The Milk Tax/Price Control Bill

POLICY BRIEF 026April 22, 2009

The Milk Tax/Price Control Bill

Summary: A Senate-passed bill (S.89) directs the Vermont Milk Commission to immediately reopen regulatory proceedings to adopt a rule requiring dairy handlers to pay Vermont dairy farms an “equitable minimum price” for milk

Background: For decades Vermont dairy farms have experienced volatile swings in prices paid to them by the handlers who purchase their milk. Numerous efforts have been made to assure that farmers receive enough from their sales to meet their costs of production, thereby enabling them to remain in business.

In 1991 the legislature revived a long disused Vermont Milk Commission, giving it the power to establish minimum and maximum prices paid to farmers for milk produced in the state. For the ensuing five years political attention was focused on getting Congressional approval for a regional dairy price fixing cartel called the Northeast Interstate Dairy Compact. Congress approved the Compact in 1996, and it remained in existence until 2001, when Congress failed to reauthorize it.

With dairy prices dropping - after hitting record highs in 2007 – the legislature revived the Milk Commission. In September 2008 the Commission made public a “draft order” that would have imposed an “assessment” on handlers delivering milk to Vermont supermarkets, general stores and convenience stores. Those retailers were believed to be enjoying a “surplus profit margin”. The assessment – actually a tax – would increase the wholesale price of milk deliver to the stores, and the stores were expected to absorb this added cost without increasing consumer prices.

The proceeds of this assessment were then to be turned over pro rata to the farmers who produced the milk, both in and out of Vermont. Economists estimated that an average Vermont farm would receive $5,900 a year from this plan.

Grocers quickly made it clear to the Commission that they would not and could not simply absorb a 38-50 cents per gallon tax on milk, without increasing consumer prices. Certain members of the Commission then proposed that the Commission impose dairy price controls on the grocers.

A majority of the Commission concluded in early 2009 that the draft rule proposal made little or no economic sense, imposed an unacceptable milk tax on consumers, and offered little net benefit to dairy farmers. The Commission essentially concluded its work without a policy recommendation.

The Pending Legislation: The most aggressive proponent of the “handler assessment plus price control” plan, Sen. Robert Starr (D-Orleans-Essex), then joined Senate President pro tem Peter Shumlin (D-Windham) and 15 cosponsors in introducing S.89 on February 11, 2009. The bill directed the general assembly to establish an “equitable maximum milk price” (not stated in the bill), and directed the Milk Commission to update that price periodically thereafter. The sponsors touted the bill as a means of protecting consumers from supposedly unconscionably high retail milk prices, but unlike the Commission’s shelved proposed Order, the bill did nothing to subsidize farmers.

The emphasis thus shifted from “farmers aren’t getting enough for their milk” (new milk tax plus subsidy) to “consumers are paying too much for milk” (retail price controls).

On April 15 the Senate passed, on voice vote, yet another version of S.89. This version removed the retail price controls of the introduced bill, and replaced them with a mandate to the Milk Commission to immediately revive the rejected “proposed Order” of September 2008. S.89 as passed by the Senate also affirms the Commission’s power to establish an “equitable minimum price” to be paid to dairy producers from assessments collected from handlers.

The bill as passed by the Senate also includes a producer referendum, whereby individual dairy producers will vote to approve a Commission order imposing a premium on handler payments to farmers. The question translates as “Should milk handlers be required to pay me more for my milk?” One would expect this to win strong support from dairy farmers. Consumers, who will of course end up paying for the higher cost of milk sold in stores, are not entitled to a similar referendum vote.

Also included in S.89 is a section requiring the Attorney General to undertake a study of the Northeast fluid milk market, focusing on anticompetitive practices of dairy cooperatives, processors, and retail firms.

The bill’s title, “An act relating to a maximum retail price for milk”, is changed to "An act relating to stabilization of prices paid to Vermont farmers”.

The bill’s advocates and critics agree that the controlling Federal milk marketing order plan, in effect in various forms since 1935, needs reexamination. They also agree that the concentration in the milk processing and marketing sectors can leave producers at the mercy of large cooperatives and handlers.

But the critics make these points:

1. However attractive it may be politically to pass legislation imposing taxes and fixing prices supposedly for the benefit of Vermont dairy farmers, that will not solve the real problems they face, at least without penalizing Vermont grocers and consumers. Instead, it will simply create new inequities.

2. Over 90% of Vermont’s milk goes outside Vermont to a regional and national market. There is no way that taxing milk sold at retail in Vermont can generate revenues that will, when distributed pro rata based on milk production, keep struggling Vermont dairy farms in business.

3. A Commission-ordered “assessment” on handlers is a poorly disguised tax on fluid milk. No unelected body, unaccountable to the people, should ever be given the power to levy taxes. If taxes are to be raised on Vermonters, only our elected representatives have the power to do so, and they must stand accountable for their actions through frequent elections.