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Lessons of the bag tax

Many think that the problem with taxes is that most people really don't like paying them. But that can also be their great virtue. Take the five cents the District just levied on every plastic bag in the city. Bag usage has plummeted. I'm one of the people juggling sandwiches and bottles of water and bags of chips and utensils as I walk back from lunch. I don't even know why. I just don't want to purchase a bag. The fact that the cost is lower than I'd notice is besides the point. It's the principle of the thing.

This is why small taxes can have an outsized effect, if correctly levied. The bag tax, for instance, makes using bags a higher-tax option than not using bags. The excise tax operates on a similar theory: It makes buying high-cost insurance a tax-heavy proposition compared with buying low-cost insurance. In many cases, the tax won't be very much, but the hope is that employers and workers who hate taxes will bend over backward to avoid it. Insurance is obviously a more complicated purchase than plastic bags, and there are concerns over whether the tax does enough to distinguish costly insurance from costly people, but that's the idea. And Lydia DePillis explains how the insights of the bag tax apply to cap-and-trade.

By Ezra Klein  |  January 25, 2010; 5:12 PM ET
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Works great at keeping people from using bags at stores which does not mean people stop using bags necessarily. It works great unless you happen to own a bag making company, work for a bag making company, be invested in a bag making company, own, work or invest in a recycling company (where a great deal of the bags wound up), want a great and inexpensive way to both reuse bags and line your home trash cans, etc., etc., and so forth...

Next item in the sights...the dreaded bottled water containers. Drink up now.

Posted by: amaranthpa | January 25, 2010 5:50 PM | Report abuse

I think this ignores the fundamental differences between health care and other consumption that are making this entire issue so difficult to deal with. Sure, if we are talking about a 'Cadillac' plan that covers your gym membership, massages, and laser eye surgery, that's one thing. But if we are talking about plans that give you very low or no deductibles and copays, that's something else. I have never really seen a convincing argument for the case that higher deductibles and copays make for BETTER health care, as opposed to cheaper insurance costs. They probably have effect around the margins as to whether you decide to take your sniffles or sore shoulder to the doctor in the first place, but they don't have any effect on the high dollar expenditures that drive our out-of-control medical costs, particularly pharmaceuticals that cost more here than anywhere else in the world, and end of life care. If there is overtreatment (as opposed to ATTEMPS to get overtreated), it is by definition a problem of inappropriate decisions by medical professionals, not by the patients. That's why the only way to deal with it in the long run is through research on effective treatments and requirements on medical professionals to use evidence based medicine.

I think there is a good case to be made that the high deductible/copay plans are most likely to be bought by thepeople who can least afford them, i.e., lower and middle class families who have very little flex in their budgets once the costs of housing, child care, and yes, insurance premiums are factored in. I don't see how we are improving the system if we force these types of families face $20,000 a year or more in medical costs (counting premiums, copays, and deductibles) if they have a serious health crisis or chronic severe illness. I know we could not have afforded that during the time when we were raising our kids, and I doubt there are many families that can afford it today.

Posted by: exgovgirl | January 25, 2010 5:51 PM | Report abuse

Robert Reich said only 4% of the cost of insurance is benefit design. NEJM surveyed experts who agreed benefit design is a poor way to control costs. A bag tax is a deeply flawed analogy--certainly not one that we should bank on when reforming 1/6th of the economy.

Posted by: bmull | January 25, 2010 5:56 PM | Report abuse

Everyone already suspects: a) they can do without a bag, and: b) they *should* do without a bag. That's certainly not the case with more and less-affordable insurance.

To me the excise tax is an example of something else: there's no sense in continuing to *subsidize* people's willingness to purchase more insurance than they need.

Posted by: Art27 | January 25, 2010 5:56 PM | Report abuse

The insights of the bag tax also apply to the individual mandate penalty. It's likely to be a better financial risk to not pay for insurance and just pay the penalty instead, but hopefully, people will just get the insurance. Otherwise - death spiral here we come...

Posted by: mtnoflbc | January 25, 2010 6:13 PM | Report abuse


I am still enraged when I see comments like this about the "Cadillac" tax. For many people, plans subject to the tax are not paying for things like gym memberships, but instead for above-average costs of care.

I'm near 50 with an expensive chronic condition, and I live in a high cost north-eastern state. I work for a large organization with good health benefits. What that means is I can choose a plan (in 2010) with about $6000/year in premiums and $2000/year out of pocket copays and drug costs thru an FSA, or I can choose an $9000/year plan that will cover 100% of everything. Since the "Cadillac" tax INCLUDES FSAs, I'm hit either way once you allow for another year or two of inflation.

What exactly am I supposed to be incentivized to do? Stop controlling my blood sugar? Don't get my eyes examined and just hope I don't have an incipient retinopathy? It's not running to the doc for sore throats for many of us, Mr. Klein, it's constant management of diseases that will kill us if we don't.

I'm fortunate enough that I make enough money that a few hundred in extra taxes won't hurt that much. But I STRONGLY RESENT paying extra taxes merely because I am sick. If others in my income bracket all pay a bit more, that's great, I'd happily vote for that.

But tax me extra because I have no choice but to spend a lot of money because of my chronic illness -- all the while throwing around the "Cadillac" term and implying that I'm just a wastrel -- and I get pretty darn pissed off.

