Topic: Regulatory Studies

Philadelphia’s Soda Tax

The Philadelphia City Council has voted to become the second city in the United States to impose a tax on the sale of particular types of sweetened beverages. The tax applies to sugared soda, diet soda, sports drinks and more, while excluding drinks that are more than half milk or fruit, as well as drinks to which sugar is added such as coffee. The tax will be 1.5 cents per ounce, amounting to 18 cents per standard size can of soda or $1 per two-liter bottle.

Public health advocates often propose taxes on sugary drinks, colloquially known as “soda taxes,” as a means of improving public health outcomes. They argue that such beverages disproportionately cause obesity and that consumers of sugary beverages impose external costs on others through higher medical costs associated with obesity.

The evidence supporting the disproportionate effect of sugar beverages on obesity is not powerful.  An article in Obesity Review concluded, “The current evidence does not demonstrate conclusively that nutritively sweetened beverage consumption has uniquely contributed to obesity or that reducing NSB consumption will reduce BMI levels in general.” 

And the externalities of the obese also appear to be minimal.  “The existing literature … suggests that obese people on average do bear the costs and benefits of their eating and exercise habits.”

But for purposes of discussion assume that consumption of such beverages does result in obesity and its health effects, which, in turn, create costs for others.  Are the taxes a good corrective?

Preventing Collusion between Plaintiff and Defense Lawyers

When a class action is settled, class members accept the benefits of the settlement while giving up any legal claims they may otherwise have against the defendant. When the class members’ claims are for money-damages, the rule of civil procedure require that prospective class members must be given the opportunity to opt out of the class to pursue their individual claims independently. This opt-out requirement is a barrier to collusion between defendants and class counsel, who could negotiate a low per-member monetary (or coupon) award in exchange for extinguishing the claims of a large number of people.

An exception to this general rule exists, however, when the claim is not for money but rather for declaratory or injunctive relief—in other words, that the defendant do or stop doing something. In that case, individual class members would have no need to pursue a separate claim for personalized relief. Put simply, in a case seeking an injunction, there’s no possibility that a different attorney would be able to get any one class member more stuff—because there’s no money or other goodies to be gotten anyway.

This commonsense reasoning for the exception to the opt-out requirement breaks down, however, when a case involves both injunctive and monetary relief. Denying an opt-out mechanism in these cases is not only illogical, but depriving class members of their money-damages claims without an opportunity to opt out of the class violates the constitutional rights of absent class members. Specifically, the Fifth Amendment’s Due Process Clause protects class members’ rights to remove themselves from the class, pursue separate claims against the defendant, and be represented by their counsel of choice. The Supreme Court has said that “due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court.” Phillips Petroleum Co. v. Shutts (1985).

While the right to opt out of the class alone is insufficient to prevent self-dealing by—and collusion between—class counsel and defendants, it gives class members the final word on whether a settlement sufficiently compensates them for surrendering their legal claims. Despite all this, the Richmond-based U.S. Court of Appeals for the Fourth Circuit recently upheld a settlement certification without opt-out in a case that originally made claims only for monetary relief, Schulman v. LexisNexis.

The statute under which the class sought relief, the Fair Credit Reporting Act, provides for money-damages remedies only, not for injunctive relief. Nevertheless, the settlement reached by class counsel and defendants would extinguish class members’ money-damages claims while awarding them merely the defendants’ agreement forever to cease harmful actions. Moreover, the court certified the settlement without requiring that class members receive notice and opportunity to opt out precisely because the settlement provides for no monetary relief. If allowed to stand, this precedent will be a wink and a nod to class counsel and defendants everywhere that, if sufficient care is taken in crafting a settlement, they need not worry about the rights and interests of those pesky class members.

Cato has filed an amicus brief urging the Supreme Court to review Schulman and ensure that the due process rights of class members are protected nationwide.

Crazy Law Allows “Discounts” for Cash but Not “Surcharges” for Credit

In Federalist 10, James Madison warned of “a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens or to the permanent and aggregate interests of the community.” These groups—“factions” in Madison’s terms—come together to seek concentrated benefits from favorable legislation and regulation rather than competing in the marketplace, while spreading the costs throughout society.

While Madison conceded that such interests could not be stopped completely, he acknowledged that certain steps could be taken to mitigate the “effects” of these groups, and the damage that they can do to the public interest. The First Amendment is one such protection. The New York legislature, however, ignored the First Amendment rights of both merchants and consumers when—at the behest of the credit-card lobby—it passed a law restricting how retailers can convey pricing schemes, as well as the public’s right to know about them. 

