Monday, November 15, 2010

Dumb and Dumber Public Policy: Portland's Leaf Fee

Roger Jensen/The Oregonian

In this recessed economy municipalities are struggling with diminished revenue in the same way states are. It is becoming harder and harder for them to provide the same services in this new economic reality. So many cities are looking for new ways to impose fees for services that were once funded with general revenues. Portland is no different.

And so the mayor saw the big wad of money spent on fall feaf removal as an opportunity to raise new revenue by imposing a leaf cleanup fee for the neighborhoods where the cleanup occurs. The problem with this tactic is twofold: charging specific fees for public goods is dumb public policy, and ironically, allowing households to opt-out actually makes it dumber.

To properly frame the policy we should begin by discussing public goods and to properly discuss public goods we can start by asking the question: why does government provide things like roads, parks and fire departments?  The answer should be clear to anyone who has had even the most basic economics education: these things are public goods - they have elements of non-rivalry (one persons's consumption does not leave less for another) and non-excludability (you cannot prevent people from consuming).  City parks are a clear example, you cannot prevent people from using them and if I stroll through a park, there is plenty left for the next person.  The moral of public goods is that given these two elements, private provision of them is always going to be inadequate relative to what is optional and so government steps in to correct this market failure.   

Roads are also public goods - especially city roads.  Yes, I use the road on which my house is situated more than the average Portland resident, but I rely on the entire network of Portland's roads to walk, bike and drive and to keep traffic evenly spread throughout the city.  This is why the network of safe and well-maintained roads is the city government's responsibility and a big part of what my taxes pay for.  So while the leaves that my and my neighbors trees deposit on the street may seem like and obvious thing to charge us for, the benefit of clearing them from the street accrues to everyone.  Streets free from leaves are safer for anyone who travels on them and also prevents clogging up the city's sewer system that we are all responsible for.

The logic of why we don't leave street maintenance up to individual neighborhoods is obvious.  One neighborhood's decision to spend less and degrade their streets imposes a cost to local residents in terms of bad roads to traverse to get to and from home, but it also imposes a cost to the the rest of the city. Of course a cost is imposed on those who travel through the neighborhood, but also in terms of displaced traffic from those who avoid the neighborhood and thus cause congestion and additional wear and tear on other neighborhoods' streets - a classic externality problem.

Using the same logic of the leaf fee removal program leads to plenty of other absurd policy options.  We could charge an extra police fee to residents of high-crime neighborhoods.  Or we could impose a park fee for those that live within two blocks of a park.  [As an aside, we already pay for this in the differential values of our homes though Measures 5 and 50 have de-linked taxes with market values but the historical value remains the basis of the tax assessment]  Clearly, these are absurd suggestions, crime affects us all, we all enjoy parks, etc.

So the leaf fee policy is dumb, but the opt-out actually makes it dumber.  You see, since the leaf fee can be avoided be cleaning up the street in front of your property yourself, this creates a dis-incentive to have and maintain street trees - something the city is actively promoting (the water bureau Environmental Services bureau even has, or had, a program by which they gave you a $50 credit for planting a tree).  It is also not going to be very good for neighbor relations - what if I sweep my leaves over in front of my neighbors house?  What if I have no trees, but by neighbor's trees drop tons of leaves on my part of the street? In fact, I think perhaps each block should pool and every house but one sweeps their leaves in front of one house and everyone chips in to play that house's leaf fee.  You can see how this program creates perverse incentives.   

I understand the cities desire to find new revenue to help support its services, but this policy is just plain dumb.


Garage Wine said...

The opt-out may be "dumb," but it is necessary.

The city cannot impose a tax without running afoul of the state's tax limitation laws. So, the city must impose a fee. The lawyers say that for a fee to be a fee (rather than a tax), those who are subject to the fee must have a way to avoid the fee.

Unfortunately for the brilliant Mr. Adams, the city really has no way to impose the fee without providing an opt-out. Oh, by the way, the lawyers also say that if the opt-out has too many hoops to jump through, then the program may be considered a tax.

Dann Cutter said...

Let's consider leaves 'pollution' for the moment. Certain houses emit pollution into a public good. It is in everyone's interest to ensure the good is not degraded, therefore, we can conclude that the pollution should be cleaned. Some folks clean up their own pollution, while others do nothing or perform inadequate cleaning. Others, often in less desirable or newer low cost neighborhoods, do not emit pollution.

Due to moral hazard, we cannot assume pollution will be addressed. Hence, the government has chosen to clean up the pollution for the public good as a service. Therefore we have a compelling argument that it should be addressed.

Government has certain costs. As pollution grows, this cost increases, with no increase in revenue. As such, an external revenue source must be used to compensate for the increased costs. However, noting that a flat universal fee would be beneficial to polluters and less beneficial to those who do not pollute, a system is devised to target those who pollute with the fee instead of everyone.

