Taxation of milk raises vexing questions about role of government in a democracy

Should dairy farmers get a higher price for their milk? Here in the Midwest, where a lot of people have ties to farms, many would answer yes.

Should government force consumers to pay more for milk so that farmers can have higher incomes? Again, at least some people would answer yes.

If a democratic society decides that government should act to raise dairy farmers’ incomes, is it fairer to make all taxpayers bear the burden, or should it come only out of the pockets of milk-drinking consumers?

These sorts of questions go the heart of people’s beliefs about the proper role of government and the fairness of different forms of taxation. They also illustrate the sorts of trade-offs that society faces when people believe that a particular market outcome is bad and that government should act to improve things.

The specific case in point is the Northeastern Dairy Compact, an institution that has received less public scrutiny than it deserves.

Little noticed except by farmers and agricultural economists, the compact raises prices to New England dairy farmers and prevents lower cost milk from being shipped into the region. Any notice of it in local media has been limited to its effects on dairy farmers in the Midwest.

But it raises broader issues that merit national discussion. The compact, in effect, taxes consumer milk purchases in New England so farmers can get higher prices. Is this fair to consumers? Is it fair to dairy farmers outside of New England who are willing and able to ship milk to that region at lower cost, but who Congress prevents from so doing?

The stated goal of the compact is to save family dairy farms in the Northeast. Concerns about structural change in dairy farming are not limited to New England, of course. Media here in the Midwest have focused much attention on the plight of the traditional dairy farm.

Jeffersonian beliefs about the social value of small, family-owned and operated farms continue strong in the United States. Such farms are an important part of our culture, support healthier rural communities, and are more stewardly of the environment, say their proponents. Many people agree; others disagree.

In a democratic society, the question is one that ultimately has to be addressed by the political process. Economics provides no answers. All economists can do is point out some of the trade-offs and lessons learned from similar efforts.

One thing experience has taught most agricultural economists is that programs to raise prices for all products of all farmers have no special benefit for small or family arms. The number of dairy farms is declining in most of the U.S., but milk output is not. Larger farms are replacing smaller ones. These large units are usually family-owned, but employ more nonfamily labor than do traditional dairies.

The newer farms often have anywhere from 500 to 600 milk cows compared to the 50 or so that was usual in the past. There is no evidence from 60 years of experience with different federal price support programs to indicate that higher milk prices will halt this shift. In fact, higher prices may accelerate it as stronger cash flows make new investment easier to undertake.

The question of who should pay for higher farm milk prices is a more fundamental one.

Economists have known for centuries that any government action, such as the Northeastern Dairy Compact, that restricts supply and mandates higher prices has the same effect as an excise tax on the product in question.

The only excise taxes most people pay are on alcohol, tobacco, tires and telephone calls. They are largely a historical relic of an era before income and sales taxes. When they were more widely used, it was generally thought more fair to impose them on luxuries rather than on necessities.

It’s hard to argue that milk is a luxury. Many states with sales taxes exempt all food from such taxation because of the continuing belief that it is not fair to tax basic necessities. So why impose a tax on milk, that most basic food for families with children?

Economists usually avoid making “value judgements,” but those who do study fairness in taxation generally argue that if some government program is intended to benefit society as a whole, it should be paid for by a tax that is also broadly based, such as the income tax.

And then there is the question of effects on farmers outside the six-state Northeastern Compact area.

Economic theory and real-world research both show that if society decides it wants to support some particular activity, such as small-scale dairy farming in New England, it wastes fewer resources if direct subsidy payments are made to such farms rather than imposing restrictions on the flow of milk from lower-cost regions such as Minnesota and Wisconsin.

The reason why six state legislatures and the U.S. Congress chose to enact a plan that imposes higher consumer prices and restricts interstate flows of milk is transparent: They know that the public would not stand for overt payments to dairy farmers funded out of general tax revenues.

They also know that most citizens and reporters will remain unaware of an opaque policy such as the compact and thus will not raise objections even though the compact is more wasteful and less fair than open subsidies.

This is not how policies should be made. The Northeastern Compact’s milk tax should be discussed by society as a whole.

© 1999 Edward Lotterman
Chanarambie Consulting, Inc.