Net Taxpayer Cost of WIC Infant Formula. J. William Levedahl and Albert J. Reed. Economic Research Service 355 E Street, SW Washington, DC

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1 Net Taxpaye Cost of IC Infant Foula by J. illia Levedahl and Albet J. Reed Eonoi Reseah Sevie 355 E Steet, S ashington, DC Contat: Levedahl@es.usda.gov Seleted Pape pepaed fo pesentation at the Aeian Agiultual Eonois Assoiation Annual Meeting, Seattle ashington, August 12-14, 2012 Views heein ae those of the authos and do not neessaily epesent those of UDSA o ERS.

2 Net Taxpaye Cost of IC Infant Foula Intodution Infant foula anufatues opete fo oen, Infant and Childen (IC) sole-soue ontats in whih the winning anufatue agees to pay the loal ageny a ebate pe unit fo infant foula obtained by poga patiipants. In exhange the loal ageny stipulating that the band of the winning anufatue is the only band that patiipants an obtain fee of hage. Nationwide, anufatues pay nealy $2.0 billion annually in ebate payents. These payents help ontain the ost to taxpaye of poviding infant foula to IC patiipants. The net ost to taxpayes of IC infant foula an be expessed as NC = (P ) whee P is the etail pie of the ontat band of infant foula, is the ebate paid by the ontat anufatue fo eah unit of infant foula obtained by patiipants, and is the level of IC patiipant deand. Rebate payents equal the podut. IC poliies that inease the ebate an be expeted to edue taxpaye ost wheeas poliies that inease patiipant deand an be expeted to inease this ost; howeve, in easuing how hanges in o affet the net ost to taxpayes a opliation ous beause the etail pie of the ontat band of infant foula ineases with both patiipant deand and the ebate. This pape obines elastiities of the net taxpaye ost of IC infant foula pesented by Reed and Levedahl (2012) (heeafte denoted as RL) that inopoate etail pie flexibilities of the ontat band with histoial data on ebates and patiipant deand to alulate how the agnitude of net taxpaye osts has been affeted by these vaiables. These esults ae used to opae the elative ipat of ebates and patiipant deand on the net ost to taxpayes of IC infant foula and to evaluate how effetive sole-soue ontats have been at ontaining taxpaye osts. 2

3 Net Taxpaye Cost of IC Infant Foula This pape akes use of annual data oveing the peiod fo 1990 though A national weighted aveage pe unit ebate fo ilk-based infant foula obtained fo FNS was used to easue the ebate vaiable (FNS pesonal ouniations). Measues of IC patiipant deand wee alulated by dividing adinistative data on ebate payents by the ebate. Table 1 epots the annual peentage hange in ebates and in IC patiipant deand gouped into thee-yea intevals. This table illustates that both ebates and patiipant deand gew apidly in the fist yeas of the 1990 s afte the widespead adoption of sole-soue ontats. Though the iddle yeas of the deade ebates ontinued to gow apidly but patiipant deand gew at a uh slowe ate. Towads the end of the deade the gowth in both ebates and patiipant delined with patiipant deand expeiening negative gowth in the fist yeas of the 2000 s. Oveall, the gowth in ebates aveaged 7.10 peent pe yea with the annual gowth in IC patiipant deand aveaging 2.10 peent. Net ost to taxpayes of IC infant foula an be expeted to inease when patiipant deand ineases but deease when the ebate ineases. Howeve, the agnitude of net taxpaye ost is attenuated by the ipat of ebates and patiipant deand on the etail pie of the ontat band. As shown in RL the inease in net ost fo patiipant deand will be lage and the deease in net ost fo ebates will be salle when pie effets ae aounted fo. Futhe, the divegene between the elastiities of net ost with espet to patiipant deand and ebates beoes lage the geate the shae of total onsue deand fo the ontat band onsued by IC patiipants. Denote this shae by Q wheeq equals total onsue deand fo the ontat band of infant foula. Foulas fo the elastiities of 3

4 the net ost with espet to ebates ( NC, equation 13a) and with espet to patiipant deand ( NC, equation 13b) that aount fo the effet of the etail pie of the ontat band ae given by RL (p. 693). Estiates of these elastiities ae epoted in Table 2 using the values of the stutual paaetes povided by RL and histoial values of. 1 Colun 2 of Table 2 illustates that thoughout the 1990 s IC patiipant deand beae oe ipotant to ontat anufatues ineasing fo = in 1991 to = in The ipliation of lage values of is that equal peentage ineases in ebates and patiipant deand esult in geate net ost to taxpayes of IC infant foula. This effet is illustated by the values of the ost ontainent ebate elastiity ( CCR ) pesented in olun 5. This elastiity easues fo eah peentage hange in patiipation, the peent hange in ebate neessay to keep taxpaye ost of IC infant foula unhanged (RL, equation 13). Colun 5 illustates that to keep taxpaye osts unhanged in 1991 ebates needed to inease by only peent fo evey peentage inease in patiipant deand but by 2002 a onepeent inease in patiipant deand equied ebates to inease by peent to keep taxpaye ost unhanged. These nubes illustate that as ineases the ability of ebates to ontain taxpaye ost of IC infant foula diinishes. hethe o not ebates ae able to ontain taxpaye osts of poviding IC infant foula depends upon the size of the ebates as well the nube of IC patiipants. Table 3 1 Stutual paaetes used by RL onsist of estiates of paying ustoe own and oss-pie elastiities of deand fo ontat and non-ontat bands of infant foula, the anufatuing supply elastiity of infant foula, and the atio of the ebate to the etail pie of the ontat band; and assued values of the elastiity of substitution between infant foula and etail aketing sevies and the fation of industy etail sales paid to anufatues. The alulation of the histoial values of is disussed in the appendix. 4

