NATIONAL TAX ASSOCIATION proceedngs Can Small Incentves Have Large Effects? The Impact of Taxes versus Bonuses on Dsposable Bag Use Tatana A. Homonoff, Prnceton Unversty* Introducton Can small ncentves have large effects on prosocal behavor? Standard economc theory suggests that fnancal ncentves wll be effectve f the costs an ndvdual assocates wth changng hs behavor are smaller than the ncentve provded for dong so. For example, small fees on resdental trash collecton have been shown to ncrease recyclng (Fullerton & Knnaman, 1996), whle small sn taxes on soft drnks had only a neglgble effect on consumpton (Sturm et al., 2010). Whle, n practce, fnancal ncentves can ether take the form of a fee for bad behavor or a bonus for good behavor, ths theory suggests that ndvduals should respond smlarly to the two types of ncentves, provded that they are the same amount. In contrast, evdence from the feld of behavoral economcs (Kahneman & Tversky, 1979) suggests that ndvduals perceve losses more strongly than gans, mplyng that a fee would be more effectve than a bonus of the same sze. I address whether small ncentves and ther desgn matter through the evaluaton of two polces n the Washngton Metropoltan Area amed at reducng the use of dsposable grocery bags: a 5-cent tax on dsposable bag use and a 5-cent bonus for reusable bag use. Usng varaton n ncentve polces across tme and locaton, I am able to determne f the framng of the ncentve nfluences the polcy s effectveness. Growng concern over the envronmental mpact of plastc bags has prompted several governments across the world to regulate the use of dsposable bags; many countres n Europe, Asa, and Afrca requre grocery stores to charge a fee for each bag the store provdes. In 2010, Washngton, DC, I gratefully acknowledge Henry Farber, Jacob Goldn, Nkolaj Harmon, Anna Knoell, Davd Lee, Alex Mas, and Abgal Sussman for readng earler drafts of ths paper and provdng helpful feedback. I also thank partcpants n the Industral Relatons Sectons Semnar and the Publc Fnance Workng Group at Prnceton Unversty for conversatons and suggestons that have greatly mproved the qualty of ths project. Chrstopher Kelly provded excellent research assstance. All errors are my own. became the frst cty n the Unted States to pass legslaton callng for grocery stores to tax customers for the use of dsposable bags. Two years later, Montgomery County, an area of Maryland borderng DC, passed ts own bag tax. Smlar legslaton has been passed n several countes and ctes n Calforna, Colorado, and Washngton. Despte the growng popularty of such laws, rgorous emprcal work that assesses ther effectveness has been lackng. Ths s the frst study to use desgn-based research to estmate the effectveness of such a polcy n the U.S. context. Scanner data from a retal chan of grocery stores provdes a descrpton of dsposable bag use after the tax and suggests a large declne n bag use n the frst few weeks of mplementaton. I also collected data on ndvdual-level consumpton of dsposable and reusable bags by observng customers as they exted the grocery store. The data set contans nformaton on over 16,000 customers n Montgomery County, and n surroundng areas outsde of the county, n the months before and after the tax s mplementaton. Ths data allows me to analyze the effect of the tax on demand usng a dfference-n-dfferences research desgn. Whle 82 percent of customers n Montgomery County used at least one dsposable bag per shoppng trp pror to the tax, ths estmate declned by 42 percentage ponts after the tax was mplemented. Addtonally, customers who contnued to use dsposable bags after the tax used fewer bags per trp, leadng to an overall reducton n demand of just over one dsposable bag per shoppng trp. These effects mply a reducton of over 18 mllon dsposable bags per year f each household n Montgomery County shopped once per week. It s possble that the tax reduced dsposable bag use through purely economc channels f 5 cents s larger than the cost customers attach to the nconvenence of brngng a reusable bag or carryng one s groceres wthout a bag, they wll use fewer dsposable bags. If ths s the case, neoclasscal economcs suggests that a 5-cent bonus should have the same mpact on behavor as a 5-cent tax. 64
105 th Annual conference on taxaton However, f customers are loss-averse, n that they adjust ther behavor more n response to losses than n response to gans, the bonus s lkely to be less effectve than a tax of the same magntude. Pror to the mplementaton of the tax, several stores offered ther own ncentve to reduce the use of dsposable bags: a 5-cent bonus for reusable bag use. I use the cross-sectonal varaton n polces across stores to compare the effect of the bonus to the effect of the tax. In stores that offer no ncentve, 84 percent of customers use at least one dsposable bag. Whle 82 percent of customers n bonus stores used dsposable bags, only 39 percent of customers n stores that charge a tax used dsposable bags. These results suggest that, whle the tax has a substantal mpact on dsposable bag use, a bonus of the same amount has almost no effect on