Oakland's new fast food tax: bad policy, bad economics

I've explained several times that businesses don't pay taxes (see here, here, here, here, and here). They merely pass those costs onto consumers. As a requisite early step in tax reform, I favor removing all taxes on businesses, which allows them to pass the savings onto consumers, and also encourages them to produce more. Because businesses would no longer have the fixed cost of paying taxes, even if we raised taxes on individuals to compensate for lost tax revenue, prices in the end would be lower than before. Businesses suffer tremendous deadweight loss in paying taxes, everything from maintaining special paperwork and hiring an accountant to hiring (or outsourcing) entire departments just for tax compliance.

Last night, the Oakland City Council passed a "fast-food" tax. Unlike the proposed tax in Detroit, Oakland's is intended to "force fast-food restaurants, convenience stores and other businesses to help pay for cleaning up street trash." It sounds like a good idea until you realize it's more bad economics fueled by politicians' ignorance.

First, only three-fourths of "qualifying" businesses will pay the annual minimum of $230. The total projected revenue is $237,000 annually, so the other fourth will most certainly bearing most of the burden, up to $3816 each per year. In other words, just like our progressive tax system that would make Marx proud, those who are more successful will be greater penalized merely for being more successful. Why should a business' size be a true indication of how much trash its customers leave? Customers at a small fast-food place may hardly litter, such that the $230 minimum that the establishment pays is more than the true cost of cleaning up its customers' litter. A larger store, wishing to stay clean so it can maintain its customer base, might already be spending its own money to keep its surroundings clean, unlike a small or mid-size store that is in a particularly filthy neighborhood. This tax also means that businesses already trying to clean up litter will stop spending that money, because government has promised to take over that responsibility. (Considering all the social programs misnamed "government charity," I'm amazed Americans still give over $250 billion annually in private charity.)

Second, $230 per year may not seem like much when distributed among many customers, and it may not dampen sales, but that takes $230 away from the customers' spending elsewhere. As Bastiat would remind us, government taxing a dollar means a business somewhere will lose that dollar in revenue; as I put it, when government pushes with a tax, it necessarily pulls elsewhere. The top figure of $3815 per year will definitely hit businesses who just barely make it into that bracket: it's like hiring a part-time employee. I would hazard a guess that most businesses pay nowhere near that in cleaning up litter, as it's not worth it to them and their customers. However, we're dealing with government, after all, whose main business is making people pay more for services than they would have in the private sector.

Third, who will do the cleanup? Again, we're dealing with government, so I envision "sanitation crews" made up of unions, who will demand higher wages and benefits compared to what would exist in the free market. This $237,000 may not even be enough once the program gets going, or once union "negotiators" lobby for more crews. The latter's rent-seeking is especially bad, because it simply gets passed onto the taxpayer.

Fourth, the people of Oakland apparently don't dislike litter enough to voluntarily pay to clean it up. Their consumer preference is to spend money on other things, so they need government to force them, via a tax (and the threat of jail if you don't pay), to cough up the money. That leads me to wonder, similar to what Bastiat stated in The Law: when people elect not to do it of their own accord, why do they believe it's legitimate for government to coerce them? Sadly, yes. People are socially engineered to think the private sector can't work, that government must make our decisions, and they're persuaded by politicians into supporting measures that, as I'll explain in the next paragraph, go after the few for the sins of the many.

Fifth, why target only fast-food businesses, convenience stores and the like? Doesn't litter also come from things purchased at supermarkets, beer distributors and liquor stores, and other establishments? In fact, the article quotes someone who gives national averages: "fast-food packaging makes up about 20 percent of all litter, with packaging for chip bags, drink containers, candy wrappers and other snacks comprising another 20 percent." Let's even double those for Oakland, and there's still 20% of litter coming from elsewhere. It's hardly fair to tax certain businesses whose products end up as only some of the total amount of litter, and not tax others whose products are just as bad.

I suspect a court would not find this tax to be a bill of attainder, which is prohibited by the United States Constitution in Article I, Section 9). The U.S. Supreme Court in Nixon v. Administrator of General Services laid out a couple of criteria: a bill of attainder must be specific in target, and it must be punitive. Oakland's new tax may not be specific enough: it's not applied to all restaurants, nor to all stores that sell food and snacks, but being applied to certain types of businesses may be sufficiently general. It's also arguable that the tax is punitive. I think so because it's disproportionately taxing some businesses but not others, but a court could find that that is overwhelmed by the non-punitive reason of raising money for cleaning up litter.

Oakland and other cities certainly have a litter problem, but targetting only certain businesses is morally wrong as well as bad economics. The article says that most of the litter is found near schools. Instead of "educating" people into not littering, instead of talking about "the need to enforce existing law," let's go a step further. Here's my novel proposal: use troublemaker students, and litterbugs caught red-handed, for cleanup detail. Throw in punks of any age caught for vandalism (from graffiti to severe property damage), and have a policeman with a shotgun watch over their efforts, just like an old chain gang. (Suddenly I have the feeling people will accuse me of racism.)

The council member who proposed the tax said, "I don't think that's too much to ask so neighbors don't have to keep picking up trash from their doorways." That's easy for her to say: she's picking up a very tiny fraction of the cost, and "asking" everyone else to pay the rest.