Topic: Regulatory Studies

Philadelphia Soda Tax

A recent New York Times article reports that today’s Democratic primary in Philadelphia partially represents a referendum on the city’s soda tax, even though it is not on the ballot. Incumbent Mayor Jim Kenney, the engineer of the 1.5 cents per ounce tax on sugary and artificially sweetened beverages which took effect in 2017, is facing two Democratic challengers who both support repealing the controversial tax.

Since its inception, the tax has faced vigorous opposition from a coalition of the beverage industry, grocery store owners, and Teamsters, as well as citizens and politicians who worried that it would unfairly burden the poor. Supporters have touted the tax’s revenue-raising potential and the public health benefits of taxing soda in a city with some of the highest obesity and Type 2 diabetes rates in the United States.

Kenney has always presented the tax as a revenue-raising measure and he reports that it has raised $200 million for education and infrastructure programs. While Kenney’s stated goal was never to change soda drinking behavior, many supporters of the tax have focused on the potential health benefits and studies have found mixed results of its impact on soda consumption in the city. From an economic standpoint there are, among others, three serious concerns about the tax’s ability to both raise revenue and reduce obesity.

First, as I discussed in 2016 shortly after it was passed, both the level and scope of the tax mean it has a dubious impact on reducing obesity. The tax is on soda consumption in general which burdens a majority of soda drinkers who are not obese instead of directly incentivizing people to avoid all behaviors that lead to excessive weight (a better alternative would be to price health insurance for the obese higher, but this is not allowed under the Affordable Care Act). And the 1.5 cents per ounce rate is estimated to decrease body mass index by .26 points, a tiny amount when considering that obesity is defined as a body mass index of 30. The tax is inefficient and it’s doubtful it has had any significant impact on obesity.

Second, it is likely that many soda drinkers have responded to the increased soda prices, but not necessarily by reducing their soda consumption. A paper by Mabel Andalon and John Gibson, which I reviewed in the winter 2017/2018 issue of Regulation, looked at Mexico’s nationwide soda tax and found that consumers substituted for cheaper brands of soda. Between 2012 and 2014 average soda prices increased by 11.9 percent, but the average price of purchased soda increased by half that rate, suggesting consumers simply bought lower-priced soda. This response is likely present in Philadelphia as well, where consumers are just as able to substitute to lower-price or even untaxed alternatives (in fact, the Times article reports that there has been a spike in the sales of powdered drink mixes which are not taxed). This undermines both the health benefits and (in the case of untaxed substitutes) the revenue raised.

Finally, people can simply avoid the tax by buying their sugary drinks in nearby localities without their own soda taxes. In the current issue of Regulation I reviewed another paper, by Stephan Seiler, Anna Tuchman, and Song Yao, that observed this exact taxpayer response in Philadelphia. The authors found that beverage purchases in Philadelphia decreased by 42 percent, but this reduction was fully offset by increased purchases outside of Philadelphia.

So, while the positive impacts of the tax are doubtful, the negative effects are felt most by Philadelphia stores and the poorest citizens who were already buying the cheapest sodas or don’t have the ability to buy their beverages outside of the city.

However, I mentioned in my 2016 post that there are some positives of the tax:

The program was not sold to voters as a public health measure, but rather as a means of raising new tax monies. The discussion of the tax and the public spending for which the revenues would be used was explicit.  And the tax is a consumption tax rather than a tax on the rich or corporations.  To be sure, the tax is on a very narrow consumption base and thus is distortionary, but at least the tax is visible. The voters will see the tax and the public services that result and can make an informed decision in the next election about the tax and its uses.

Of course, there are other issues up for debate in this primary and it is unlikely that the soda tax alone will make or break Mayor Kenney. But the tax’s transparency has allowed for an effective democratic process and voters will be able to weigh the soda-tax-funded programs relative to its incidence.

Written with research assistance from David Kemp.

Professor Tim Wu Makes The Case Against Antitrust Policy

It is common to hear proponents of antitrust action against big tech firms talk up the potential for future harms to consumers from sustained dominance by Facebook, Google, and Amazon. 

In her influential “Amazon’s Antitrust Paradox,” lawyer Lina Khan argued that “the current market is not always a good indication of competitive harm” and that antitrust authorities should “ask what the future market will look like.” This sentiment was recently echoed by economist Jason Furman in a digital competition review for the UK government.