behavor, evdence consstent wth a model of loss averson. A survey of consumer atttudes on the effectveness of bag taxes and bonuses also supports a role for loss averson n explanng the observed pattern of consumer behavor. I present a smple model of reference-dependent preferences and estmate ths model usng my observatonal data. I estmate a coeffcent of loss averson that s larger than those prevously found n the lterature. I explore the possblty that customers receve an added beneft from acqurng a product,.e., a dsposable bag, for free (Shampaner et al., 2007). Ths would generate a dscontnuous jump n the utlty functon at a zero-prce reference pont, leadng to an estmate of the coeffcent of loss averson. The paper concludes by explorng mechansms other than loss averson that may have caused customers n stores chargng a tax to use fewer dsposable bags than customers n stores offerng a bonus. Frst, I show that dfferences n demographc composton of customers at the two types of stores do not affect my results. Second, whle survey data suggests that customers are less aware of the bonus than the tax, the dfferences n awareness cannot fully account for the dfference n effectveness of the two polces. Next, I nvestgate whether the results are drven by customers respondng to a shft n socal norms assocated wth the tax. I surveyed customers on ther atttudes about the use of dsposable bags and polluton regulaton before and after the mplementaton of the Montgomery County tax and found no change n socal norms between the two perods. Lastly, recent evdence suggests that customers are more lkely to avod any charge that s framed as a tax (as opposed to a fee). To explore the possblty that such tax averson explans the dscrepancy n consumer behavor when faced wth a bonus versus a tax, I conducted an experment n whch partcpants were asked how they would respond to a hypothetcal 5-cent penalty for usng a dsposable bag, randomzng whether the penalty was framed as a government tax or as a fee nsttuted by the store. I fnd no dfference between the two scenaros. Ths paper s organzed as follows. Secton I revews the hstory of dsposable bag regulatons, both nternatonally and domestcally. Secton II presents two models of the customer s choce to brng a reusable bag. Secton III descrbes the varous data sources used n the emprcal analyss. Secton IV presents estmates of the mpact of the dsposable bag taxes n the Washngton Metropoltan Area. Secton V contans an analyss of the mechansms that may have contrbuted to the effectveness of the tax polcy. Secton VI concludes. Background on Dsposable Bag Regulatons Internatonal Polces Plastc bags were frst ntroduced to grocery store customers n the 1970s and are now used n almost every store n the Unted States. Clapp and Swanston (2009) report that Amercans consume 100 bllon plastc bags each year, wth worldwde estmates reachng as hgh as 1.5 trllon. Whle these plastc bags are often recyclable, the Envronmental Protecton Agency (EPA) estmated that only 5.2 percent of plastc bags n the Unted States n 2005 were actually recycled (usepa, 2006). The uncontrolled dsposal of plastc bags has caused envronmental problems across the globe. In an effort to reduce polluton caused by the consumpton of dsposable bags, several domestc and nternatonal governments have passed varous polces to curb plastc bag consumpton. Startng n the early 2000s, several countres, mostly n Afrca, banned the use of plastc bags. As an alternatve to an outrght ban, Ireland became one of the frst countres to levy a tax on consumers for plastc bag use; the 0.15 tax per bag led to a dramatc 94 percent decrease n consumpton n the frst year (Convery et al., 2007). South Afrca 65
NATIONAL TAX ASSOCIATION proceedngs combned the two types of polces, bannng the use of all plastc bags under a certan thckness as well as prohbtng stores from offerng free plastc bags. 1 Dkgang et al. (2012) and Hasson et al. (2007) conclude that these polces led to an mmedate reducton n plastc bag use. A smlar polcy n Chna led to a 49 percent reducton n plastc bag consumpton (He, 2010). Washngton Metropoltan Area Dsposable Bag Regulatons The Anacosta Rver, located n Washngton, DC and Maryland, suffers from excessve ltter and polluton. The buldup of dsposable bags degrades water qualty, harms aquatc lfe, and causes floodng by cloggng storm drans. 2 In December 2008, the Dstrct Department of the Envronment (DDOE) conducted a study to assess the types and sources of trash that were pollutng the rver. The study showed that plastc bags comprsed 47 percent of all trash n trbutary streams and estmated that t would cost $32.4 mllon to clean up the rver (DDOE, 2008). In response to the report, DC enacted the Anacosta Rver Cleanup and Protecton Act n 2009. Ths law requres all retalers n the dstrct that sell food 3 to charge 5 cents per sngle-use plastc or paper bag startng on January 1, 2010, makng DC the frst cty n the Unted States to charge a fee for the use of dsposable bags. The law also requres that the fee be charged at the pont of purchase and not be ncluded n the cost of other tems. One to two cents of