Booze, smokes on agenda for quirky government bureau

By DANIEL WAGNER, AP Business Writer

BELTSVILLE, Md. -- Deep in a secure laboratory just outside Washington sits the federal government's heaviest smoker.

It is a half-ton hulk of a machine, all brushed aluminum and gasping smoke holes, like a retrofit of equipment used on an Industrial Revolution production line. It can smoke 20 cigarettes at once and conclude which are unsafe because they are counterfeit and which are unsafe merely because they are cigarettes.

Down the hall, a chemist tests shiny flecks from a bottle of Goldschlager, the spicy cinnamon schnapps, to make sure they're real gold. A government agent was sent out to stores to buy it and hundreds of other alcoholic drinks randomly chosen for analysis.

Back at headquarters in downtown Washington, a staffer prepares for a meeting of the Tequila Working Group -- a committee created to mollify Mexico and keep bulk tequila flowing north across the border.

These are the proud scientists, rule-makers and trade ambassadors of the Alcohol and Tobacco Tax and Trade Bureau, one of the federal government's least-known and most peculiar corners.

The bureau, known as TTB, collects taxes on booze and smokes and tells the companies that produce them how to do business -- from approving beer can labels to deciding how much air a gin bottle can contain between lid and liquor.

It decides which valleys in Oregon and California can put their names on wine labels, what grapes can go into wine and which new alcoholic drinks are safe to import.

The bureau is one example of the specialized government offices threatened by Washington's current zeal for cost-cutting. Obama administration officials weighed eliminating it during the fiscal stalemate of 2011, according to news reports at the time. Its officials were called to the White House budget office to justify their existence -- or risk having their duties split between the Internal Revenue Service and the Food and Drug Administration.

The White House ultimately left the bureau's $100 million budget in place for this year -- perhaps because it spends far less money to collect each tax dollar than its counterpart, the IRS. But officials there remain hyper-aware of their vulnerability as Republicans and Democrats look to squeeze savings from unlikely places.

If they look closely, the belt-tighteners will discover an agency whose responsibilities often appear to conflict -- a regulator that protects its industry from rules it deems unfair, a tax collector that sometimes cuts its companies a break.

Some of its decisions are open to negotiation. A tequila-like liquor with a scorpion floating in it made scientists balk until the producer convinced them that the scorpions are farm-raised and non-toxic.

In other words, this may be the only federal agency that responds favorably to receiving scorpion candy in the mail -- an edible tool for persuading scientists that the arthropods were fit for human consumption.

If labs, rules and taxes weren't enough for the bureau's 500-odd employees, they also have law enforcement authority. TTB investigators can send people to jail for things like removing alcohol from the production line and reselling it before it has been taxed by authorities.

With all these responsibilities, it's no surprise the agency's priorities sometimes clash. The bureau gives companies a wide berth on some rules and taxes, officials and experts say, mainly because of its small size and history of collaborating with business. It has granted millions in tax givebacks because of concerns that companies will sue and tie up government resources.

"Because we're regulated by such a friendly agency, and because enforcement isn't huge, there's a level of non-compliance that's sort of acceptable," says Rachel Dumas Rey, president of Compli, a California company that helps wineries comply with Treasury policy.

Agency officials say they use scant resources where they can make the most difference, generally on the biggest producers or companies where there is an indication of wrongdoing.

Yet last July, the bureau slashed a tax bill for the multinational agribusiness conglomerate Cargill from $839,370 to $63,000. Cargill failed to report or pay taxes on about 23,000 gallons of nearly pure industrial alcohol that leaked from a rail car, violating several U.S. laws, according to documents on the bureau's website.

Since 2010, under similar deals with alcohol and tobacco companies, the agency has forgiven more than $25.4 million; the total amount is unclear because some public documents do not list the size of the tax bill or penalty that is being reduced. Nine companies persuaded the agency to slash their bills by more than 95 percent, including Procter & Gamble's Olay subsidiary, which uses alcohol in its skin care products.

Tom Hogue, a spokesman for the bureau and former explosives inspector, says it only agrees to reduce companies' tax bills "if we are satisfied that the (remaining) penalty is commensurate with the violation and is sufficient to deter future illegal conduct." In cases where settlements are granted, Hogue says, "they allow us to use our resources to counter non-compliance, instead of tying them up in court."