One of the best cases against such an approach was inadvertently delivered by long-time antitrust champion Professor Tim Wu at a Stigler Center conference on antitrust last week. While critiquing the consumer welfare standard approach in a debate with Tyler Cowen, Wu said:

everyone who is even vaguely honest as an economist will agree that dynamic costs matter more than static costs and dynamic benefits matter more than static benefits. But those are the hardest to measure, so we’ve gotten trapped in a world where the old joke about the economist and the street light has become the soul of the law.

Exactly. Antitrust policy can indeed tend to think of markets too statistically. But antitrust enforcers also have no special insight into the future of markets and available technologies, and hence the change in the balance of costs and benefits to consumers going forwards. Looking at a static market may well lead to mistaken conclusions. But it’s a complete leap of faith to presume that replacing static analysis (more accurate but incomplete) with dynamic analysis (supposedly comprehensive but wildly speculative) will deliver better outcomes for consumers.

Government Should Keep Its Hands Off Our Tofu Sausages!

You may or may not want to eat something called a “veggie burger,” but you probably have a good idea what is in it: Vegetables. And not meat. Similarly, you also probably have a good idea what is in a “hamburger”: Beef, not ham. And a “cheeseburger”: Not just a big cheese patty, but cheese melted on top of beef (yum!). Consumers are pretty savvy about these things.

Sometimes governments try to offer “clarity” through labeling regulations, but in doing so they often make things more confusing. Last year we wrote about U.S. government efforts to prevent dairy-free milk products from using the word “milk” on their packaging. Now, the European Union’s legislative body, the European Parliament, is going after the millennial scourge of plant-based products with “meaty” words in their name (avocado toast appears to be safe for now). As The Guardian reports:

Veggie burgers are for the chop, a Brussels committee has decreed, to be replaced by the less palatable-sounding “veggie discs”.

And it won’t be just bean or mushroom burgers condemned to the food bin of history. Vegan sausages, tofu steaks and soya escalopes could all be approaching their ultimate best-before date, after a vote in the European parliament on revisions to a food-labelling regulation.

In a move that some MEPs suspect bears the fingerprints of the meat industry, the parliament’s agriculture committee this week approved a ban on producers of vegetarian food using nomenclature usually deployed to describe meat.

The protected designations would include steak, sausage, escalope, burger and hamburger, under a revised regulation that passed with 80% approval. The measures will now be voted on by the full parliament after May’s European elections, before being put to member states and the European commission.

The French socialist MEP Éric Andrieu … said MEPs had voted purely in the best interests of the consumer and it should be seen as an opportunity for vegetarian brands to make their mark.

“We felt that steak should be kept for real steak with meat and come up with a new moniker for all these new products. There is a lot to be done in this front, a lot of creativity will be needed,” he said. “People need to know what they are eating. So people who want to eat less meat know what they are eating – people know what is on their plate.”

We’re not so sure that calling a veggie burger a veggie disc is going to help these meat alternative producers “make their mark.” What on earth is a veggie disc anyway? Can we play frisbee with it? (We would probably still be curious to try it though, as long as it comes with fries). But more broadly, this proposed change to EU food labelling laws raises some important policy questions, and not just for Europeans, as there is a similar effort underway in the U.S. to prevent plant-based foods from using terms such as “beef” or “meat” in their labels.

Last year, Missouri passed a law reserving the use of the term “meat” for products that are “derived from harvested production livestock or poultry.” The Missouri law has been challenged in court, and a settlement is expected soon.  However, that hasn’t stopped other states from taking up similar legislation, and there is also a push by the U.S. Cattlemen’s Association to restrict the use of the terms “beef” and meat” at the federal level.

Before the competition for who can create the most restrictive labelling requirements gets out of hand, EU and U.S. lawmakers should consider the following: Does the additional information, or lack of information, add clarity for consumers, or does it create confusion? Let’s consider the Missouri law. As NPR reports with regard to Tofurky plant-based deli slices: “Under the law, those aforementioned Tofurky deli slices would have to be described like ‘protein textured’ rather than ‘meaty’ or ‘soy roast beef.’” First of all, we have serious doubts that anyone has ever described something they have eaten as “protein textured.” And as a related point, it is worth considering whether the requirements of the labelling regulation provide any helpful information about the product.