Posted by: nospamthanks | January 25, 2010 6:22 PM | Report abuse

There are (at least) two problems with using the bag tax as an analogy for taxing health benefits:

1. The end user pays the extra amount for the bag -- *he* decides the value of the bag for himself. In the case of the health insurance excise tax, the consumer is a subordinate player: employers decrease their expenditures on insurance but the effect on consumer consumption is muted because the consumer doesn't pay the tax himself.

2. The bag tax is "universal", everyone knows that everybody else is paying the same amount for the exact same commodity. With health care, no one has any idea of the cost of his own care, let alone someone else's. It's hard for people to feel that such a tax is fair when they know that the people across the street (who may be younger and work for larger company with diluted risk) have much more generous, un-taxed, coverage.

Posted by: Athena_news | January 25, 2010 6:50 PM | Report abuse

Ezra, you've written how the health bill had to leave employer-provided coverage alone as much as possible to have any change of passage.

The excise tax clearly violated that principle, and it is now (with the individual mandate) one of the bill's two least popular components.

Posted by: tyronen | January 25, 2010 7:02 PM | Report abuse

I'm inclined to agree with the others who question the value of analogizing the bag tax and the health-insurance excise tax. But I have found the effects of the bag tax very interesting. I'm sure it depends on where you shop, but at the grocery stores I shop at, it has totally surprised me that practically everybody seems to bring reusable bags. I don't mean lots of people, I mean practically everybody. Including me!

Posted by: thehersch | January 25, 2010 7:04 PM | Report abuse

Comparing a five cents tax on plastic bags to a tax on health insurance plans is simplistic and silly indeed. All one has to do is purchase reusable small tote bags. A tax on health insurance plans though will result in many people eventually having lower quality health care coverage. Big difference.

Posted by: Aprogressiveindependent | January 25, 2010 9:02 PM | Report abuse

Ezra, the truth is that I remember fall 2008 when you were actively mocking McCain's excise tax ideas, so I can't say I'm really impressed with your sudden turnaround on the issue regarding them now.

Posted by: tyromania | January 25, 2010 9:25 PM | Report abuse

But McCain's excise taxes weren't crafted with love and polished with hope like Obama's excise tax.

On the other hand, Obama didn't exactly write the current legislation. He may not like the excise tax, and sees it as a necessary evil in attempting to achieve the larger goal.

That doesn't explain Ezra's flip-flop, though. Maybe he was just more willing to give the idea a fair hearing, once it was pitched by the Democrats.

Posted by: Kevin_Willis | January 25, 2010 11:37 PM | Report abuse

The bag tax is more akin to a VAT tax. I'm not sure why a VAT tax has not been considered as a means of funding health care reform. If the tax were targeted to certain goods and services that people of means would be more likely to buy, it would not be regressive.

A VAT tax would be more broad-based and fair than an excise tax targeting only employer-sponsored health plans of a certain dollar amount, where geography and employee demographics (and ancillary benefits like dental and vision) could skew the plan value high even without it having particularly rich benefits. The excise tax can (and will be) avoided, and in avoiding it will deleteriously impact employees, while a VAT tax could not so easily be avoided, especially if applied to a number of commonly-purchased goods and services.

Posted by: Policywonky | January 26, 2010 9:25 AM | Report abuse

Policywonky, there is/was some of that VAT-style targeting in the bill. Remember the special taxes on tanning salons and some cosmetic surgery?

Oh, and Ezra, you might invest in some reusable bags. They'll save you the juggling, and they last for years.

Posted by: KenInIL | January 26, 2010 10:30 AM | Report abuse

It's overkill to predict that this reaction will be nearly as strong for other taxes/caps-and-trades. The bag tax is in your face. You can choose to pay the bag tax separately from choosing whether or not to buy your sandwich. But in a cap-and-trade system for carbon emissions, end-users of energy will not have two lines on their monthly electric bill, one for the renewable fraction of their electric supply and one for the coal fraction of their electric supply. In other words, the tax will be embedded in the overall price. That makes it harder to notice and therefore harder to emotionally react against as decisively as in the bag situation. The bag situation is great for behavioral economic theory--it's nearly a pure case. But the other taxes you talk about involve a much muddier interaction with the end users, so there's not a strong reason to think reactions will be anything like proportionate to the bag tax.

Posted by: JonathanTE | January 26, 2010 10:42 AM | Report abuse

The bizarre premise everyone's accepting here is that the government has any business controlling whether you use plastic bags. FALSE.

A tax on plastic bags is supposed to cover externalities associated with bag use -- if they're going to tax it, then we should be able to see where roughly one nickel per bag is being spent by the government to offset hidden costs of bag use.

I suspect the "litter" that will be cleaned up, and the pollution in the river, is not quite as simple as a few bags (which for the most part are made of biodegradable materials anyway). What's happening here is that people who can afford bags are being required to clean up the externalities of other transactions.

Note that the most enthusiastic supporters of this bill probably don't litter anyway, and now the quality of their lives is taking a hit as they either do without bags or without the money necessary to buy them. And was it just me, or did anyone else notice that good food is being wasted in this pursuit? What's the impact on local businesses now that many shoppers have decided to buy food where bags are not taxed -- have any jobs been lost?

Finally, Ezra, not everything is a lesson in healthcare. That's dead, dude. You lost. Time to moveon.

Posted by: whoisjohngaltcom | January 27, 2010 8:08 AM | Report abuse

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