Why a Bag Tax Works Better Than a Reusable Bag Bonus

Government policies, no matter how well-intentioned, often fail to achieve their goals. Practitioners of the rapidly expanding field of behavioral economics, which seeks to better understand why people do what they do, are laboring to change that.

Now comes a newly minted Princeton Ph.D., Tatiana Homonoff, with some evidence on what works – and what doesn’t – in her three-part, 141-page dissertation:

The Case of the Bag Tax

Observing 16,251 shoppers at 16 grocery stores in Washington, D.C., neighboring Montgomery County, Md., and northern Virginia and data from grocery store scanners, she found that a 5-cent tax on disposable bags substantially decreased disposable bag use while a 5-cent bonus for using a reusable bag did not.

Before the tax, several stores offered a 5-cent bonus to shoppers who brought their own bags. In stores that offered no incentive, 84% of shoppers took at least one throwaway bag per shopping trip; in stores that offered the nickel lure, 82% did.

In contrast, some 82% of Montgomery County shoppers used at least one disposable bag per shopping trip before the bag tax was imposed; 40% did afterward. (Meanwhile, a survey by the D.C. government finds that only 16% of residents and 8% of businesses polled oppose the four-year-old bag tax law. )

Small incentives can lead to big changes in behavior if they are designed well, she concludes. Starbucks, she suggests, would have more success at reducing the use of paper cups if it abandoned its 10-cent discount for those who bring their own cup in favor of cutting the price of coffee by 10 cents and charging 10 cents extra for a paper cup.

Hidden Taxes vs. Posted Taxes

To old-school economists, a tax is a tax whether it’s built into the price of a pack of cigarettes or added at the cash register. To behavioral economists, there’s a difference.

Using cigarettes as a case study, and the fact that states vary in their use of excise (including the prices) and sales (imposed at the register) taxes, Ms. Homonoff discovered that higher- and lower-income consumers respond in different ways: “Low-income consumers reduce cigarette demand in response to both excise and sales taxes whereas higher-income consumers only reduce cigarette demand in response to excise taxes.” (The upper-income folks, it seems, look at the price on the shelf but don’t pay attention to what they pay at the register.)

One lesson she draws is that legislators who worry about the regressive nature of taxes on cigarettes (or soda) should levy them at the register because then more of the revenue will be paid by upper-income consumers.

Regulating Payday Lenders

The growth in payday lenders, which provide small-dollar loans that typically must be repaid within two weeks to a month, has drawn scrutiny from legislators and regulators because the interest charged on such loans is so high, often 400% at an annual rate.

Using government surveys of unbanked and underbanked households in four states, Ms. Homonoff finds that state restrictions on payday loans, not surprisingly, reduce their use; about 3% of residents used the loans before the restrictions and less than 1% afterward. But the decrease is almost entirely offset by an increase in the use of pawnshop and other high-interest-rate loans. (The number of pawnshops in the U.S., she notes, has increased from 5,000 in 1985 to 9,000 in 1992 to just over 12,000 today.)

“The issue of payday loans cannot be addressed in isolation without considering the availability and desirability of other forms of high interest credit,” she concludes. People who don’t have access to traditional forms of credit will find a way to borrow, even at high rates, for temporary, unexpected expenses.

Ms. Homonoff is now an assistant professor in policy analysis and management in Cornell University’s College of Human Ecology. Parts of her dissertation were co-authored with Jacob Goldin, a Ph.D. candidate at Princeton University who is also pursuing a law degree at Yale and will clerk for federal appeals court Judge Richard Posner next year.