A tax by any other name

Like any other type of tax, levies are rarely ever abolished or reduced

IN MANY rural sectors, producers pay levies which are collected by the government and transferred to an industry organisation which is responsible for spending the money for the benefit of the industry.

Levies are in reality a special purpose tax. And like any other type of tax, they are rarely ever abolished or reduced.

These levies are used to support research and development (R&D), promotion and marketing, residue testing, and plant and animal health programs. In some cases the government contributes additional funds, a form of corporate welfare.

Quite sizeable organisations are funded by levies, including Meat and Livestock Australia, Australian Wool Innovation, the Grains Research and Development Corporation and Horticulture Australia. Many careers are dependent on their continuation, which means a significant amount of scepticism is required whenever they are discussed.

The arguments in favour of levies rely on the proposition that by pooling producer funds, activities can be undertaken that would not otherwise occur. Some people refer to this as market failure, which may be technically correct although those who like the market failure term tend not to have much faith in markets to start with.

In the case of research, some activities are certainly too expensive or too long lasting to be undertaken by individual producers. In other cases, individuals who fund the research would not be able to gain the benefit without sharing them with those who have not paid.

This especially applies to fundamental research that explores the building blocks upon which applied research is based. Someone needs to discover the genes, molecules and biological pathways that drive organisms before products can be developed to block, enhance or modify them.

However, it is also true that levies pay for a lot of R&D that would be funded by individual producers if they were not available. There are few things faster than the withdrawal of a proposal to undertake R&D upon discovering that it might be funded via levies.

In an ideal world, R&D would all be funded by individuals on a voluntary basis. The benefits would flow to those who provided the funding, leading to economic rewards that provided an incentive to others to either buy into the results or undertake their own. In fact, this is the model used in most industries. Levies are not found in mining, manufacturing, transport or tourism, for example.

The availability of funding for R&D which would otherwise have been undertaken privately is a major disincentive and almost certainly leads to a lower overall level of R&D expenditure. The R&D organisations all know that, and yet there is an enormous amount of work undertaken that falls into this category.

This problem is even more significant when it comes to marketing.

These levies are similarly based on the argument that marketing by individual producers can only take market share from competitors and not expand the overall size of the market. Only by pooling resources, it is claimed, can this ‘market failure’ problem be rectified.

Like many traditions common in the rural sector, this has an element of truth. When there are large numbers of producers of roughly similar size, it is not feasible for any individual producer to take on the role of market development. It is too expensive and in any case the benefits are inevitably shared with those who have not paid for them.

Things change when one or more producers have a substantial market share, however. If they invest in market development, as a minimum they will pick up any growth in proportion to their market share. If they manage to brand their product and create customer loyalty, they should do better than that.

The same applies to export markets. These are more expensive and require more resources to develop, so only very big producers have the resources to chase customers and increase demand. Development of the Aussie beef market in Japan, for example, may not have occurred if it had been left to individual meat producers or processors.

The point is, there may be occasions when pooling funds is warranted, but there are many more times when the use of pooled funds cannot be justified and may even have a negative effect on private investment. Each use of pooled funds should be carefully considered.

But convincing anyone of that is probably not very likely given the range of vested interests. It is a forlorn hope to think that rural R&D and marketing organisations might apply a more critical eye to their activities. A more attractive option would be to ensure that those who pay the levies, the producers, have a regular opportunity to decide whether to pay levies in the first place and, if they agree, how much they ought to be.

The wool industry does exactly that. Every three years a poll is conducted in which wool growers vote on a range of levy options, including a rate of zero. Although there are plenty of growers who believe zero is the right amount, a majority has so far consistently supported a higher amount.

While some levies are only used for R&D (eg. the cotton industry), they are all compulsory. Moreover, while the introduction of levies is normally subject to some kind of plebiscite, unless there is a proposal to increase them only wool producers ever get an opportunity to decide whether to retain them.

In my view the whole system of levies, from deciding whether to introduce them, whether to retain them, how high they ought to be and how to spend the funds, is overdue for review.

David Leyonhjelm

David Leyonhjelm

has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com


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