The retail delivery fee should be repealed
Testimony on Minnesota HF 5
Today, I testified in front of the Transportation Finance and Policy Committee on HF 5. This bill would, among other things, halt indexing on the motor fuels tax, repeal the retail delivery fee, and exempt all Social Security benefits from the state individual income tax. I testified in support of the second of these measures. Part of my testimony can be found below.
Dear Members of the House Transportation Finance and Policy Committee:
My name is John Phelan, and I am an economist at the Center of the American Experiment, a public policy institution based here in Minnesota. Thank you for the opportunity to provide comments on HF 5 which would, among other measures, repeal the retail delivery fee.
In 2023, Minnesota became the second state to impose a fee on deliveries from such as Amazon Delivery, Uber Eats, and DoorDash, specifically a 50-cent fee on orders totaling more than $100. Nobody denies that state and local governments face problems funding the building and maintenance of roads, but these delivery fees are an inefficient and ineffective way to close budget gaps, and lawmakers should consider other, better, policy options.
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The non-solution
Transportation funding problems are, then, very real, but Minnesota’s delivery fee is a misconceived way to remedy them.
First, our state’s delivery fee contains a number of exemptions which make the tax complicated and difficult to comply with. Food — including from restaurants — medical supplies and baby products are exempt. So, too, are deliveries from retailers with less than $1 million in retail sales during the previous calendar year. And so, too, are transactions not subject to sales and use tax — except for clothing.
Second, like all costs, at least some part of the retail delivery fee will be passed along to the customer, depending on the relative supply and demand elasticities for the service. These fees also disproportionately impact the elderly, mobility-challenged individuals, and the less affluent. For example, approximately 14% of the customer base of food delivery services is over 60 years of age, and surveys have shown that 52% of the population making less than $10,000 use such services.
Third, these fees put local retailers at a price disadvantage to non-local competitors that do not use last-mile delivery services. While exemptions do allow for small mom-and-pop stores to not be hit by these fees, larger local companies, especially sellers marginally above the limits, would be affected. As profits among delivery companies are already razor thin (or even cross-subsidized by other entities), it is reasonable to expect that delivery charges would increase by the full amount of the tax. As this fee is inevitably passed on to the consumer, it is likely that demand for locally delivered items would decrease at the margins, making the playing field less even for retailers.
Fourth, delivery companies that use gasoline- or diesel-powered vehicles would be responsible for paying the delivery fee in addition to the state’s gas tax. This, in effect, is double taxation of the same use of the transportation infrastructure. This favors those companies that use electric vehicles, compounding the problems of transportation finance.
Actual solutions
Regarding each of these three factors, indexing the gas tax to inflation, as Minnesota’s state government did in 2023, was good policy. Furthermore, as a permanent policy fix, it would make sense to adjust the gas tax for factors such as improved gas mileage and more electric vehicles. Certainly, though, the retail delivery fee should not be part of this policy mix.
For these reasons, the retail delivery fee should not be part of the solution to a very real problem.