When the alcohol and tobacco bureau was split from the Bureau of Alcohol, Tobacco and Firearms, it held on to the former agency's tax collection duties, including for firearms and ammunition. It's still the government's third-biggest revenue collector, after the IRS and Customs and Border Protection. It took in $23.5 billion in federal taxes on alcohol, tobacco, weapons and ammo in the fiscal year ended Sept. 30, 2011, the most recent data available. That amounts to $468 for every dollar the agency spent collecting taxes -- more than twice the IRS' ratio, officials note.

The bureau also works with government trade officials to protect and expand international markets for American alcohol and tobacco. Its expertise is crucial in negotiating with Europeans about wine labeling, or standing up to countries that refuse to recognize American "straight bourbon" for what the government says it is: corn whiskey stored in charred new oak containers for at least two years.

In this role, the agency has come to the rescue over the years of whiskey lovers in China, Colombia and Brazil. Those countries' governments tried to ban booze containing too much fusel alcohol, the pungent byproduct of fermentation that gives some whiskey its spicy, solvent-like aroma. Working through international trade groups, armed with data from TTB scientists, U.S. officials spent years convincing them to reverse their policies and allow the importation of whiskey that meets American standards. That was a win for American alcohol producers.

Sometimes, to protect U.S. producers, the bureau erects trade barriers of its own. Under a proposal by the bureau last spring, anything labeled Pisco must have originated in Chile and Peru. (Pisco is a South American grape brandy whose signature cocktail, the Pisco Sour, is so celebrated that it has its own official Peruvian holiday.)

Aspiring Pisco producers in Bolivia, in the U.S. government's eyes, can take a hike.

This is no accident: It's the result of a trade agreement that compels Chile and Peru, in exchange for the Pisco rule, to make sure any bourbon sold there is from the U.S. and meets this country's standards.

USING TAXES TO CONTROL SOCIAL PHENOMENA

The U.S. is the only nation with an alcohol regulator based in its Treasury Department. Treasury was the federal government's monitor of products seen as sinful or illicit even before Prohibition began in 1919.

When the government first tried to crack down on cocaine and heroin in 1914, it did so by enacting steep taxes. For a time, marijuana also was controlled by imposing taxes so high, it was hoped, that people might lose interest.

After Prohibition was repealed in 1933, the government tried to keep a handle on the alcohol industry by writing production standards for alcohol directly into the tax code. That's where wine's alcohol content is limited to 24 percent.

The government uses taxes to control social phenomena, explains Bill Foster, who ran the bureau's headquarters before retiring this summer.

"Tobacco and alcohol are two of those commodities," Foster says.

The taxes are collected directly from producers and manufacturers, which pass those costs along to consumers. Liquor producers generally pay a flat rate of $13.50 per proof gallon -- a gallon of liquid that is one-half alcohol by volume. Small cigars and cigarettes are taxed at a rate of $50.33 per 1,000 sticks.

GIANT, GIN-SOAKED SNAKES

The current Alcohol Tobacco Tax and Trade Bureau was split from the Bureau of Alcohol, Tobacco and Firearms in 2003. ATF was moved to the Justice Department, where it focuses on firearms, explosives and violent crime.

Officials who regulate and tax alcohol and tobacco remained at Treasury, where they continue to ensure that wine doesn't contain pesticides and absinthe is free of thujone, the psychoactive ingredient -- now banned -- that gave it its hallucinogenic reputation.

That's how Dr. Abdul Mabud found himself overseeing 26 chemists at a lab in Beltsville, Md., that tests hundreds of bottles, cigarettes and perfumes every year.

One afternoon, Mabud holds aloft a jar of pure, clear alcohol containing a coiled king cobra, its hood flared and forked tongue extended. Surrounding it are smaller green snakes that appear to be biting each other's tails.

The snake liquor was submitted for consideration as an import from east Asia, where snakes are believed to increase virility.

"With that much snake in there, it's probably not a beverage," Mabud says, explaining why the shelves of America's liquor stores and supermarkets are free of giant, gin-soaked snakes.

