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.
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?
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