Second, the U.S. Cattlemen’s Association claims that plant-based food producers are misleading consumers by using terms associated with traditional meat products that come from live animals. For instance, they claim that the Beyond Meat company’s use of the term “burger” in its “The Beyond Burger” is a prime example of such misinformation. We encourage you to peruse the Beyond Meat product site and let us know if you find it misleading. The label for the Beyond Burger says “Plant-Based Burger Patties” in bold font on the front of the package. Is this misleading? Is there any reason you might think this came from a cow? To take another example, while sometimes people seem confused about whether a hotdog is a sandwich, no one thinks it actually contains dog meat, do they? Consumers are generally quite knowledgeable about these things. And if they are confused, they can either read the list of ingredients, ask someone, or Google it.

The French MEP pushing for these strict rules in the EU suggested that we look to Europe’s “foodie culture” in understanding the importance of the law. But foodie culture isn’t frozen in time, it evolves as people become concerned about other things, such as the humane treatment of animals, for instance. Shouldn’t policy be flexible enough to let consumers express their actual concerns and allow companies to respond?

Transit Continues Its Death Spiral

Nationwide transit ridership in the first quarter of 2019 was 2.6 percent below the same quarter in 2018, according to data released by the Federal Transit Administration (FTA) last week. Transit’s most recent downward spiral began in 2014, and ridership over the twelve months prior to March 31 was 8.6 percent below the same twelve months four years ago.

Ridership is declining for all major forms of transit travel. First quarter bus ridership was 2.1 percent below 2018 while first quarter rail ridership declined by 3.2 percent. Commuter rail, light rail, heavy rail, and streetcars all lost riders.

Since transit agencies depend on fare revenues to cover part of their operating costs, declining ridership can force them to cut service or raise fares, either of which is likely to lose them more riders. This is known in the industry as the “transit death spiral,” and even major agencies such as the Bay Area Rapid Transit District (BART) are worried about it.

The FTA data show that first quarter ridership had fallen in all but twelve of the nation’s fifty largest urban areas. It even fell in Seattle, the one urban area that has, up until 2019, consistently shown ridership growth.

Ridership over the past four years has declined in every state except Washington.

Thanks to Seattle’s previous ridership growth, Washington is the only state that saw more transit riders in the year prior to April 2019 than the same period four years ago. To understand why ridership in Seattle was growing, it is first necessary to look at where ridership has declined the most.

A Tale of Two Train Disasters

In 2004, Denver-area voters approved a sale tax increase to pay for “FasTracks,” a plan to build 119 miles of rail transit lines in the metropolitan area. In 2008, California voters approved the sale of bonds to pay for the construction of a 520-mile high-speed rail line between Los Angeles/Anaheim and San Francisco/San Jose. FasTracks is within a metropolitan area and high-speed rail is supposed to connect several metropolitan areas, yet there are a lot of similarities between these two projects.

Both rely on technologies that were rendered obsolete years before they received voter approval. The agencies sponsoring both projects ignored early warning signals that the projects were not cost effective. Both had large cost overruns. Advocates of both lied to voters about the benefits and costs of the projects. Due to poor planning, both projects remain incomplete. Despite the failure of the projects to date, both have adherents who hope to complete them.

My 2004 paper, Great Rail Disasters, chronicled the failure of recent rail transit projects to significantly enhance transit or transportation in their regions. Since then, there have been several new disasters, but RTD’s FasTracks and California’s high-speed rail project are two of the biggest.

Obsolete Technologies

In 1927, the Twin Coach company designed the first bus that cost less to operate, as well as to buy, than any railcar. Within 10 years, more than 500 American cities replaced their rail transit lines with buses, and by 1974 only eight urban areas still had some form of rail transit. 

The Twin Coach Model 40 bus was first used in Milwaukee, Wisconsin.

Buses are not only less expensive, they have the added benefit of being able to move more people per hour than most rail lines in the same amount of land. A railcar may hold more people than a bus, but for safety reasons the frequency of trains is restricted to 20 to 30 per hour, while a dedicated bus lane can move several hundred buses per hour.

“Actual” for RTD means actual capacity based on the train lengths and frequencies used; for Istanbul it means actual ridership.

The Istanbul Metrobus, for example, has a theoretical capacity of 30,000 people per hour and actually moves up to 20,000 people per hour. The 32-mile line carries twice as many people per day as all of RTD’s buses and trains combined. The theoretical capacity of Denver’s light rail is 12,000 people per hour, and Denver’s commuter rail is less than 14,000 people per hour. Neither operate anywhere close to those numbers, so buses could have been a viable low-cost substitute.

