While the industry was popping corks in early February over the

approval by the

Bureau of Alcohol, Tobacco and Firearms

of bottle labels that hint at health benefits arising from the moderate consumption of wine,

Strom Thurmond

, R-S.C. -- the

Senate's

oldest (at 96) unreconstructed Confederate -- was translating a personal snit into legislation that, if passed, could become a waking nightmare.

As his first contribution to the legislative prowess of a Senate no longer distracted by the antics of a White House intern, Thurmond introduced three bills. The first would prohibit the industry's new labels. The second would wrest regulatory authority over alcohol from the BATF and vest it with the

Food and Drug Administration

. The third -- and potentially most damaging -- bill would increase the federal excise tax on wine by anywhere from 100% to 300%, depending on the alcohol content.

Thurmond's new legislation slaps table wine with a tax bill that soars from $1.07 per gallon to $2.97. While that amounts to only about 37 cents per bottle (a trifle to somebody buying a $25 Cabernet), it could devastate the under-$10-per-bottle category, where a vintner's entire profit per bottle is typically about 33 cents.

Because under-$10-a-bottle wine represents more than 80% of all wine sold, the tax increase could be disastrous, because raising prices in this category will most likely not be an option. As

Drinks and Diversions

has pointed out previously, record world harvests, over-planting of vineyards in California and an impending global wine glut all work against wineries which might try to cover the taxes through a price increase.

With the exception of

Chalone

(CHLN)

and

Moet Hennessy Louis Vuitton

(LVMHY)

, whose product mixes favor higher-priced brands, every other public winery lives and dies from sales of under-$10 wines. In addition, Thurmond's bill levies the tax increases on stocks already in the hands of retailers and wholesalers. That means that the only public wine retailer,

Geerlings & Wade

(GEER)

, would have to pony up for all its existing inventory. The effect could depress retail prices further if retailers try to blow out inventory before the tax hike takes effect.

The industry shouldn't have been blindsided by this -- especially since Thurmond promised more than a year ago that he would introduce this legislation if the BATF approved the industry's labels. Thurmond is a life-long anti-alcohol fanatic whose deep loathing turned into a personal

jihad

when his daughter was killed by a drunk driver in 1993. It was that sad event that drove Thurmond on in his battle to post the warning labels now found on all alcoholic beverages.

Few people in the wine industry want to talk about the bill since they seem pretty sanguine about the chances of defeating it. "We can argue the merits if it comes to that," said John DeLuca, president of the

California Wine Institute

.

One corporate lobbyist for a large multinational drinks company was more blunt: "Actually, we think this fight will be the one where everybody sees just how many screws he

Thurmond has loose. The Senate leadership is already embarrassed by all the time it spent with Monica and has some credibility to regain."

What he neglects to point out is that, as speaker pro tem of the Senate, Thurmond is the second-highest-ranking senator and very much a part of the leadership. He is also third in line to succeed the president, following the vice president and the speaker of the

House

. Further, as chairman of the

Senate Armed Services Committee

, and ranking member of the

Committee on the Judiciary's Subcommittee on Antitrust, Business Rights, and Competition

, he has some important chits he can call in if he really wants to go to the mat on this one.

He's already announced that he won't run for re-election in 2002 -- which means he really has nothing to lose if this is the battle he wants to be known for. Let's face it, expecting logical behavior here may not be the smartest thing. After all, this is a guy who still talks proudly of his filibuster against the 1964

Civil Rights Act

and his 1948 run for president as a segregationist Dixiecrat.

What's more, the wine industry is going to have to fight this battle all by itself. The

Distilled Spirits Council of the United States

, along with

Seagram

(VO) - Get Report

and other members, have waged a decade-long battle for equality of beverage taxation -- which means raising those levied on wine and beer to match those of spirits. Thurmond's bill would do just that for wine: The tax on wine is $12.87 per gallon of pure alcohol from wine, versus $27.70 per gallon of distilled spirits alcohol.

It's also no accident that Thurmond's bill singles out wine for tax parity with spirits, and omits beer, which is taxed at roughly the same rate as wine. Beer has a powerful populist image that politicians are loathe to cross. In introducing his legislation, Thurmond explained in remarks on the Senate floor why he was not entertaining the notion of increasing beer taxes. "Like distilled spirits," he said, "wine is consumed by more prosperous taxpayers, so it is reasonable that wine should be taxed at a rate similar to distilled spirits."

The Wine Institute may have a tougher time than it thinks, especially with beer and spirits' tacit support for Thurmond's bill. It's also not the power it once was, having failed to regain all of the influence it lost when its number-one booster,

House Majority Whip Tony Coelho

, D-Calif., was forced to resign suddenly in 1989 to head off a

Justice Department

criminal probe.

Thurmond's tax -- or its defeat -- could shape into one of the important battles that determines the wine industry's profitability over the next several years. And despite industry assessments that the aging Confederate from South Carolina may have brought an insufficient number of marbles to this match, they'd better not underestimate him, or else this is one nightmare from which there may be no awakening.

Lewis Perdue is editor and publisher of

Wine Investment News, a comprehensive site offering breaking news and analysis of the 22 publicly traded wine and liquor companies, and private wine partnerships. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.