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DC Bag Tax Pays Off – Maybe?

March 30, 2010 · 7 comments

The controversial “bag tax” in Washington DC appears to be paying off. The DC Office of Tax and Revenue says that the tax has generated about $150,000 in the month of January alone – money that will be directed to the newly created Anacostia River Clean Up Fund.

That may be all fine and good but proponents of the tax are more focused on the behavioral change than the revenue: the DC Office of Tax and Revenue estimates that usage of disposable bags has decreased dramatically. In 2009, about 22.5 million disposable bags were being given away each month. In January, the first month that the new tax was in place, just 3 million bags were distributed – a nearly 88% decline in one month.

That’s good news, right?

Maybe. The results of the DC experiment illustrate a serious flaw in tax-driven policy. Bag use is down so mission accomplished, right? Not exactly. While it’s easy to say that policy taxes, including sin taxes, ostensibly have as their goal a certain behavior (in this case, to reduce waste), there is a bigger goal: raising revenue. The irony of sin taxes is that if policy pundits get their way, they effectively cut off the revenue stream.

It’s already happening in DC. DC officials had estimated that the tax would generate $10 million over the next four years to support clean up projects. That works out to about $210,000 in tax per month. The supposition is that the revenue would be compressed towards the beginning of the taxing period as taxpayers get used to the idea of paying the tax. Eventually, they modify their behavior and… voila. A win-win.

But what happens if the behavior is modified too quickly? In DC, the tax generated less than $150,000 in its first month. That means that projections are already off by $60,000 in the first month. If that trend continues, the fund will fall short of its goal by about $3 million.

Ouch.

The same goes for other sin taxes. The very nature of taxing “bad behavior” is that, if you’re successful, the revenue stream will eventually dry up. And yes, it feels like that should be a good thing. But politicians aren’t really counting on the idea that the tax will accomplish the behavioral goals – they tend to count on the revenue. It’s exactly the reason that I tend to be critical of these kinds of taxes.

You think tanning is a bad idea? Let’s tax it… But with the exception of, perhaps, George Hamilton, if you make tanning too expensive, people will stop tanning. The notion of taxing the tanning industry to save our collective skins may feel noble – but if it actually works, how do we make up the revenue to pay for health care?

Obesity a problem? Let’s tax soda. But what happens if we successfully wean our nation off of Coca-Cola and Mello-Yello? We run out of revenue (and there goes Philadelphia’s budget).

And on it goes. Cigarettes, plastic surgery, trans fats…. pick your poison. The more that we decide to put the kibosh on bad behavior by taxing it, the more we’re actually counting on the tax not to be successful. What kind of strategy is that?

{ 6 comments… read them below or add one }

1 garagefather March 30, 2010 at 10:11 am

It is nice when the obvious is pointed out to people who ignore the obvious. One thing that is becoming increasing obvious to people of the western world is that massive entitlement programs are going to drive income taxes through the roof and with any tax on behavior, the increases will limit the activity. We are on the cusp of a point when our income taxes (FICA, Medicare,Federal, State, and Local income taxes are going to have to skyrocket in order to meet the increasing demands of the entitlement systems. Medicare is already in the hole and this year social security is cashing in its IOU’s from the feds to provide benefits to its entitled masses. Soon, payroll taxes will grow to the point that working will be an undesirable behavior for our youth because the government will take most of what they earn to pay for its lofty and unsustainable promises. We may soon see a generation that looks at working for Uncle Sam’s entitlement system as a sin and avoid the behavior due to prohibitive taxes and the availability of welfare and under-the-table work. The system will collapse on itself shortly there after, as it is in Greece and Spain. It will be coming soon to a neighborhood near you. On our current path, it is as inevitable as tomorrow’s sunrise.

2 Roy Daniel DSilva March 30, 2010 at 11:04 am

I think I am in a better geographical locale when it comes to paying taxes… all this tax information is too taxing on my brains (pun intended). Great info though.

3 Evan March 30, 2010 at 2:11 pm

I think I said that on one of your previous posts when they keep jacking up prices for cigs!

Another side effect will be when the plastic bag company goes out of business!

4 ReaderGirl March 31, 2010 at 10:21 am

I’m so sick of taxing what is thought to be immoral. We live in the land of the free with fair representation as long as you fit your leaders’ view of what is immoral or not. I just read a great article in the book The Fat Studies Reader titled Neoliberalism and the Constitution of Contemporary Bodies by Julie Guthman. I highly suggest it! The article discusses how there is only so much consumption us humans can do, so then you have us consume diet products and nutritionally devoid food (fake fats and sugars that pass right through). Lots more good stuff in the article too.

Also, fat people and smokers spend less on health care! Read http://www.usatoday.com/news/health/2008-02-05-obese-cost_n.htm.

5 kevin April 1, 2010 at 1:39 pm

The primary goal of most sin taxes is supposed to be to discourage behavior, and not primarily act as a revenue generator. There are exceptions (primarily taxes on casinos), but generally the idea is that smoking, drinking, soda, etc… cause 10X billion dollars in unnecessary health care expenses each year, and that taxing them will decrease those expenses to 5X billion each year. Thus, in addition to the actual tax revenue raised, you are effectively raising 5X billion in indirect tax revenue. Or, put another way, “decreasing the size of government.” The tax revenue should be an incidental byproduct of the cost savings. Because of this, sin taxes are theoretically bi-partison friendly.

The problem is that state and federal governments earmark these revenues towards certain expenditures. As you point out, with decreasing revenues, there ends up being budget shortfalls when the taxes actually decrease behavior. Sin taxes are great, but taxing authorities should never allow for revenues to be included in any budget.

6 David Alpert January 24, 2011 at 2:11 pm

I covered the debates over this bill in DC, and this was never meant to be a revenue raiser. The purpose all along was to try to reduce bag use, based on the knowledge that people will think twice about something if it will cost them money but often won’t otherwise. The thinking went that if bag use is reduced a lot, then there will be fewer bags polluting the area; if it goes down less, then at least you get some money to use to pay to clean up the trash.

DC avoided the problem kevin noted by specifically segregating the revenue into a special fund. Nobody was allowed to use it in calculations about balancing the overall budget, so it didn’t cause any problem when the revenues came in under budget. It just means less cleanup is needed, because more people are just reusing bags.

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