the tax goes to the retaler to cover costs assocated wth the tax s mplementaton whle the remander goes to a fund dedcated to cleanng up the Anacosta Rver. 4 Inspred by DC s polcy, Montgomery County, an affluent county n Maryland that borders DC to the northwest, passed a smlar ntatve. As of January 1, 2012, all retal establshments 5 n Montgomery County were requred to charge a 5-cent tax for each dsposable bag that a customer used. Proceeds from the tax enter the county s Water Qualty Protecton Charge. Smlar blls have been suggested n other jursdctons n the Washngton Metropoltan Area, but none have passed as of ths date. Addtonally, pror to the mplementaton of ether tax, several retal chans offered ther own ncentve for brngng a reusable bag. Customers shoppng at these stores receve a 5-cent bonus for each reusable bag they use nstead of takng a new dsposable bag. Of the four stores wth the largest marketshare n the Washngton Metropoltan Area, two provded such a bonus. Other Domestc Regulaton of Dsposable Bags The state of Calforna has been a hotbed for dsposable bag regulaton over the past few years. San Francsco became the frst U.S. cty to regulate the use of dsposable bags wth a ban on plastc bags n 2007. On July 1, 2011, Los Angeles County not only banned plastc bags, but began chargng a mnmum of 10 cents for paper bags. Over the next year, the ctes of Santa Monca, San Jose, and Sunnyvale, as well as the countes of Marn, Santa Clara, and Santa Cruz passed smlar laws. As of ths date, dsposable bag taxes have been proposed n states as dverse as Arzona and Pennsylvana. Whle I wll focus mostly on the mpact of the polces n DC and Montgomery County, I wll provde some descrptve evdence on the effectveness of regulatons n other locatons as well. Modelng Responses to Fnancal Incentves Consder a customer who s choosng whether or not to use a dsposable bag or brng a reusable bag. A customer has utlty U (w, b ), where w represents customer s wealth and b s a bnary choce varable that equals one f the customer chooses to brng a reusable bag and zero otherwse. Customers also have dosyncratc preferences for reusable bag use and ncur a utlty cost for brngng a reusable bag, c, whch can be a postve cost (for example, a psychologcal cost for rememberng to brng a bag) or a negatve cost (for example, a warm glow from helpng the envronment). For smplcty, customers must use one of the two types of bags and requre only one bag. Assume that c enters the utlty functon lnearly and that the customer s utlty s addtvely separable between c and w so that utlty when there s no external ncentve can be defned as U N, (w, b ) = u(w ) b c. Now suppose that customers are subject to a tax of x for usng a dsposable bag. The ndvdual s utlty functon then becomes U T, (w, b ) = u(w (1 b ) x) b c. Smlarly, f we consder a polcy where customers receve a bonus of x for usng a reusable bag, the utlty functon becomes U B, (w, b ) = u(w + b x) b c. 66
105 th Annual conference on taxaton When wll customers choose to brng a reusable bag rather than use a dsposable bag? The table below outlnes the condtons under whch a customer would choose to brng a reusable bag under dfferent polces. If no fnancal ncentves are provded, customers wll brng a bag f 0 > c,.e., f they derve a personal beneft from brngng a reusable bag. If customers are charged a tax for dsposable bag use, they wll brng a reusable bag f the decrease n utlty they suffer from havng to pay the tax s larger than the cost of brngng a reusable bag. Smlarly, f customers are awarded a bonus for reusable bag use, they wll brng a reusable bag f the utlty gan from recevng the bonus s larger than the cost of brngng a reusable bag. Should we expect that customers wll have the same response to a bonus and a tax of the same sze? The followng secton presents two models wth dfferent predctons for the relatve effectveness of the tax and bonus polces. Neoclasscal Model In ths paper, I consder the effect of tax and bonus polces wth a very small x,.e., 5 cents. Standard economc theory predcts that f c s also very small, these ncentves could stll have large effects on consumer behavor. In other words, a small fnancal ncentve wll be effectve as long as demand for dsposable bags s elastc. Suppose customers maxmze utlty over wealth and that utlty s strctly ncreasng and weakly concave (u (w ) > 0 and (u (w ) 0),.e., margnal utlty s dmnshng n wealth. Then customers wll derve less utlty from a gan n wealth than from a loss of the same magntude due to the curvature of the utlty functon, and the proporton of customers brngng a reusable bag wll be larger under the tax polcy than under the bonus polcy. However, Rabn (2000) demonstrates that ndvduals must be approxmately rsk-neutral over small stakes n order for expected-utlty models to mply reasonable levels of rsk averson over large stakes. Hs calbratons suggest that the consumpton value of a dollar should not change sgnfcantly over changes n wealth up to $1000 dollars. Gven that the ncentves consdered n ths study are only 5 cents per bag, t s reasonable to assume that utlty s lnear,.e., u(w ) = g