Two years after Washingtonians were forced to begin paying the much-lamented bag tax passed by the D.C. City Council in 2009, a new study released this week by the Boston-based Beacon Hill Institute (BHI) and commissioned by Americans for Tax Reform highlights the unrealistic assumptions of bag-tax proponents, as well as the unintended and negative economic consequences of D.C.’s bag tax.
According to the D.C. Office of the Chief Financial Officer (OCFO), the bag tax has raised only $975,000 in the current fiscal year, well short of official projections. In its first year the bag tax only generated $1.5 million, as opposed to the $3.6 million predicted by D.C. officials. This shortfall reflects the fact that shoppers altered their behavior to avoid the tax at an even greater rate than District officials expected and that business-compliance estimates were overoptimistic. The BHI report underscores the fact that tax changes do not occur in a vacuum and affect consumer behavior more than government officials anticipate. This is also why BHI’s dynamic analysis is more accurate than the static model used by the government.
The new report explains why the District’s projected revenue and decline in bag usage missed the mark so badly. D.C. officials had to compensate for the fact that, as the fiscal-impact statement for the bag-tax bill noted at the time of passage, there is no accurate information on bag usage in the District. As a substitute for this lack of local data, D.C. officials used a study of bag usage in Seattle as a proxy, reasoning that Seattle is of similar size and, like D.C., taxes both paper and plastic grocery bags.
Yet Seattle is a flawed proxy for a number of reasons, and these flaws lead to inaccurate usage estimates. The most notable problems include Seattle’s vastly different weather patterns — it rains more frequently in Seattle and there is greater need for plastic bags in rainy conditions — the relative ease with which D.C. residents can avoid the new tax by shopping outside of the District, and the OCFO’s unrealistic assumption of 100 percent compliance by businesses.
Under more realistic assumptions, BHI found that D.C. bag usage declined by 67 percent, as opposed to the 80 percent drop expected by bag-tax proponents. D.C.’s overestimation of compliance accounts for why bag usage is higher than the government expected, but revenue from the tax continues to fall short of projections.
Even more noteworthy is the study’s finding that a claw-back in bag usage can be expected moving forward and, as a result, D.C. residents will be paying more in bag taxes than the public or government is anticipating. This has to do with something called the “rebound effect,” which has been documented in a number of countries that have imposed bag taxes, such as Ireland, Italy, and South Africa.
The “rebound effect” refers to the phenomenon that while bag usage decreases for a short period of time after the imposition of a new tax, the impact on behavior subsequently diminishes and bag utilization rises again as the shock of the new tax wears off.
BHI, using information from countries that have implemented bag taxes — such as Ireland, Italy, and South Africa — demonstrates how the “rebound effect” works in practice and uses that data to extrapolate what can be expected in D.C. In 2002, the government of Ireland approved a €15-cent tax per plastic grocery bag. This caused annual usage to drop from 328 bags to 21 bags per capita. However, by 2007 annual usage had climbed to 33 bags per capita. To reverse this unexpected upward trend, the government increased the €15-cent tax to €22-cents. Italy’s experience was the same as Ireland’s. In Italy’s case, the bag tax was €13-cent per bag. Again, consumption fell at first but then rose again, causing Italian lawmakers to increase the tax, this time to €22-cent per bag. D.C. lawmakers can expect a similar rebound in bag usage and, consequently, an increase in the dollar amount of bag taxes to be paid by Washingtonians.
The rebound effect in D.C., according to the BHI report, will yield a 57 percent increase in bag usage by 2016, which will cost D.C. taxpayers $5.73 million and lead to a number of adverse economic consequences. According to the report, “Employment losses will rise to 136 net local jobs from 101 in FY 2011, and aggregate real disposable income will fall further by $8.08 million from $5.8 million in FY 2011. Investment declines will increase to $1.58 million from $600 thousand in FY 2011.”
The D.C. bag tax was a terrible idea to begin with. It has been bad for small businesses and low-income residents in particular. The bag tax also has nothing to do with improving the environment and is really another veiled cash grab by the notoriously corrupt and economically inept D.C. City Council. It should be repealed immediately, before more damage is done.
— Patrick Gleason is Director of State Affairs at Americans for Tax Reform. Gleason is also a resident of D.C. who avoids paying the bag tax at all costs and would never rat out a business owner for non-compliance