From the good folks who brought us Ebonics as a second language (wait, make that first language) comes another creative policy proposal. On Tuesday night, the Oakland City Council decided to deal with its local trash problem by taxing fast-food restaurants up to $3,815 per year to pay for street clean-up. (Reports here and here.)
This strikes me as wrong-headed… or maybe brilliant. I guess it depends on your perspective. Let me explain:
According to the standard theory, the government provides public goods — like national defense and perhaps street clean-up — because they involve benefit spillovers (“positive externalities”) and thus won’t be optimally produced by market actors. To finance its efforts to provide these goods, the government normally taxes the beneficiaries of the goods. That seems relatively fair, and relatively efficient: if members of the public decide the good at issue isn’t worth the tax, they can “punish” their elected representatives at the ballot box.
Under the Oakland plan, the beneficiaries of the public good — i.e., the good folks of Oakland — will not directly pay for it. Instead, the cost of street clean-up will be foisted on customers of fast-food joints. That seems a little unfair, especially to customers who are not residents of Oakland and therefore neither benefit from the tax nor have any way to register their displeasure with it.
Of course, we often depart from the “beneficiaries should pay for services” norm when there are good reasons to do so. Here, one might seek to justify the tax at issue as a means of internalizing the costs associated with selling fast-food — i.e., the heightened risk of litter. That justification fails.
First of all, the structure of the tax creates no incentive for cost-reduction, which is the goal of cost-internalization. The magnitude of the tax is based on business size. It doesn’t go down if the establishment makes efforts to reduce the degree to which its patrons litter. Indeed, even if a fast-food joint hired its own street cleaners to follow patrons around and pick up after them, it would still have to pay the tax. There’s therefore no way to justify the tax as a means of reducing the social costs associated with fast-food.
In addition, the internalization rationale fails because the businesses being forced to pay for litter are not in a good position to reduce it. As Judge Friendly observed in the famous Bushey decision (the one where the drunken sailor opened the valves in a drydock, causing extensive damage to the dock and a ship), it makes little sense to require folks to pay for harms caused by another if they are not in a position to cost-effectively reduce those harms. That’s what we have here. The businesses at issue can’t really prevent their customers from littering once they’ve left the business premises. One might argue that fast-food joints could reduce litter by reducing the amount of packaging they use, but that’s probably not a practical possibility. Because packaging is expensive, fast-food joints already have an incentive to use as little as possible. Cutting back more would mean that food is more exposed to air, raising the risk of disease (and consequent legal liability). Taxes like Oakland’s are simply not going to drive fast-food joints to use less packaging. From a public health standpoint, we probably wouldn’t want them to do that anyway.
So — we have a tax that (1) isn’t paid by the beneficiaries of the service it funds and (2) can’t be justified on cost-internalization grounds. This all seems wrong-headed. Where’s the brilliance I referred to earlier?
Well, look at what Oakland’s getting: It’s getting revenue to pay for a local service, and that revenue is coming from businesses that will undoubtedly pass the cost along to their customers. If the businesses — primarily national chains — passed the cost only to their Oakland customers, then the proposal wouldn’t be a great deal for Oakland’s citizens. Their taxes wouldn’t rise to pay for additional street cleaning, but they’d pay more for their fast-food. Is it really likely, though, that the national chains that are the target of this tax are going to impose higher prices only in their Oakland stores? Probably not. The relatively small tax isn’t worth the hassle of setting special locality-specific prices. Thus, the brilliance: The Oakland City Council is effectively “nickel and diming” national chains, forcing them to charge slightly higher prices throughout the country in order to provide a benefit to the good folks of Oakland. Pretty impressive, even by Oakland standards.
Thom: mine was a Coasean comment. It takes two to tango. Your desire for cleanliness clashes with my desire to toss things where I want. Even if we don’t expect the tax to change anyone’s behavior, we still need to answer the basic question of why your desires should trump mine — or why I should subsidize your preferences and not the other way around.
I realize that the fast-food tax is both over-inclusive (not all fast-food consumers litter) and under-inclusive (health nuts litter too), but since we can’t realistically tax individual behavior, this might be the second best.
I have no view on whose preferences should be subsidized. I just want to point out that in the absence of incentive effects and transaction costs (of collecting the tax), we should be agnostic on whom we want to subject to tax. I also express no opinion on whether the tax will have incentives effects or whether itâ€™s cheaper to collect tax from fast-food joints than from residents of Oakland directly.
It may make sense to tax polluters if doing so gets them to change their behavior (via cost-internalization). This reduces social cost — i.e., the inefficiencies resulting from externalities. The tax here is unlikely to reduce social cost because the party directly bearing the tax is not “rewarded” (with lower taxes) for reducing social costs, and, in any event, is not in a good position to reduce the cost at issue, litter. The internalization rationale for pollution taxes therefore doesn’t work.
If we want to tax “producers of waste,” then we’d focus on litterers (is that a word?). Oakland’s tax, effectively paid by all fast-food consumers — not just the litterers, and, for reasons stated above, probably not just fast-food consumers in Oakland — doesn’t concentrate the tax burden on either beneficiaries of the public good or creators of the social cost.
Why would you think that the government normally taxes the beneficiaries of public goods? Pollution is a classic story where the government taxes the producers of public bads instead. If patrons of fast-food establishments impose waste on the rest of the world, we can plausibly tax either producers of waste or consumers of cleanliness, even if the tax creates no incentive effects on either side.
I understand the intuition that small deviations from previously profit maximizing prices (made small by spreading them across all markets rather than just Oakland, for example) might be better for the firm than a larger price increase in Oakland in some cases. I guess another interesting factor suggesting that you are correct is that these fast-food chains compete on price with one another such that no Oakland chain would reap any substantial benefit from deviating from “cost-spreading” strategy by setting higher Oakland specific prices.
I’ll match your casual empiricism with casual theorizing!
Sure, chains can — and do — set special prices for local markets, but there’s a cost to doing so (e.g., hassles, reduced ability to engage in national or region-wide price advertising, etc.). If the local cost increase occasioned by a tax is great enough, a chain would go ahead and incur these costs. Here, though, the tax is pretty small and the cost of Oakland-specific pricing would be pretty big (for example, McDonalds couldn’t advertise prices in the San Francisco Chronicle — or, if it did, it would have to clutter up the ads with information about Oakland’s special pricing). My hunch — and it’s admittedly just a hunch — is that this small tax wouldn’t justify costly efforts to tailor prices for one municipality within a much larger metropolitan area. I suppose the national chains might go ahead and incur these transactions costs (rather than just cross-subsidizing Oakland) in order to prevent other localities from following Oakland’s lead. I guess we’ll have to watch what happens to the price of Big Macs in Oakland!
(BTW–If you’re right, then there’s no “brilliance” to this tax. It’s just wrong-headed.)
Thom, I guess I am confused at why say, McDonald’s, WOULDN’T impose higher taxes in the Oakland market alone? It appears that you argument is that they wont bother because it is not worth it to set locally profit-maximizing prices relative to the cost of the hassle of doing so. But we see local price changes all the time in all sorts of markets (how is that for casual empiricism?) . Dont we? I guess I would be interesting in hearing you talk a bit more about why it wont be worth it?