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How to Clean a River

D.C. Implements a Model Pigouvian Tax

By Peyton R. Miller

A few weeks ago I was buying a couple of textbooks at the Coop. When the sales clerk took out a bag, I instinctively told him I didn’t need one. It occurred to me later that I would not have refused the bag had I made the purchase several months ago. My summer in Washington, D.C., where a five-cent tax is imposed on shopping bags, had conditioned me to do without them.

On Jan. 1, 2010, the tax on plastic and paper bags distributed by District of Columbia retail stores went into effect. The City Council enacted the measure as a way to reduce pollution in Washington’s Anacostia River: A study by the D.C. Department of the Environment found that plastic bags constitute 47 percent of the trash in the river’s tributaries and 21 percent in the river itself. Businesses retain one to two cents of the new fee, and the rest goes to the Anacostia River Cleanup and Protection Fund. Although the tax has been a source of annoyance for residents, it appears to be fulfilling its objective and could serve as a model for pollution control.

The bag tax is properly understood as a Pigouvian tax, the goal of which is to internalize what economists call an “externality” that arises from private consumption. In this case the externality is that many bags end up in the river, which adversely affects the entire community—not just individuals who use them to carry groceries. The purpose of the tax is to adjust the price of bags so it reflects the social cost associated with their consumption.

While this sounds good on paper, Pigouvian taxes are often improperly applied. The amount of the tax should be no more than the amount needed to internalize the externality. And it should be understood primarily as a corrective device—not as a revenue source—meaning the revenue should be rebated or used for a non-mandatory purpose. One recent “Pigouvian” tax that violates both of these principles is the $1.01 increase in the federal cigarette tax in 2009, the amount of which was determined not by the social costs of smoking but by the amount of revenue needed to expand the Children’s Health Insurance Program entitlement.

The D.C. shopping bag tax is more reasonable. American retail has created a culture in which bags are unquestioningly provided free of charge for virtually every purchase, no matter how small, and in which people use new bags for each shopping trip when it would often be easy to save and reuse them.

Council members understood that shopping bags serve a legitimate function. They did not ban plastic bags as San Francisco did in 2007. And they did not adopt a punitively high levy, as in Seattle’s failed attempt to impose a tax of 20 cents per bag. Instead, the city imposed a tax that was just high enough to do the job. A five-cent charge makes customers think twice before requesting a bag for small purchases, and creates an incentive to save bags for reuse on routine shopping outings. On the other hand, such a small price is unlikely to affect personal income, or, despite anecdotal reports to the contrary, to induce people to refuse bags they actually need or shop outside the District to avoid the tax. Part of the revenue compensates retailers for their inconvenience, and the rest is devoted to a discretionary function that will not have to be rescued by the general fund if bag tax revenues decline. A decline in revenues, moreover, would likely be the result of fewer shopping bags, which would reduce the need for river cleanup funding.

While the jury is still out on the tax’s economic impact, it shows early signs of reducing waste. City officials estimate that consumption fell from 270 million bags in 2009 to 55 million in 2010, and retailers are buying only half as many bags. A private environmental group that cleans the Anacostia River says it has collected only a third as many bags in 2010 as in the previous year. Perhaps the most salient criticism of the measure comes from the Washington-based Tax Foundation, which points out that shopping bags are frequently reused for other purposes and that any reduction would be partially offset by more purchases of garbage bags and other plastic bags. No doubt this is true, but it is hard to dispute that the tax has eliminated many shopping bags that would have been discarded, and the increase in other types of bags seems unlikely to incur much inefficiency since it merely replaces retail stores with individual consumers as the buyers of bags.

By far the most dangerous aspect of such a tax is that it could legitimize further environmental initiatives that would be less reasonable. Taken by itself, however, the D.C. shopping bag tax is a modest regulation that appears to be accomplishing its objective. Cities with similar pollution problems would do well to consider Washington’s example.

Peyton R. Miller ’12 is a Government concentrator in Winthrop House. His column appears on alternate Tuesdays.



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