w, over the change n wealth caused by these polces. Wth ths assumpton, neoclasscal economcs predcts that the condtons under whch customers would brng a reusable bag under the tax polcy and under the bonus polcy are the same (see table at top of page 68). Reference-Dependent Model Prospect theory, developed by Kahneman and Tversky (1979), proposes that, whle utlty s defned n terms of net wealth, value s defned n terms devaton from a reference pont (.e., gans and losses). They suggest that ndvduals perceve losses more strongly than gans of the same sze, a phenomenon referred to as loss averson. Consder a smple reference-dependent utlty functon where utlty s lnear n wealth but wth a knk at a reference pont, w*: * * γ ( w w ) f w > w uw ( )= * * αγ ( w w ) f w w,where α >1. Utlty Functon Condton to Brng a Bag No Incentve U ( w, b ) = N uw ( ) c fb=1 0> c, uw ( ) f b =0 uw ( ) c fb=1 Tax Polcy U ( w, b ) = uw ( ) uw ( x)> c T, uw ( x) fb=0 uw ( + x) c f b =1 Bonus Polcy U ( w, b ) = uw ( + x) u( w)> c B, uw ( ) f b =0 67
NATIONAL TAX ASSOCIATION proceedngs No Incentve Tax Polcy Bonus Polcy U Utlty Functon Condton to Brng a Bag γ w c f b =1 ( w, b ) = γ w fb=0 0> c N, γ w c f b =1 U ( w, b ) = T, γ ( w x) f b =0 γ x> c γ ( w + x) c fb=1 U ( w, b ) = B, γ w fb=0 γ x> c If an ndvdual s reference pont s hs wealth level n the absence of any ncentve polcy, then the condtons for usng a reusable bag smplfy to the equatons n the table below. Snce a > 1, ths model predcts that customers are more lkely to brng a reusable bag when the fnancal ncentve takes the form of a tax rather than a bonus. The followng sectons emprcally test whether customers respond smlarly to the two polces, as predcted by neoclasscal theory, or f customers exhbt loss averson. Data The frst part of ths paper assesses the effectveness of the tax n reducng the use of dsposable bags usng two data sets. Frst, I use transactonlevel scanner data from a large retal chan of grocery stores n several areas that have mplemented a dsposable bag regulaton. The data set ncludes a 10 percent sample of all transactons n multple stores n DC, Montgomery County, Santa Monca, San Jose, and Santa Cruz County n the months followng the mplementaton of the dsposable bag tax n each area. 6 Each observaton corresponds to a purchased product and ncludes nformaton on date, store locaton, and a transacton dentfer used to lnk all purchases n a gven transacton. In addton, the data ncludes a lne tem for whether or not the customer was charged for the use of a storeprovded paper or plastc bag. Ths data allows me to calculate the percent of customers usng at least one dsposable bag n the days followng the mplementaton of the tax; however, I am not able to compare demand before and after the tax, nor am I able to compare demand n ctes wth a tax to demand n ctes wthout a tax. To address ths lmtaton, the man analyss utlzes a data set I collected contanng nformaton on demand for dsposable 7 and reusable 8 bags before and after the mplementaton of the Montgomery County tax. I collected data at 16 stores n the Washngton Metropoltan Area eght stores n Montgomery County, four stores n Vrgna, and four stores n DC approxmately two months before and two months after the mplementaton Utlty Functon c fb=1 * No Incentve U ( w, b ) = N, 0 f b =0 Condton to Brng a Bag 0> c Tax Polcy U T, * ( w, b ) = c γα x fb=1 fb=0 γα x > c Bonus Polcy U B, γ x c f b =1 * ( w, b ) = 0 f b =0 γ x> c 68
105 th Annual conference on taxaton of the tax. 9 These stores nclude three dfferent grocery store chans and one organc market chan. To obtan measures of demand, I stood by the regster at each store for an average of 10 30-mnute ntervals per store, randomzng the order n whch I vsted each store, and recorded the number and type of bags each customer used, as well as the customer s gender and race. The fnal sample contans nformaton on 16,251 customers. Ths data set enables me to compare the change n demand n Montgomery County before and after the polcy to that n control stores n DC and Vrgna. The stores n Maryland and Vrgna that I selected for ths study are located n the ctes of Bethesda, Slver Sprng, and Arlngton, whch border DC and are popular communtes for those employed n the dstrct. Whle the cty of DC s poorer and more dverse than these suburban commuter towns, the DC stores selected for ths study are located n the wealther areas of the cty n order to mantan comparablty to the samples from Maryland and Vrgna. 10 The second part of ths paper addresses the queston of whether a 5-cent bonus for usng a reusable bag can have the same effect on behavor as a tax of the same amount. The observatonal data mentoned above was collected at four dfferent grocery store chans two of whch offered a bonus program, two of whch dd not. The prmary analyss uses ths data to determne whether customers shoppng at stores that charge a 5-cent tax for dsposable bag use exhbt smlar behavor to those shoppng at stores offerng a 5-cent bonus for reusable bag use. I use two addtonal data sets to nvestgate whether the dfferences n behavor I observe n bonus versus tax stores suggests that customers are loss-averse wth respect to ncentves for reusable bag use or f there are other mechansms at work that could cause ths dscrepancy. Frst, I conducted n-person surveys of customers as they exted the store after ther shoppng trp before and after the polcy change n Montgomery County. These surveys were conducted at 12 dfferent locatons at two grocery store chans n Maryland, Vrgna, and DC. I collected data for the pre-perod from September to October of 2011 and returned to the same stores 11 to conduct the post-perod ntervews n March of 2012. 