Oakland’s Fast-Food Tax — Madness or Genius?

Cite this Article
Thom Lambert, Oakland’s Fast-Food Tax — Madness or Genius?, Truth on the Market (February 09, 2006), https://truthonthemarket.com/2006/02/09/175/

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.