Commentary: Why Texas laws have breweries shedding tears in their beer

The direct result of a new law will discourage out-of-state entrepreneurs from opening new breweries with taprooms in Texas and limit the growth of existing ones.

Special interests are at work to obtain government favors, the bitter fruit of which can be partially seen in the recent shakeup at the Texas Alcoholic Beverage Commission.

The alcoholic beverages market in Texas functions under a three-tier system that requires the strict separation of brewers/distillers, distributors and retailers. In most cases, businesses in one of the three categories cannot have an ownership interest in either of the other categories. The system was instituted following the repeal of Prohibition based on the unjustified fear that vertical integration of the industry would lead to Prohibition-style corruption.

HOW WE GOT HERE: Texas brewers lose legislative fight over taproom bill, headed to governor’s desk.

In fact, over time, the three-tier system itself promoted government favoritism, the beneficiaries of which are generally in one tier: the distributors.

For instance, apart from an exception permitting certain breweries to self-distribute their products if they do not manufacture more than 125,000 barrels a year, brewers today must sign a contract with a licensed distributor to sell their products.

The law requires that the contract be exclusive and open-ended and does not allow manufacturers to “cancel, fail to renew, or otherwise terminate” the contract with the distributor but for good cause. Clearly, distributors do not welcome competition.

As if that wasn’t enough, the Texas Legislature has made it illegal for producers to sell their territorial rights to distributors. They must give them away, while distributors can resell these rights to a competitor for a profit.

Also, most breweries cannot sell for off-premises consumption, meaning you cannot buy a beer to bring home. The brewery, instead, mist sell to a distributor — and you, the final consumer, must buy the beer from a retailer at a substantial markup.

UPDATE: Texas brewers group forms a PAC to change state’s ‘broken’ beer laws.

Legislation passed in 2013 slightly opened the market for craft brewers, allowing them to sell to final consumers — only for on-premises consumption — if they produced under a certain number of barrels per facility. A cap per facility was also imposed on the number of barrels they could sell for on-premises consumption.

Many breweries have opened taprooms since then, including breweries from out of state. They created jobs and allowed beer aficionados to pair their hobby with quality time in open-air taprooms while giving them another way to support their favorite brewery.

However, the new law passed last year reinforces the distributors’ position in the three-tier system by undoing some of the opportunities brewers and consumers enjoyed since 2013. The law tightens restrictions on the opening of taprooms in a number of ways. The production in all premises wholly or partly owned by a permit holder is now counted toward the same cap on production.

Breweries with existing taprooms falling outside the scope of the tightened regulation were grandfathered. But future breweries in this situation would:

• Be limited in how much of their brewery they can sell to other brewers or beer manufacturers.

• Be required to sell their beer to a distributor first — to then immediately buy it back from the distributor at a markup to sell it on their premises to final consumers.

Can you guess who benefits from these restrictions? Not the consumers, nor the craft brewers.

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These regulations under Texas’ three-tier system impose significant costs on brewers, investors and consumers. They limit how brewers can promote products, expand their business, and make a profit.

The higher costs discourage investors from providing new capital to craft brewers. Fewer brewers and taprooms mean fewer jobs for Texas workers — and higher prices for Texas consumers seeking to enjoy their favorite beverages.

The reason that Texans generally cannot buy their beer directly from brewers: distributors do not want them to. It is high time we look more closely at the negative effects the three-tier system of alcohol regulation has on Texans and the Texas economy.

Martinez-Gouhier is a research analyst in the Center for Economic Prosperity at the Texas Public Policy Foundation.

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