12 The survey yelded a response rate of 56 percent for a total of 1,624 respondents. Customers were asked how many dsposable and reusable bags they used that day, whether they knew f the store provded a bonus for brngng a reusable bag or charged for takng a dsposable bag, personal demographc characterstcs, subjectve measures of how much both of these polces dd or would encourage them to use a reusable bag, and atttudes toward plastc bag use, envronmentalsm, and government regulaton of polluton. Second, n order to test customers response to other hypothetcal dsposable bag regulatons, I use data from an onlne survey admnstered through Amazon s Mechancal Turk (Mturk), a crowdsourcng web servce. 13 The Effect of the Washngton Metropoltan Area Bag Tax Can small fnancal ncentves deter undesrable behavor? Ths secton revews prevous studes on ths queston and provdes evdence of the effectveness of the tax polces n the Washngton Metropoltan Area at reducng consumpton of dsposable bags. Lterature Revew on Small Fnancal Incentves For decades, taxes on commodtes that mpose negatve externaltes on socety have been popular among federal and local governments. Several of these sn taxes have not only provded a substantal source of government revenue, but they have also been effectve n curbng behavor that s unhealthy for the ndvdual or harmful to the publc. For example, cgarette taxes have been shown to decrease smokng rates, leadng to better health outcomes for smokers and ther famles (Chaloupka & Warner, 2000). However, these taxes consttute a substantal porton of the after-tax prce of the commodty. 14 In contrast, taxes on soft drnks, whch are much smaller around 4 percent showed only a very small mpact on consumpton (Sturm et al., 2010). Smlarly, evdence on the effectveness of other types of monetary ncentves s mxed. Fullerton and Knnaman (1996) show that chargng ndvduals for resdental waste dsposal reduced waste and ncreased recyclng. Lacetera et al. (2012) present evdence that fnancal ncentves postvely affect blood donatons and that the effect ncreases wth the sze of the ncentve. However, Ttmuss (1970) suggests that fnancal ncentves may not, n fact, ncrease publc goods contrbutons and, n some cases, could deter such prosocal behavor. Several theores have been proposed for why ncentves 69
NATIONAL TAX ASSOCIATION proceedngs amed at promotng prosocal behavor may have these unntended consequences. Gneezy and Rustchn (2000b) show that students asked to collect money door-to-door for charty exhbt less effort when offered a small fnancal ncentve and suggest that ths extrnsc motvaton (.e., the fnancal ncentve) crowds out an ndvdual s ntrnsc motvaton (e.g., altrusm). Another theory suggests that the ntroducton of a fnancal ncentve shfts the decson to contrbute to the publc good from a socal frame to a monetary frame (Gneezy & Rustchn, 2000a; Heyman & Arely, 2004). Demand for Dsposable Bags After Tax Implementaton As a frst step, I use grocery store scanner data to nvestgate consumers dsposable bag use n the weeks followng a tax s mplementaton. Ths data allows me to determne f a customer was charged for usng a dsposable bag durng a gven transacton. 15 Because the measure of dsposable bag use s derved from bag tax collectons, I only have nformaton on dsposable bag consumpton n areas that charge a tax and only after a store has mplemented the tax. Therefore, I cannot compare consumpton before and after the polcy, nor can I compare stores that charge a tax to those that do not. However, ths data provdes a descrpton of how dsposable bag use changed n the frst few weeks after mplementaton, as well as n the long-term. Fgure 1a plots the percent of customers usng a dsposable bag n stores located n DC for the frst year of the tax polcy, startng on January 1, 2010. 16 The fgure shows that 58.1 percent of customers used at least one dsposable bag on the frst day the tax was mplemented and 52.7 percent used a dsposable bag n the frst week of mplementaton. Ths estmate decreased to 41.5 percent by the last week n January and remans at or below 40 percent for most of the year. I replcate ths analyss for Fgure 1: Proporton of Customers Usng a Dsposable Bag 70