Herein is where you find flaw - and also where I think your argument goes off track. If we assume that a moral hazard exists, then if everyone pays, it will encourage everyone to pollute as there will be no consequence for consumption of service. Those who are unable to pollute will be disenfranchised. If however, pollution is charged back to those who pollute, then there is an incentive to reduce one's pollution and provide evidence of such.

Street trees which pollute provide not only a public benefit, but also in general higher property values to the owners - they are compensated then accordingly for their pollution. Thus, having street trees vs not polluting is a question of marginal utility to the owner.

The government has set a standard for pollution. Once an area exceed that standard, it is entered as an necessary area to address. Assuming a reasonable astute market, this is relatively efficient. Thus, it is known where the pollution is generated. The examples provided at the end presume a non-rational actor, someone who risks criminal fines for spreading their pollution to their neighbor or who is willing to do more work than either the fee or self cleaning would justify. Neither make sense economically.

While initially inefficient in requiring documentation, once established, residents along streets should be able to reasonably show whether they pollute, or not - and as such the fee will be transferred in an efficient manner. HOAs will add it to their fee base, older neighborhoods will either pay the fee, or add it to the list of responsible and value-insuring homeowner activities like mowing lawns etc. Heck, a market has been created now for pollution addressing where one did not exist before.

All in all, the leaf cleaning fee targeting polluters makes sense. While this year's opt-out is tragically flawed in requiring no documentation, by next year it will be a process by which a reasonable value judgement is made on cost vs effort.

Patrick Emerson said...

I assume that trees are a net good not a bad. There are both positive and negative externalities associated with trees, but I think the positive outweigh the negatives and my home value does capture part of the positive but not all.

But I think you are missing the point by focusing on trees: take leaves on streets as a given - how should a municipality deal with the problem?

Dann Cutter said...

But I ask you, why should the 'municipality' deal with the problem?

We have previously established that we can consider the leaves 'pollution' and that it is in the general interest to clean up this pollution.

So it needs to be cleaned up - but as you are so often saying, less government = better free market. So, the government here addresses a moral hazard by assigning a value to the cleanup of the pollution, but establishes a mechanism by which it can be avoided. This value ostensibly corresponds to the cost (governmentally inefficient) assigned to the property owners who ostensibly cause this pollution (similar to a tax on carbon production for example). After all, trees need not have deciduous leaves.

If a homeowner wants no tax, they will cut down the trees, or plant different foliage... but like yourself, the value of shade trees far outweighs this, so it honestly becomes an economic question of whether the they pay the fee, or whether they address the issue in another fashion. In this market, if the government is truly inefficient, a secondary market of leave cleanup will result, leading to a benefit to society (clean streets), the homeowner (less effort or fee cost than otherwise), and the city (less expense). If the government is efficient, then the basket of goods to the homeowner should be no different between their previous method of addressing the issue or paying the fee.

We cannot assume there is the third option of the city just paying for it, as those dollars do come from other services (such as crime prevention), and it allows for a continuation of a moral hazard with diminished value to a reasonably large portion of the tax base.

It's a case of what is the 'least' the municipality can do to address the issue - this fee represents a method by which the issue gets addressed, the polluters pay, and the economically most efficient outcome should result.

Jeff Alworth said...

Another perverse incentive (unless you mentioned it and I missed it) is that the fee makes it more likely people now regard the service as the city's problem. I see lots of people now depositing their leaves in front of their homes, rather than in their leaf bins. (More than one leaf bin every two weeks and you get charged, so why not dump them in front of the house?) Of course, this means the city is creating a bigger problem they are responsible for managing.

The political optics are terrible, too. By charging people for a fee previously covered by taxes, you enrage them unnecessarily. Add to that the various exemptions and differential pricing schemes, and it's a sure bet this is one of the least popular moves the City That Works has made since Vera hired Mark Kroeker.

Patrick Emerson said...


I meant to (and I did so in a comment on an interesting post by Paul Gronke on BlueOregon) but forgot to mention it here. But this is less about a specific incentive and more about a social norm: we are not supposed to rake leaves into the street but there is no specific sanction other then ones own moral compunction. With this fee, that moral restraint is eroded (as is evident in the massive leaf piles on my street).


You still seem to be conflicted about the positive/negative externality. I am assuming a net positive externality so that we should encourage trees in neighborhoods as government policy not discourage them as this fee does. I am also making the point that a clean street in front of my house benefits everyone, not just me. In fact, if I had my druthers I'd say leave my street leafy but clean everyone else's: I can be careful riding out of my driveway, but I want safe streets for the rest of my journey. And this is exactly the point, everyone would probably choose the same.