By Orley Ashenfelter

Why is New Jersey trying to shut down the state’s wineries? And why, especially, is this happening just as New Jersey’s winemakers are winning competitions in San Francisco and Napa?

The short answer? The liquor lobby, and its determination to preserve a system that guarantees its profits by government regulation.

Here is how it works: The repeal of Prohibition permitted the state to put in place a distribution system that guarantees consumers must buy wine from a middle man, who must buy from another middleman, who must buy from still another middleman. And, of course, the state limits the number of permits granted at any level of the tier. It is called the three-tier distribution system.

The liquor lobby is desperate to retain this system and the artificial profits it generates. Ironically, New Jersey’s lawmakers are fully prepared to sacrifice the state’s nascent winegrowing industry on the altar of the liquor lobby. This is bad for consumers and bad for taxpayers. That the state is prepared to sacrifice jobs and tax revenues in the midst of a recession makes it even more incomprehensible.

How did we get to this point? It turns out that the repeal of Prohibition also permitted the states to regulate, in apparent conflict with the interstate commerce clause, the sale of alcoholic beverages. This conflict has been simmering since 1933.

The current New Jersey problem arises from a Supreme Court decision in 2005 that resolved one aspect of the conflict. The decision compelled states to give equal treatment to in-state and out-of-state sellers of alcoholic beverages — something that is more or less guaranteed for any other product traded in interstate commerce. Prior to this “Granholm” decision, many states permitted wineries and liquor stores to ship to in-state consumers, but forbade out-of-state shipments.

Many states responded to the Supreme Court’s decision in favor of equal treatment by permitting everyone to ship, whether in-state or not. This was a clear victory for consumers in those states. But New Jersey responded differently — it made all shipping of alcoholic beverages illegal. Realizing that this would more or less put all of New Jersey’s wineries out of business, the state produced a new regulation offering in-state wineries their own additional sales outlets. Of course, new outlets were not offered to out-of-state wineries. So guess what? This new Rube Goldberg rule, which was patently unconstitutional, has now also been struck down, leaving New Jersey’s wineries in a desperate situation.

Much to their credit, and in opposition to the liquor lobby, the New Jersey winegrowers decided to bite the bullet and welcome out-of-state competition. Their proposal, now before the state Legislature, permits small wineries (with production less than 250,000 gallons or about 105,000 cases) in the state to ship their wines directly to consumers. And it also permits small out-of-state wineries to do the same. This law seems to pass constitutional muster and it is a win-win for New Jersey’s wine consumers and producers, as well as for its taxpayers.

The odd thing about the desperate tactics of the liquor lobby is that such a tiny change toward a freer market in wine sales could not possibly do them any real harm. There are only 50 wineries in New Jersey, and out-of-state producers regularly ship (illegally, of course) into the state anyway.

It is about time state legislators voted to free the grape. And please do it soon — 2010 was the hottest and driest year in recent New Jersey history, and our wineries are sitting on some righteous juice!

Orley Ashenfelter is Joseph Douglas Green 1895 Professor of Economics at Princeton University, president of the American Economic Association and president of the American Association of Wine Economists (wine-economics.org).