105 th Annual conference on taxaton stores located n Montgomery County n fgure 1b. Ths fgure shows that on January 1, 2012, the frst day of the Montgomery County tax, 39.8 percent of customers used at least one dsposable bag. By the last week n January, only 26.3 percent of customers were charged a tax. One concern wth nterpretng changes n behavor as a response to the tax s that there may be seasonal fluctuatons n dsposable bag use that could conflate the effect of the tax. Whle I do not have data on bag use n ether area before the tax was mplemented, fgure 1c compares behavor n DC n the frst year of mplementaton to behavor n the followng two years. Whle the fgure shows a substantal drop n dsposable bag use durng the frst month of 2010 (when the tax was mplemented), t does not show a smlar change n behavor durng the frst month of 2011 or 2012. Ths suggests that dfferences n bag use across dfferent dates n January are unlkely to be drvng these results. As mentoned n Other Domestc Regulaton of Dsposable Bags, several ctes and countes n Calforna banned the use of plastc bags and mposed a 10-cent charge for dsposable paper bags. Fgure 1d plots the percent of customers charged for a paper bag n stores n the ctes of Santa Monca and San Jose, as well as unncorporated areas of the Santa Cruz County. Santa Monca mplemented ts polcy on September 1, 2011, San Jose on January 1, 2012, and Santa Cruz County on March 20, 2011. Whle the data for the Calforna locatons s much noser than the data from DC and Montgomery County due to the smaller number of stores n the sample, there s stll a slght decrease n paper bag use durng the frst week of the polcy. It s also nterestng to note that the percent of customers usng a paper bag on all dates s notably lower n the Calforna stores than n the stores n the Washngton Metropoltan Area. Ths may have to do wth dfferences n polces the Calforna polcy nvolves a plastc bag ban and charges a hgher fee for paper bag use or may be due to dfferences n behavor across locatons pror to polcy mplementaton. The Effect of the Montgomery County Bag Tax: A Dfference-n-Dfferences Analyss Whle the scanner data allows a precse descrptve analyss of bag use behavor n the months followng the mplementaton of the tax, the lack of pre-tax scanner data prevents me from usng the data to draw any causal nterpretatons about the tax s effect. Evaluatons of the South Afrcan plastc bag levy (Hasson et al., 2007; Dkgang et al., 2012) suffer from the same crtcsm both studes use frm-level data from a small number of retalers to examne plastc bag consumpton over tme, but nether ncludes data pror to the polcy mplementaton. Whle the evaluatons of the Irsh bag tax (Convery et al., 2007) and the Chnese bag fee (He, 2010) utlze plastc bag consumpton data before and after the polcy, nether study collects data on a set of control stores or locatons. Ths can be a problem f there are factors that affect bag consumpton other than the plastc bag regulaton that were changng at the same tme as the polcy mplementaton,.e., shfts n socal norms around envronmental behavor, seasonal patterns n dsposable bag use, or changng economc condtons that affected ether producton of dsposable bags or grocery shoppng behavor. To deal wth these ssues, I expand on the descrptve analyss usng data on grocery bag demand collected before and after the mplementaton of the Montgomery County bag tax. As mentoned n the Data secton, I collected data on dsposable and reusable bag use at 16 stores n the Washngton Metropoltan Area, ncludng stores n Montgomery County (where there s a polcy change), DC (where a tax had already been mposed two years pror to data collecton), and Vrgna (whch has no bag tax) before and after the mplementaton of the Montgomery County tax. Ths allows me to perform a dfference-ndfferences analyss to assess the mpact of the tax on varous measures of bag consumpton. Table 1 contans the mean values of the demographc characterstcs of customers n the sample by state and tme perod. Whle the three locatons vary slghtly n ther racal composton, all three areas are predomnantly whte wth a smlar gender rato. In addton, the demographcs wthn a locaton do not change sgnfcantly between the two tme perods. The analyss begns wth a smple comparson of means of varous measures of demand across locatons and tme perods. Whle reusable bags are the most common substtute for dsposable bags, customers may opt to not use any bags at all; therefore, the majorty of the analyses presented n ths paper wll nclude measures of demand for both dsposable and reusable bags to create a complete pcture of the changes n behavor as a result of the 71
NATIONAL TAX ASSOCIATION proceedngs Pre (1) Table 1 Demographcs DC Maryland Vrgna Post (2) Pre (3) Female 58.49 59.73 59.78 61.22 53.09 56.85 (49.29) (49.06) (49.04) (48.73) (49.92) (49.54) Whte 63.79 63.25 59.31 59.69 77.77 76.59 (48.08) (48.23) (49.13) (49.06) (41.59) (42.35) Black 23.28 21.95 27.93 26.31 10.12 9.72 (42.28) (41.41) (44.87) (44.04) (30.17) (29.63) N 1,207 1,649 3,799 4,515 2,006 3,075 Standard devatons n parentheses. Table reports mean values of each varable. Post (4) Pre (5) Post (6) bag regulatons. Fgures 2a and 2b show the percent of customers usng any dsposable and any reusable bags, respectvely, n the three locatons before and after the mplementaton of the Montgomery County tax. Recall that n DC, stores are requred to charge a 5-cent tax n both perods, whle there s no bag