New York’s no-surcharge law—like those in 10 other states—insulate credit-card companies from consumer knowledge about who is actually causing the higher prices on goods when they use their credit card (“swipe fees”). The law does this not by restricting the merchants’ ability to charge different prices as between cash and credit payments—that’s legal everywhere—but by regulating the communications regarding the different prices.

To put it simply: the law allows merchants to offer “discounts” to cash-paying customers, but makes it a crime to impose economically equivalent “surcharges” on those who use plastic. By mandating how these merchants convey their pricing structure, New York is restricting speech on the basis of its content, which would seem to be an obvious First Amendment violation.

A federal district court agreed—as have two other federal courts, including the U.S. Court of Appeals for the Eleventh Circuit when it struck down a similar Florida law. The district court held that the law “plainly regulates speech”—not conduct—by drawing a line between prohibited “surcharges” and permissible “discounts” based solely on words and labels. The Second Circuit disagreed, however, holding that the law regulates “merely prices,” not speech.

Cato has now filed an amicus brief urging the Supreme Court to take up this important case and rule that collusion between business interests and state government can’t be used to circumvent constitutional rights. Indeed, the Framers sought to protect speech from the type of crony capitalism New York’s no-surcharge law manifests. We also argue that the Court should clarify that the First Amendment covers speech even if it involves commercial matters. When legislatures abridge these protections, judges should apply the highest form of scrutiny to these laws rather than limply deferring to majoritarian will. 

The Supreme Court will decide later this month, or possibly this fall, whether to take up Expressions Hair Design v. Scheniderman.

Thanks to former Cato legal intern Frank Garrison, who’ll be starting as a legal associate later this summer, for help with this brief.

Appeals Court Approves Net Neutrality Rules

The United States Court of Appeals for the District of Columbia upheld on Tuesday June 14, 2016 so called “net neutrality” rules issues by the Federal Communications Commission in February 2015.  Two previous attempts by the FCC to regulate the internet under different sections of the Telecommunications Act were overturned by the same court in 2010 and 2014 reflecting the traditional policy distinction between heavily regulated traditional telephone landline service and so-called information services involving computers that were not regulated.

The rule issued by the FCC in 2015 reclassified internet services as falling under the same legal regime as traditional telephone service.  Yesterday’s Appeal Court decision accepts that reclassification and the legal authority that goes with it.

Regulation has published four articles in the last two years year criticizing traditional public utility regulation of the internet.  Christopher Yoo from the University of Pennsylvania argues that traditional telephone regulation envisions a monopoly service and government oversight ostensibly intended to limit prices and expand service provision. But the expansion of wireless high-speed Internet has allowed multiple competitive providers to provide service to a large majority of American consumers while restraining capital costs.  “What Hath the FCC Wrought”, by former FCC chief economist Gerald Faulhaber, argues that service quality will suffer to the extent that internet access providers can’t charge more for streams that impose greater costs on the system. Kansas State professor Dennis Weisman argues that internet regulation will likely protect competitors from competition rather than serve consumer interests just like the old telephone regulatory scheme. And Larry Downes from the Georgetown Center for Business and Public Policy argues that the movement to re-regulate telecom is propelled by some firms’ quest for rents under new regulation, and by Federal Communications Commission attempt to regain political power and the benefits that come with it. 

Much Higher Tax Rates in 2013 Left Top 1% Taxes About the Same

Top Tax Rate and Taxes Paid

A timely new blog post from the Tax Foundation points out that, “taxes on the rich are much higher than they’ve been in recent years. Between 2008 and 2012, the top 1 percent of households paid an average tax rate of 28.8 percent. However, in 2013, this figure spiked to 34.0 percent, as a result of tax increases in the “fiscal cliff” deal and the Affordable Care Act”.

“Readers should check out the new CBO report,” the authors suggest, “and reflect for themselves about whether or not high-income Americans are now paying their fair share of taxes.”

The trouble is that the tax rate alone can’t tell us how much the Top 1% paid in taxes: To know how much taxes were paid by the Top 1% requires knowing how much income they reported to the IRS.  The reason this matters is that there is ample evidence that the “elasticity of taxable income” is very high among top taxpayers, which simply means they find ways to report less income if marginal tax rates go up.  This doesn’t require lawyers or loopholes: Avoid capital gains tax by not selling assets and/or shifting into exempt assets (housing up to $500k); avoid the dividend tax by holding tax-exempt bonds; defer personal tax on business income by retaining earnings within a C-corporation; avoid punitive tax rates on second earners by becoming a one-earner household; retire early, etc.

