October 3, 2005

Governor faces sticky decision
Bill pits foes of teen drinking against the liquor and retail industries

Flavored malt beverages - such as Mike's Hard Lemonade or Smirnoff Ice - have sparked a tax quandary for California and spawned legislation that poses a dilemma for a governor advocating healthier children and no tax increases.

Assembly Bill 417 pits Attorney General Bill Lockyer and opponents of teenage drinking against the liquor and retail industries, which say vetoing the measure could lead to a multimillion-dollar tax increase and reduce the supply of flavored malt beverages statewide.

Schwarzenegger must decide whether to sign or veto the bill before Saturday at midnight, a time of intense politicking, with a special election looming.

"He's on record as saying that he wants to protect young people, that he supports parents in their efforts to keep children safe and healthy - and signing this (bill) would just fly right in the face of those commitments," said attorney James F. Mosher, director of the Center for the Study of Law and Enforcement Policy.

Paul A. Smith disagrees.

Smith, a vice president for the California Grocers Association, which supports AB 417, contends that signing the measure has nothing to do with teenage drinking and everything to do with tax fairness and consumer choice.

But Smith recognizes that the decision won't be made in a vacuum.

"This is all about the politically charged atmosphere we have," Smith said of the controversy. "You can't separate it from election-year politics."

Debate over flavored malt beverages focuses on their classification as beer, not distilled spirits, which are taxed at a rate more than 15 times higher.

Specifically, California taxes beer at 20 cents per gallon, and distilled spirits - hard liquor - at $3.30 per gallon.

Lockyer is urging the Board of Equalization to impose the higher rate on flavored malt beverages because beer, under state law, cannot contain alcohol from distilled spirits.

Flavored malt beverages contain the same alcohol content as beer, 4 to 6 percent, but a portion of their alcohol comes from flavorings containing elements of distilled spirits.

Malt beverages are brewed like beer, but the beer taste is removed and replaced to resemble lemonade, apple, cherry or other sweet juices.

AB 417, by Republican Assemblyman Greg Aghazarian of Stockton, would retain the status quo by allowing malt beverages to continue being taxed as beer.

Aghazarian's bill would adopt a recently enacted federal guideline as California's standard: Malt beverages would qualify as beer if 51 percent of their alcohol comes from brewing.

Big money is at stake: The higher tax rate could cost the liquor industry, and ultimately consumers, more than $40 million per year.

A veto of AB 417 also could affect supply, because flavored malt beverages potentially could not be sold at more than 35,000 restaurants and retail outlets that are licensed to sell beer but not hard liquor.

Opponents of Aghazarian's bill call it a sneaky attempt to appease the liquor and retail industries, which have been generous Schwarzenegger contributors. AB 417 was a "gut and amend" bill, unveiled in the final three weeks of this year's legislative session, resulting in hurried public hearings.

Malt beverages, sometimes called "alcopops" or "cheerleader beer," are designed to appeal to teenage drinkers and women by tasting more like soda pop than beer, opponents claim, adding that raising their price and lowering their availability could reduce consumption.

"It's like a gateway drug for teenagers," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, which lobbies for legislation to reduce drunken driving.

Added Mosher: "The challenge for the industry, with the young generation so hooked on Coca-Cola, is how do you get (teenagers) used to the harsher taste of alcohol? Well, you create these beverages that are very similar to soft drinks."

Teenagers interviewed Friday near Land Park agreed that flavored malt beverages appeal more to girls, but they were split on whether they're more popular with a high school than college crowd.

David Tuller, 18, said such "baby" drinks aren't particularly popular at any age, but perhaps are more common among high schoolers.

Rosemary Moralez, 19, disagreed.

"High school kids, they usually like to impress their friends by drinking hard stuff and carrying around bottles of vodka and stuff," she said.

The American Medical Association released a study last year that found roughly one-third of teenage girls nationwide have tried alcopops, a far higher percentage than boys.

Eighty-two percent of those young female consumers agreed that malt beverages taste better than beer or other alcoholic drinks, the study said.

"The state has a duty to do everything in its power to protect our kids from death and other harm caused by drinking," said Tom Dresslar, Lockyer's spokesman. "That's no laughing matter. If this bill becomes law, the state will abdicate that duty."

Officials of the retail and liquor industries counter that Aghazarian's bill doesn't seek special treatment, it just assures that malt beverages will be taxed the same as they always have been.

Every state except Maine currently treats flavored malt beverages as beer, and the new federal regulation - by the Tobacco Tax and Trade Bureau - supports that interpretation, industry officials note.

More than 17 million gallons of flavored malt beverages were sold in California in 2003-04. Nationwide, such sales represent 2.5 to 2.7 percent of the beer market, according to a report by the state Board of Equalization.

Aghazarian said malt beverages should not be made a scapegoat for underage drinking, which can be tackled by better enforcing current laws and better educating families.

"What this bill does, in effect, is burden adult consumers who enjoy flavored malt beverages without any corresponding benefit in the fight against underage drinking," said Gary Galanis, a spokesman for Diageo Inc., makers of Smirnoff Ice.

Taxing Mike's Hard Lemonade at the rate of distilled spirits could add $1.62 to the price of a six-pack, officials said.

A Federal Trade Commission report, in 2003, found no evidence that advertisements for flavored malt beverages have targeted teenagers.

Smith, of the grocers association, said opponents of AB 417 are pushing a larger, anti-alcohol agenda.

"Rather than hold a press conference and say, 'Ban these products,' they portray this bill as something more than it truly is," he said.