The Plastic Bag Tax

I was in our nation's capital over the summer with good friend and blogger, Justin. Justin told me about a recently begun plastic grocery bag tax. The tax proceeds are slated to clean up Anacostia River. Justin liked the idea because it cut down on waste. He had completely switched over to re-usable cloth bags.

I wondered if the tax was a good idea though. On the face, it seems like it has two good elements (reducing garbage and cleaning up rivers), but like any good economist, I am forced to think about the dark side. What costs does the tax create? Might we in fact be worse off because of the bag tax? Justin challenged me to make him care about the bag tax that last day in D.C. and I'll do my best.

There are several dimensions where the tax could go wrong:

The size of the tax.
The bag tax is a Pigouvian tax designed to increase efficiency by bringing the price of bags in line with the cost the bags do to society. The tax is 5 cents, but does a bag do 5 cents of damage to society that isn't already accounted for in its price? Today's plastic bags are much thinner than they used to be so they take up less space in landfills. Also, landfills are not as scarce as people imagine them to be. Using up space in landfills probably has very little externality associated with it.

It's probably not that people are not upset with the bags that end up in a landfill, but rather they're upset with the bags that end up in the river. Those bags are unsightly and potentially damaging to the creatures that live in the river. This begs the question, how much damage does a bag that gets into the river cause?

It might be far greater than 5 cents or far less. But it is not the bags in the river that are getting taxed, its all bags. Justin cuts back on his bag use, but that doesn't make the river any cleaner. In fact, since he's not paying taxes on his cloth bags, he's not even helping clean it up. There are likely to be fewer bags used, but in all likelihood the people who are cutting back are also the people who aren't littering. In this case, the tax's effect on the number of bags in the river will probably be limited.

The tax is targeting the wrong thing, bags instead of litter. Thus, not doing as much as intended.

The river cleanup.
The estimated $3.6 million in revenue from the bag tax is earmarked to go to cleaning up the river. Again, this sounds noble, but is it the right way to spend the money. Once collected, it doesn't actually matter where the tax money goes. There is no reason to connect the bag tax to the river cleaning.

Government officials must decide is the best way to spend $3.6 million dollars cleaning up a river. Suppose there was no bag tax and no government river cleanup yet. If an anonymous donor gave the government $3 million would the government spend it on cleaning the river? There are dozens of programs the government engages in, would that money be better spent on education, parks, police? I don't know, but I do know that the earmarking is silly and tax payers need to consider the best use of funds regardless of their source.

The unintended consequences.
I was uneasy about the bag tax because it seemed inconvenient to people, but I have recently learned that it might be more than inconvenient, but also dangerous. A recent study on cloth grocery bags finds that they are covered in bacteria. The tax incentivizes people to live in a slightly more bacteria contaminated world. Healthy and well-informed people probably won't be affected because they will always prep their food correctly and wash their bags. But there are some people who will get sick. Perhaps not many, but it is a consequence of the tax.

My favorite economic saying is, "there is no free lunch." Everything has a cost. The bag tax has a cost and people need to be wary of things that sound good as even less garbage has a downside.