Tax Hike Could Belie 'Two-Buck Chuck'

(MoneyWatch)  Does it matter that "Two-Buck Chuck," the world's most famous cheap wine, might soon cost more than two bucks in California thanks to a proposed tax-hike meant to help solve the state's fiscal crisis?

Probably not. In other states, Two-Buck Chuck is already called Three-Buck Chuck or even Four-Buck Chuck thanks to rising transportation and other costs in recent years. The wine is actually called Charles Shaw, and is sold exclusively in Trader Joe's California stores at a rigid $1.99 per bottle. Fred Franzia, the wine industry's loosest cannon and perhaps its most successful marketer, has helped cement the "X-Buck Chuck" brand for his company, Bronco Wine, and it seems unlikely that Californians or anyone else will stop drinking it because it doesn't technically live up to its local nickname.

That's not stopping Franzia, a convicted "grape fraud" felon whose recent plea for a presidential pardon went nowhere, from claiming that the tax hike would be "like shooting Charles Shaw in the eye."

The tax, he told the Los Angeles Times, will force him to raise his price past his largely self-imposed $1.99 limit. Actually, he said that the "profit margin is already so low we will have to raise the price." That "already" makes it sound like Franzia had planned to shoot Mr. Shaw in the eye himself, whether or not a tax is imposed.

But it won't matter ?€" or at least, Charles Shaw wines won't be hurt any more than other wines will be by the tax hike. Less so, in fact. Historically, cheap wine has been drink of choice during recessions.

Gov. Arnold Schwarzenegger proposes a tax of 5 cents per drink ?€" a drink of wine being 5 ounces. On a 750-milliliter bottle, the tax would soar from 4 cents to 29.6 cents.

Analysts say the price of Two Buck Chuck will probably rise to somewhere between $2.20 and $2.50.

Trader Joe's, which has sold the wine exclusively since 2002, hasn't weighed in on the tax or on potential price increases.

Bronco will have to pay about $15 million more under the tax, which would be applied to wine made and sold in California, as well wine imported into the state.

The wine business is especially vulnerable because of its structure: Wholesalers mark up their costs by 30 percent, including taxes. Retailers are loath to accept shelf-price increases, so winemakers would be left to dicker with their distributors over who pays what proportion of any additional tax expense.

Franzia might be right when he says it is "ludicrous to put an extra tax on a home-grown product" ?€" at least one so hefty. But given the other spending cuts and tax-hikes likely to be imposed by California's fiscally dysfunctional state government, the wine industry, and Franzia in particular, aren't likely to draw much sympathy.