For Free Trade Among The States

Ray Keating The Christmas season is a time for giving gifts to family and friends. Maybe a selection or two from that out-of-state winery you visited a few months back would be nice. Place an order by telephone or over the Internet, and the wine can be delivered to your home.

Not so fast. Better check to see if you live in one of 24 states that actually outlaw direct shipments to consumers from out-of-state wineries. Against the law to buy your favorite wine? That’s pretty annoying. Indeed, it’s outrageous for consumers, and for the thousands of small wineries around the nation that justifiably would like to serve customers wherever they might live.

These restrictions have been challenged in court, and a case involving distribution prohibitions in Michigan and New York was argued before the U.S. Supreme Court on December 7, with a decision expected by June.

The Founding Fathers understood the various economic messes that could be created by politicians. It’s easy to envision elected officials in a state creating an environment whereby in-state businesses could easily sell their wares to residents, while making it far more costly or difficult for out-of-state businesses to do so -- perhaps even prohibiting those distant enterprises from making such sales. Fortunately, such protectionism among the states is not permitted under the Interstate Commerce Clause of the U.S. Constitution. Article I, Section 8 states, in part, that Congress shall “regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes.” Making sure that protectionism did not spread among the states helped both consumers and producers, and played a key role in creating a robust, national economy.

Seems pretty clear. States don’t have the right to erect protectionist barriers. That would include prohibitions against direct wine shipments from out-of-state wineries. But what about Amendment XXI to the Constitution, which ended Prohibition? It states: “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” Does this somehow override the Commerce Clause? Those favoring prohibitions on out-of-state direct wine shipments argue it does.

However, that’s a difficult position to defend. And that became clear during the arguments before the Supreme Court. Several newspaper stories reported the questions and comments made by various justices, and they seemed quite skeptical of the positions taken by the states restricting sales.

A key argument is that bans on out-of-state direct wine deliveries serve to protect minors from underage drinking. Newsday’s report noted skepticism among some justices. Justice Antonin Scalia reportedly observed: “What you’re arguing is not essential to states’ enforcement of alcohol laws. That’s shown by the fact that 26 states let wineries ship to customers.” Then there’s the issue that New York, for example, while not allowing out-of-state winemakers to make direct shipments, allows in-state wineries to do so. Justice David Souter noted that this undercut the underage drinking argument, saying: “The very activity you don’t want them to engage in, you engage in, or your local wineries.”

New York and Michigan also asserted that the XXI Amendment gives states carte blanche in making their alcohol laws. As noted in the New York Times, Michigan Solicitor General Thomas Casey said that the amendment permitted “mere protectionism.” However, this also did not sit well with some justices. Justice Stephen Breyer reportedly said that regarding the XXI Amendment, he found “not a word in any brief that I saw of any intent to get rid of the antidiscrimination principle.”

The winemaking business has blossomed in recent years. For example, the number of wineries has grown from 1,367 in 1985 to 3,726 this year, according to a Wall Street Journal report. These businesses should be able to reach customers across the nation. Twenty-six states allow for direct shipments from out-of-state wineries, and there is no sound constitutional, economic or societal reason for the denial of such deliveries in the other 24 states.

In addition, this case could easily have implications for other enterprises. The Journal noted that “15 states require mortgage lenders to maintain a brick-and-mortar presence to do business in those states.” There is legislation in Congress that would create a national market in health insurance, so that an individual living in New Jersey, for example, could shop around via the Internet to purchase health insurance in another state in order to save money and get appropriate coverage. The decision in this wine case could affect these and other areas in the marketplace where state lawmakers attempt to restrict access and choices for consumers.

The Commerce Clause of the U.S. Constitution makes economic sense and has served the nation well. It’s time to clear away assorted state-based restrictions that hurt both producers and consumers. Hopefully, this process will get a jumpstart if the U.S. Supreme Court upholds a free market in wine.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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