regulaton n Vrgna n ether perod. In the pre-perod, customers n the Vrgna sample used at least one dsposable bag 82 percent of the tme whle customers n DC used a dsposable bag only 45 percent of the tme. Smlarly, Vrgna customers rarely brought a reusable bag when shoppng, only 16 percent of the tme, compared to 46 percent n DC. These numbers changed only slghtly between the two perods. In contrast, demand n Montgomery County shfted dramatcally after the mplementaton of the tax. Behavor n the pre-perod resembled that observed n Vrgna 82 percent of customers used at least one dsposable bag whle only 16 percent brought a reusable bag. However, behavor n Montgomery County after the tax mrrored the behavor observed n DC 40 percent of customers used a dsposable bag whle 49 percent brought a reusable bag. Table 2 contans the statstcs correspondng to those dsplayed n the fgures as well as means for addtonal measures of bag demand. I consder demand for the two types of bags on the extensve margn (the percent of customers usng each type of bag), the ntensve margn (how many bags each customer uses gven that they use that partcular type of bag), and overall demand (the uncondtonal number of bags of each type the customer uses). Whle the effect of the tax seems to have the largest mpact on demand on the extensve margn, Montgomery County customers who contnue to use dsposable bags after the tax use fewer bags per trp. The data also shows an ncrease n the proporton of customers choosng not to use any bags at all. I then use a regresson framework to evaluate the effect of the Montgomery County tax on these measures of demand controllng for varous ndvdual- and store-level covarates. The emprcal model follows a dfference-n-dfferences strategy and takes the followng form: Y = θ + θ MD* Post+ θ Post+ θ MD+ λx + ε, 0 1 2 3 where Y s a measure of demand on the extensve and ntensve margn, respectvely; Post s an ndcator for observatons after the mplementaton of the Montgomery County tax; MD s an ndcator for customers shoppng n Montgomery County; and X s a set of controls. 17 The coeffcent of nterest s q 1, the coeffcent on the nteracton of Post and MD, whch measures the effect of the tax on demand n Montgomery County relatve to changes n demand n the control stores. Table 3 presents results for the effect of the tax on one measure of consumpton, demand for dsposable bags on the extensve margn, usng dfferent control varables n each specfcaton. The model n column 1 controls for tme perod, state, and the nteracton of shoppng n Montgomery County and shoppng n the post-perod only. The results show that the tax caused a decrease n the proporton of customers usng at least one dsposable bag by 41.7 percentage ponts. Column 2 adds controls for the avalable ndvdual-level demographc characterstcs, race and gender. 72
105 th Annual conference on taxaton Fgure 2: Demand by Locaton and Tme Perod 73
NATIONAL TAX ASSOCIATION proceedngs Table 2 Demand Before and After the Montgomery County Bag Tax DC Maryland Vrgna Pre (1) Post (2) Extensve Margn Dsposable 44.5 45.7 81.7 39.6 82.2 80.8 (49.7) (49.8) (38.6) (48.9) (38.3) (39.4) Reusable 46.0 46.6 15.9 49.2 16.3 17.2 (49.9) (49.9) (36.5) (50.0) (36.9) (37.7) No Bags 14.9 11.3 5.7 15.4 4.7 4.8 (35.6) (31.7) (23.2) (36.1) (21.1) (21.5) Intensve Margn Dsposable 2.23 1.76 2.32 1.76 2.37 2.14 (2.17) (1.43) (2.05) (1.43) (2.02) (1.82) Reusable 1.63 1.52 1.67 1.66 1.79 1.65 (1.07) (0.95) (1.14) (1.09) (1.27) (1.15) Overall Demand Dsposable 1.00 0.81 1.90 0.70 1.95 1.73 (1.82) (1.31) (2.06) (1.25) (2.04) (1.84) Reusable 0.75 0.71 0.26 0.82 0.29 0.28 (1.09) (1.00) (0.76) (1.13) (0.84) (0.78) N 1,207 1,649 3,799 4,515 2,006 3,075 Standard devatons n parentheses. Table reports the probablty of usng a bag (extensve), demand among users (ntensve), and uncondtonal demand (overall) for each type of bag. Pre (3) Post (4) Pre (5) Post (6) If certan demographc groups are more lkely to use reusable bags nstead of dsposable bags, dfferences n demographcs across locatons and tme perods could bas my results. Whle mnortes and males are more lkely to use a dsposable bag n general, the estmate of the effect of the tax s unchanged by the ncluson of these controls. Thrd, whle I randomzed the order n whch I vsted each store, dfferences n the tme of data collecton across locatons could affect the results. I control for tme of day n column 3 and fnd only the slghtest change n the estmates. 18 Fnally, the study ncludes several dfferent chans of grocery stores n varous locatons throughout the ctes consdered. Whle I attempted to choose comparable stores, dfferences n the locaton or sze of the store, addtonal store polces about reusable bag use, or neghborhood demographcs could affect whether customers choose to use a dsposable bag. To account for ths possblty, my preferred specfcaton n column 4 ncludes store fxed effects. As wth the other controls, the addton of store-level fxed effects has lttle mpact on the estmated effect of the tax. Usng ths preferred specfcaton, table 4 repeats the analyss for the other measures of demand. The table ncludes measures of demand for both dsposable and reusable bags on the extensve and ntensve margns, respectvely, as well as a bnary measure for usng no bags of ether type. On the extensve margn, the mposton of the tax led to a decrease n dsposable bag use of 42.0 percentage ponts and an ncrease n reusable bag use of 32.7 percentage ponts. In addton, the percent of customers who used no bags at all ncreased by 11.1 percentage ponts. 19 On the ntensve margn, I observe smaller, but stll statstcally sgnfcant, effects on bag consumpton the number of bags used by dsposable bag users decreased by 0.22 bags and the number of bags used by reusable bag users ncreased by 0.15 bags, a change of approxmately 8 and 9 percent, respectvely. 74
