The recent kerfuffle over “Obama's tax on Christmas trees” is the most imbecilic one I have encountered in 30 years as an economist.
Fortunately, informed commentators eventually introduced some sanity, but not before the Obama administration caved into pressure and suspended the program. Many in the general public probably were left with the notion that the administration did actually make an independent decision to create a new excise tax on one product.
In fact, the “tax” was requested by tree growers' associations to fund advertising and promotion of their product, similar to industry programs to promote other commodities. The program would have been fully funded by fees on the industry at 15 cents per Christmas tree sold.
The move for a Christmas tree “tax” started four years ago, under legislation that goes back 45 years and that has been renewed repeatedly with strong bipartisan support. At the state level, such “taxes” for commodity promotion date from one Florida instituted in 1935 to promote its oranges.
Critics ignore the simple fact that the president has no choice on this. Under long-existing law, if a majority of the producers of a commodity vote for a promotion program funded by a mandatory fee, the U.S. Department of Agriculture legally must help implement the program. Once operating, the program will be run by a board selected by the producers. Money raised never goes to the U.S. Treasury, but held in a private bank account and spent as directed by the producer organization.
The Christmas tree program will join about 20 older ones.
There is much irony in the way conservative think tanks and Fox News are foaming at the mouth about the “Christmas tree tax,” since such programs of mandatory producer assessments all mimic one for cotton that began in 1966 and that, along with others enjoys near-unanimous support among Southern and other farm-state Republicans in Congress.
One may wonder, however, what economic rationale there is for such programs.
The economic phenomena involved are “perfect competition,” “collective action problems” and “free-riding.”
Perfect competition is an idealized situation in which there are many sellers, many buyers, a uniform, unbranded product and perfect information. Farming comes closer to this than any other sector.
The problem is that in perfect competition, it might benefit a group of producers as a whole to advertise their product, particularly if it competes with alternatives produced by companies with greater monopoly power. But because any advertising would benefit the group as a whole, no individual small producer would capture the benefits of spontaneously spending his or her own money on promotion. One, or several, could spend, but others would free-ride, enjoying some of the benefits of increased sales but bearing none of the cost.
This was the situation for milk producers. Sales of branded soft drinks marketed by large corporations were increasing sales while milk consumption dropped. Given a universally known brand and quasi-monopoly power, a Coke or Pepsi benefits greatly from advertising.
Yes, regional processors might have well-known local brands and did advertise. But there was no company with an incentive to advertise milk nationally the way producers of competing beverages did. Competitive producers simply could not compete with monopolistic producers.
Dairy farmers as a group would benefit from advertising, but it would not happen unless there was a limit on free-riding. Orange and cotton producers had recognized that decades earlier and established the model of a government-sanctioned mandatory fee for all producers when approved by a majority of the group.
Economic evaluations of the programs generally find economic returns to producers ranging from 2-1 to 10-1. This does not mean that all producers within a group benefit equally or that these programs are the most effective way for producers to spend money to improve their income.
Some producers always object to mandatory assessments, usually citing abuse of free-speech rights in legal challenges to new programs. The Supreme Court has generally ruled in favor of such programs. There is a possibility that a future court may end such programs. That might advance libertarian goals of individual liberty, but it would reduce income for farmers.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