Mabud traces his lab's history to 1886, when Congress passed steep taxes on margarine -- at the time, an upstart competitor to the nation's dairy products. The 1886 law aimed to prevent crooked margarine-pushers from selling their product as butter. Treasury's first food-quality lab was set up to preserve butter's integrity.

Today, the bureau owns some of the most sophisticated equipment available, including the smoking machine, which can be set to inhale in at least three ways, depending on how long and hard the smoker being simulated prefers to puff: light, medium and Canadian. The last one is when the perforations around the cigarette's filter are blocked and the machine takes bigger, more frequent puffs. It was invented by the Canadian government, and does not necessarily reflect the actual smoking habits of Canadians, says Dawit Bezabeh, chief of the bureau's tobacco lab.

"That's the worst-case scenario," he says.

SENSITIVE WORK IN ALCOHOL AND TOBACCO

Officials are less chatty about a third agency priority: The diplomatically sensitive work of promoting the international alcohol and tobacco trade.

The bureau helps strike deals with other countries that have liquor industries, like the one with Peru and Chile over Pisco. The idea is to protect U.S. alcohol and tobacco producers from unfair competition. Jim Beam's prices might be easily undercut, for example, if an overseas firm was allowed to label something as bourbon even though it was aged in a cask that is neither charred nor oak nor new.

That's how the Tequila Working Group was born. Citing safety concerns, Mexico had threatened to stop exporting bulk tequila -- a commodity that supports 500 U.S. bottling jobs. After the bureau agreed in 2006 to regular meetings with Mexico's tequila industry, Mexico backed down. The jobs were saved.

Until the early 2000s, the U.S. negotiated wine-making standards as part of a European wine trade group. As the American wine industry blossomed, officials began to believe that the group was favoring European wineries, for example, by refusing to endorse American agricultural methods. Every member of the group had veto power, and France was willing to use it.

The U.S. escaped Europe's dominance by joining with other oenological up-and-comers like Australia, Argentina, Canada, Chile, New Zealand and South Africa to form the World Wine Trade Group. The group encourages countries to accept each other's wine-making methods.

SUPPORTING TRADE, COLLECTING TAXES

Its complicated history helps explain why the bureau looks and acts different from most government offices. As a tax-collecting agency, it wants to see its industries thrive. As a consumer-protection outfit tasked with keeping antifreeze-spiked wine off the market, the bureau must rein in dangerous, sloppy practices by industry members.

If other government agencies ran that way, the Consumer Product Safety Commission would be promoting U.S. baby crib makers at the same time it evaluated their products as potential death traps.

"There's some peril with that kind of approach," says Jeff Bumgarner, a professor of criminal justice at the University of Minnesota who studies the history of federal law enforcement. "The trade part of your mission is one of support and standing up the industries, and the tax collection part and the regulatory part and the compliance part is one of holding those industries in check."

That basic conflict leaves the U.S. government with an alcohol regulator that recently hosted industry executives at conferences to educate them about the bureau's rules and encourage "voluntary compliance," then months later raided a Native American reservation that was suspected of harboring cigarette tax evaders.

Critics say the bureau's close relationship with industry makes it less likely to take a hard line against violators.

Foster sees it another way. He says agents and officials like him are more effective overseers of the industry because they started out working on the distillery floor, measuring batches of liquor and handing producers their tax bills.

"It gave us all a significant understanding of how the industry operates and what their challenges were," he says.

Agency officials say they are making the most of limited resources, and doing better than most federal departments. And their workload is increasing steadily. The alcohol and tobacco bureau is responsible, for example, for approving every label to be used on an alcohol product in the U.S. As the number of microbrewers and microdistilleries explodes, the work of reviewing those labels is becoming a heavier lift.

The bureau now regulates more than 56,000 companies, an increase of 27 percent since 2007. In that time, its core budget rose only 8 percent.

AGENCY HICCUPS

Like any government office, the agency has had its share of hiccups. Agawam grapes were known on U.S. wine labels as Agwam grapes until the bureau corrected its spelling error in rules published last year.

Vintners with leftover Agwam labels were given until October to stop using them.

• Follow Daniel Wagner on Twitter: www.twitter.com/wagnerreports

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