed the Legislature's most recent circumvention of Heald, as did the Michigan Restaurant Association. The major supporter of the law was the Michigan Beer and Wine Wholesalers Association, a politically powerful trade group that represents the state-endorsed wholesale beer and wine distributors.

While Heald recognized Michigan's authority to regulate alcohol distribution within its borders (which is granted by the U.S. Constitution's 21st Amendment), it prohibited the state from applying a different standard to in-state and out-of-state wine and beer suppliers. Michigan lawmakers could have responded to this ruling by allowing Michigan consumers to save money by avoiding the MB&WWA middlemen, instead granting residents here direct access to all of the nation's federally licensed wine and beer suppliers. Some form of this standard is the law in nearly two dozen states. Instead, Public Act 474 essentially prohibits both in-state and out-of-state suppliers from shipping direct to Michigan customers, mandating that both sell only to the state-endorsed wholesalers represented by the MB&WWA.

Wholesalers form the second tier of what is known as a "three-tier" distribution network. The first tier is producers, importers or other suppliers of beer and wine to the Michigan market; the third tier is the final retail seller, such as local stores and restaurants. Nearly all beer and wine sales in Michigan must pass through this licensing network.

Contrary to initial fears, organized crime's control of alcohol distribution did not survive after Prohibition, in the wake of which many states created three-tier distribution systems. Michigan's system dates back to 1933, the year of Prohibition's repeal. Today, the MB&WWA represents 75 private distributors, each with a state-granted privilege to control the flow of more than 90 percent of all the beer and wine that is consumed by Michigan residents. In 2004, the MB&WWA dedicated a new 8,500-square foot, $2 million Lansing headquarters. The reception area is named the "1933 Room."

This room was featured in a detailed series of articles about the MB&WWA written by Detroit Free Press reporter Jennifer Dixon and published between Feb. 10 and 12, 2005. A popular location for state lawmakers to host fundraisers, the 1933 Room represents just one form of political influence that Dixon linked with the organization.

She asserts that Michigan wholesalers are "the envy of their industry" and quotes a former chairman of MB&WWA who claimed that they are routinely congratulated by out-of-state colleagues who note "how good we have it" in Michigan. High up amongst what he called the group's "blessings" is not being one of the states that allow consumers to avoid the middleman-wholesalers.

Because these government-sanctioned monopolies are privately held, businesses records of their value and profits are not public information. Dixon gives a hint as to their profit making potential by citing statistics showing that one large Michigan distributor marks up each case of beer by $4 to $5 after getting it from Anheuser-Busch and before sending it along to a retail store. The wholesalers' chief lobbyist is quoted as saying that many of his members are millionaires.

What sustains these "blessings?" Dixon's work suggests that much of it involves political campaign contributions.

She found that all but nine of the 148 lawmakers elected to the Legislature in 2002 received a campaign contribution from the wholesalers. (Michigan Capitol Confidential research for this article discovered that all but 11 of the 148 lawmakers serving in 2008 and voting on the bill to create the direct shipment ban had received at least one such contribution during their career.) Michigan's current governor, attorney general and secretary of state are also recipients.

The Michigan Campaign Finance Network lists the wholesaler's political action committee as donating $722,698 during the 2006 election cycle, ranking it as the No. 14 largest PAC. However, unlike virtually all of those PACs listed higher, such as unions, business groups and funds linked directly to Democrat and Republican causes, Rich Robinson, director of the MCFN, told the Detroit Free Press that the MB&WWA is unique because it is one of the few that gives generously to politicians from both political parties.

And these donations are not trivial. MCFN analysis shows that the wholesalers ranked as one of the "top contributors" for 88 of the 148 lawmakers during the 2006 election cycle. Winning this election put them in position to vote on the bill to ban direct shipment. For 65 of them, the MB&WWA was one of their five largest single sources of campaign cash; 51 of them received $4,000 or more from the wholesalers' PAC and eight senators received equal to or in excess of $9,000.

Dixon reported additional benefits given to some lawmakers. One front-page article highlighted a 2004 trip to Grand Cayman for four lawmakers — paid for by the MB&WWA — so that they could attend and speak at a wholesaler's event. Even though the Michigan Legislature was still in session during part of the trip, the four guests included the Speaker of the House, the Senate Minority Leader, and the chair of the House committee that handles bills dealing with liquor regulation.

The newspaper notes that the trip cost the trade group $11,213, and that this was an "unusual lobbying tactic" given that their analysis of more than 100 other associations and corporations revealed "only a few" that reported trips for lawmakers with costs exceeding even $1,000. The article quotes the wholesalers' newsletter that described the trip as "five days of governance, business seminars, social events, sporting activities and to just kick back from the winter doldrums of the Midwest."

Because the lawmakers spoke at the gathering, and thus ostensibly provided something of value to the wholesalers, under Michigan law they were entitled to have the cost of their trip paid for by the MB&WWA. Similar trips have been provided to resorts in Cabo San Lucas, Palm Beach, the Bahamas and more. One of the four lawmakers in attendance at the Grand Cayman event was asked by Dixon what the wholesalers got for such expenditures. He replied: "They get a lot of goodwill, no doubt about it."

That lawmaker, State Rep. Ed Gaffney, R-Grosse Pointe Farms, was one of 98 state representatives to vote in favor of the bill to ban direct shipment of beer and wine to adult customers. It was one of his last acts as a term-limited state legislator. On Jan. 16, 2009, just over two weeks after he left office and exactly one week after Gov. Granholm signed the direct-shipment ban into law, the governor appointed Gaffney to a seat on the Michigan Liquor Control Commission, the primary regulatory agency that oversees the state's beer and wine wholesaler industry. This job pays $82,000 per year.

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Kenneth M. Braun is a policy analyst specializing in fiscal and budgetary issues at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.