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.