Istanbul Metrobus dedicated lanes move as many as one bus every 14 seconds. Photo by Myrat.

Buses are also potentially faster. RTD’s one bus-rapid transit line averages speeds comparable to its commuter train and more than twice as fast as its light rail. Plus buses, unlike trains, can leave dedicated lanes and fan out to many destinations.

Infrastructure Lovefest Bad for Taxpayers

Amidst the constant animosity between the Trump administration and Democratic congressional leaders there appears to be a rare glimmer of bipartisanship. In a recent meeting, President Trump, Senator Schumer, and Speaker Pelosi agreed to a $2 trillion infrastructure plan. While the specifics are not yet hashed out and it’s anyone’s guess whether the plan comes to fruition, the initial details of the agreement seem to spell bad news for taxpayers.

At the core of the plan is a mutual rejection of public-private partnerships (P3s), arrangements between state and local governments and private companies where the company agrees to fund and manage infrastructure in return for payments from users. Last year’s $1.5 trillion infrastructure plan, masterminded by former Trump economic advisor Gary Cohn, relied extensively on P3s and offered only $200 billion in federal funding. The Democrats and Trump, who reportedly said about the last plan, “That was a Gary bill…. That bill was so stupid,” both agreed that the new plan would rely on federal funding. (And Trump also reportedly noted that he wanted to increase funding $100 billion because $2 trillion sounds better than $1.9 trillion. As my colleague Ryan Bourne argues, coming up with a number and then deciding how to spend it is not an effective way to determine an appropriate amount of federal spending.)

Despite both sides’ skepticism of P3s, and a recent New York Times editorial that described them as “gimmickry,” P3s offer a real option for financing infrastructure building and maintenance without burdening taxpayers with the costs. As I have previously discussed, there are currently a number of P3 projects across the United States and the arrangements have been increasingly embraced around the world. While there have been some legitimate concerns about early P3 projects, experience has helped policymakers and experts learn how to structure partnerships that reduce risk for companies and protect taxpayers and users.

Further use of P3s would help us transition to a more efficient way to finance infrastructure: a user pays model. Richard Bird and Enid Slack explained the benefits of having infrastructure users pay the costs in the spring 2018 issue of Regulation. There are two choices for infrastructure funding, either those who use the infrastructure pay for the service or the costs are borne by taxpayers. Unlike taxes, user charges are not distortionary, they provide signals to consumers about the true costs of the service, and they allow the public to more easily assess the performance of service managers and politicians. However, though user fees are more efficient, and economically and technically feasible, political concerns about distribution and providing “free” public services have been an obstacle to expanding their use.

P3s and user charges offer a more effective way to pay for infrastructure without a huge price tag for taxpayers. Unfortunately, though the bipartisanship of the $2 trillion infrastructure plan may seem like a breath of fresh air it looks like it will be the usual case of billing all taxpayers for services enjoyed by a few.

Written with research assistance from David Kemp.

Political Influence in Retail MJ Industry

This article from the Boston Globe describes, and implicitly criticizes, the large role of political connections in determining who can legally sell marijuana in Massachusetts:

Lobbyist Frank Perullo had good reason to believe his client’s proposal to open a medical marijuana store would receive a warm reception from the Cambridge City Council. After all, Perullo counted six of the nine councilors as his political clients, including Leland Cheung, whom Perullo served as campaign treasurer.

Cheung was ready to do his part. He planned to offer a resolution supporting the marijuana shop.

But Perullo wasn’t going to leave anything to chance at the August 2016 council meeting. So his staff sent Cheung an e-mail labeled “talking points,” describing Commonwealth Alternative Care’s exotic marijuana products.

“LC, please see attached for this evening,” a staffer wrote, addressing Cheung by his initials. “Let me know if you have questions.”

Nothing happens quickly in Massachusetts politics, or in the business of pot, for that matter. But Perullo’s diligence — and carefully cultivated relationships — paid off. Today Commonwealth Alternative Care’s pot shop is under construction in Inman Square.

The Globe’s concern about political insiders benefiting at the expense of competition is understandable.

But the true villain is regulation that limits the number of legal marijuana sellers. 

Absent this government-created barrier to entry, political influence would be irrelevant.

Instead, legal marijuana would be available at pharmacies, coffee shops, Walmart, stand-alone pot shops, and any place where consumers might wish to purchase it.

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