5 epots the ontibutions of ebates and IC patiipants to the net ost to taxpaye of IC infant foula. Contibutions wee alulated by ultiplying the annual gowth ate of patiipant deand o ebates by the oesponding elastiities NC o NC evaluated at the appopiate value of. Colun 5 of Table 3 epots the total effet on taxpaye osts fo hanges in both ebates and patiipant deand. These esults illustate that exept fo initial yeas ebates have been quite effetive at ontaining taxpaye osts of poviding IC infant foula. In ost yeas ebates wee suffiient to edue the taxpaye ost of IC infant foula. Oveall, ebates have been able to edue the net ost to taxpayes by an aveage 7.6 peent pe yea even while IC patiipant deand ineased by an aveage of 2.1 peent pe yea. These nubes suggests that sole-soue ontats have been able to geneate a suplus of funds that ould be used to subsidize IC patiipants that wee not infant foula eipients. Conlusion GAO (2006) and Oliveia et al. (2010) have expessed onens that a eent downwad tend in ebates ay affet the ability of sole-soue ontats to ontain the ost of infant foula. The esults in this pape illustate that even when ebates wee gowing uh oe slowly at the end of the 1990 s they still wee able to ontain taxpaye osts of IC infant foula beause the ate of gowth of patiipant deand was uh salle than in ealie yeas. e an onlude that it is not possible to deteine whethe ebates ae too high o too low without efeene to the level of IC patiipant deand. 5

6 Table 1: Aveage Annual Peentage Change in Rebates and IC Patiipant Deand, Yeas Rebate pe an IC Patiipant Deand Aveage Notes: Peent hanges in ebate pe an ae alulated using FNS estiates of the national aveage ebate fo ilk-based infant foula. Peent hange in IC patiipant deand is oputed as the diffeene between the peentage hange in IC ebate payents and the peentage hange in ebate pe an. Adinistative data on IC ebate payents wee obtained fo FNS. 6

7 Table 2: Net Cost Elastiities, 1991 to 2002 Yea γ NC NC CCR Notes: Q, NC lognc log, NC log NC log, CCR log log. The alulation of uses estiates of the elative size of IC d log NC 0 in the ontat band industy given by P Q whee P Q equals total evenue of the ontat band industy, see the disussion by RL (p. 694) and in the appendix. 7

8 Table 3: The Relative Size of IC and Annual Peent Change in Net Taxpaye Cost of IC Infant Foula, Peent Change Yea γ Due to Due to Net Cost Notes:. Net ost due to equals NC ( ) d log ; due to equals NC ( ) d log Q 8

9 Refeenes Geneal Aounting Offie FNS Could Take Additional Steps to Contain IC Infant Foula Costs. GAO , ashington D.C. Mah. Oliveia, V., E. Fazao and D. Sallwood Rising Infant Foula Costs to the IC Poga. USDA Eonoi Reseah Sevie, Eonoi Reseah Repot No Reed, J. and J. Levedahl IC and the Pie of Infant Foula. Aeian Jounal of Agiultual Eonois. 94(3): ef USDA Food and Nutition Sevie, Vaious yeas. Fisal Yea Infant Foula Rebates Estiate, eo. Offie of Analysis and Nutition Evaluation, Pesonal Couniations. 9

10 Appendix Histoial values of wee alulated using the elationship that links the etail and anufatuing easues of the elative size of IC in the ontat-band industy given by P Q k whee P and k P Q P Q is the fation of etail sales of the ontat band that is paid to anufatues. Values of wee alulated in two steps. P Q A wholesale pie fo infant foula in the ontat akets P was alulated as a weighted aveage of the standadized pies of eah anufatue using the 1994 IC aket shaes as weights. Values of P wee then obtained by dividing ebates given in Table A-1 by these pies. Values of IC infant foula as the popotion of infant foula supplied to ontat akets, Q, wee obtained using annual estiates of the popotion of U.S.-bon infants enolled in IC oeted fo diffeenes in beastfeeding ates fo newbon and six-onth-old infants and fo IC and non-ic infants, and the assuption that the popotion of a anufatue s output obtained by paying ustoes in the ontat-band akets equals the anufatue s 1994 IC aket shae. 10

11 Table A-1: Pe Unit Rebates and the Annual Peent Change in Rebates, Rebate Payents and IC Patiipant Deand fo 1990 to 2002 Peent Change Yea Rebate pe an Rebate Rebate Payents Patiipant Deand 1990 $ Notes: Peent hanges in ebate pe an ae alulated using FNS estiates of the national aveage ebate fo ilk-based infant foula. Peent hange in IC patiipant deand is oputed as the diffeene between the peentage hange in IC ebate payents and the peentage hange in ebate pe an. Adinistative data on IC ebate payents wee obtained fo FNS. 11