Looking at the same thing from a different angle, the graph shows that average taxes actually paid by the Top 1% grew rapidly after the tax rate on capital gains was cut from 28 percent to 20 percent in 1997. Taxes paid by the Top 1% grew even more rapidly after 2003 when the tax rate on capital gains and dividends was further reduced to 15 percent and the top tax on salaries and unincorporated businesses was cut from 39.6 percent to 35 percent.  If you want the rich to pay more taxes, cut their tax rates.  

As it turns out, 2013 showed that we can’t just assume higher tax rates mean docile taxpayers will simply write bigger checks to the U.S. Treasury. On the contrary, when the average tax rate on the Top 1% increased by 18.4 percent in 2013, the amount of income reported by the Top 1% fell by 15.4 percent – from $1,856,000 in 2012 to $1,571,600. The net effect was almost a wash, in terms of taxes actually paid. According to the CBO, average federal taxes paid by the Top 1% were $530,128 in 2013 –virtually unchanged from $529,056 in 2012. 

Presidential candidates Bernie Sanders and Hillary Clinton propose even more increases in top tax rates on income and capital gains (to 54.2 percent with Sanders, 43.6 percent with Clinton), ostensibly to finance their lavish government spending plans.  But even a relatively small dose of this same poison failed to raise significant revenue from the Top 1% in 2013, partly because of the drag on the overall economy from reduced incomes and incentives. 

Respecting Property Rights Means Paying Just Compensation for Takings

There’s no such thing as a free lunch. Or as the Fifth Amendment puts it, “nor shall private property be taken for public use, without just compensation.” Despite the clarity with which the Takings Clause proclaims that government must respect property rights, state and local governments have long been contriving ways to obtain private property without paying the constitutionally required just compensation.

In 2012, San Juan County, Washington—the islands in the Salish Sea between Seattle and Victoria—enacted a rule that conditions shoreline owners’ proposed land uses on dedicating a portion of their property as on-site conservation areas. This isn’t a new tactic. In Nollan v. California Coastal Commission (1987), for example, the Supreme Court rejected the government’s conditioning of a building permit on the landowners’ granting a public easement across their property to access a beach. The Court acknowledged that conditioning a benefit on the property owners’ giving up their Fifth Amendment right to just compensation is “an out-and-out plan of extortion.” The Court elaborated seven years later in Dolan v. City of Tigard (1994), ruling that courts must apply a high level of scrutiny to conditions attached to land-use permits to prevent government “gimmickry.”

Government Exceeds Its Powers in Enforcing the Endangered Species Act

“It is not rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits,” the Supreme Court held last year in Michigan v. EPA.It seems that the U.S. Fish and Wildlife Service (USFWS) did not get the message, with its willy-nilly imposition of significant economic costs when designating “critical habitat” for endangered species.

A California builders’ association is now asking the Court to establish that judicial review is available for individuals and businesses affected by these agency actions that purport to enforce the Endangered Species Act (ESA). The ESA specifically requires federal agencies to take economic impacts into consideration, but the USFWS routinely ignores the costs of designating land as a critical habitat. The San Francisco-based U.S Court of Appeals for the Ninth Circuit held that the designation of critical habitat is an action fully committed to agency discretion, and that it may ignore any cost implications at its leisure, but this would seem to contradict Michigan v. EPA and other precedent.

The USFWS employs a cost-benefit accounting method called “baseline analysis,” which separates the impacts that would occur absent designation (baseline impacts) from the impacts attributable to designation (incremental impacts). It then only considers the incremental impacts, despite enormous disparities between baseline and incremental costs—one order of magnitude or two—and fanciful estimates that the economic impact of critical habitat designation is often $0.

Cato, joined by the Reason Foundation and National Federation of Independent Business, filed an amicus brief urging the Supreme Court to take up this important question of whether courts can even review the government’s Enron-style of cost-benefit analysis. Independent research by Reason’s Brian Seasholes found that in examining 159 of the 793 species that have critical habitat designation, there are at least $10.7 billion in economic impacts, hundreds of jobs lost per species designated, and regulatory burdens affecting 60,169,546 acres of land (11,261,054 privately owned) spanning 37 states and two territories.