105 th Annual conference on taxaton Table 3 Effect of Tax Polcy on Dsposable Bags - Extensve Margn (1) (2) (3) (4) Post*MD -0.417*** -0.417*** -0.419 *** -0.420 *** (0.014) (0.014) (0.014) (0.014) Post -0.005-0.003-0.002-0.002 (0.010) (0.010) (0.010) (0.010) MD 0.001-0.013-0.009 (0.010) (0.010) (0.010) DC -0.362*** -0.372*** -0.372 *** (0.011) (0.011) (0.011) Black 0.100 *** 0.100 *** 0.099 *** (0.009) (0.009) (0.009) Other Race 0.025 ** 0.025 ** 0.025 ** (0.010) (0.010) (0.010) Female -0.068 *** -0.067 *** -0.066 *** (0.007) (0.007) (0.007) Afternoon 0.005 0.003 (0.008) (0.008) Evenng 0.027 *** 0.026 *** (0.008) (0.009) Store FE No No No Yes N 16,251 16,251 16,251 16,251 Robust standard errors n parentheses. Outcome varable: probablty of usng at least one dsposable bag. * p < 0.10, ** p < 0.05, *** p < 0.01 In order to provde a measure of the overall effect of the tax on demand, I can combne the extensve and ntensve margn estmates followng McDonald and Mofftt (1980). In partcular, I can decompose the condtonal expectaton of demand nto ts extensve and ntensve components: Ey [ x]= E[ y x, y>0]* P( y>0 x), where y represents demand and x represents the covarates. Usng the product rule, the total effect of a change n one of the covarates on demand s gven by: Ey [ x] Ey [ xy, >0] = * Py ( >0 x ) x x + Py ( >0 x) * Ey [ xy, >0]. x By utlzng sample estmates of P( y > 0 x) and E y x, y > 0], evaluated at the sample mean of each covarate, I can combne the estmated coeffcents from the extensve and ntensve margn regressons nto a rough estmate of the overall effect of the taxes on demand. 20 Table 5 presents these results. The estmates suggest that the tax decreased the number of dsposable bags used by 1.26 bags and ncreased the number of reusable bags used by 0.62 bags per customer per shoppng trp. 21 Loss Averson and Incentve Desgn Can a bonus for reusable bag use have the same mpact on consumer behavor as a tax on dsposable bag use? The prevous secton documented that Montgomery County s 5-cent tax was assocated wth a substantal reducton n consumers use of dsposable bags. Pror to the mplementaton of both the DC and Montgomery County taxes, 75
NATIONAL TAX ASSOCIATION proceedngs Table 4 Effect of Tax Polcy on Demand - Extensve and Intensve Margns Extensve Margn Intensve Margn (1) Dsposable (2) Reusable (3) No Bags (4) Dsposable (5) Reusable Post*MD -0.420*** 0.327*** 0.111*** -0.215*** 0.150** (0.014) (0.013) (0.009) (0.070) (0.069) Post -0.002-0.002-0.006-0.227*** -0.116** (0.010) (0.010) (0.006) (0.051) (0.047) Black 0.099*** -0.102*** -0.001-0.153*** -0.185*** (0.009) (0.009) (0.006) (0.046) (0.039) Other Race 0.025** -0.057*** 0.022*** -0.133*** -0.217*** (0.010) (0.010) (0.007) (0.051) (0.043) Female -0.066*** 0.153*** -0.061*** 0.381*** 0.203*** (0.007) (0.007) (0.005) (0.035) (0.031) Afternoon 0.003 0.031*** -0.024*** 0.265*** 0.026 (0.008) (0.008) (0.006) (0.043) (0.038) Evenng 0.026*** 0.009-0.032*** 0.270*** -0.062* (0.009) (0.008) (0.006) (0.043) (0.037) Store FE Yes Yes Yes Yes Yes N 16,251 16,251 16,251 10,314 5,003 Robust standard errors n parentheses. Outcome varables: probablty of usng at least one bag or no bags (extensve) and demand among users (ntensve) for dsposable and reusable bag demand, respectvely. * p < 0.10, ** p < 0.05, *** p < 0.01 several grocery store chans n the Washngton Metropoltan Area offered customers a 5-cent bonus for each reusable bag they used nstead of takng a dsposable bag. In ths secton, I use ths natural experment to compare the effect of these two polces to assess the mportance of framng when desgnng fnancal ncentves. Lterature Revew For customers shoppng n stores that offer a bonus program, the economc ncentve to use a reusable versus dsposable bag s 5 cents, the same as under the tax. Consequently, neoclasscal models of behavor suggest that these two polces should have the same effect on behavor; the form that the ncentve takes a bonus versus a tax should not affect demand. However, work n behavoral economcs suggests that ths equvalence may not hold n practce. Evdence from both lab and feld experments (Kahneman et al., 1991; DellaVgna, 2009) ndcates that ndvduals perceve losses more strongly than gans of the same sze. If grocery store customers are loss-averse, then a polcy that charges customers for dsposable bag use may be more effectve than a polcy that rewards customers for usng reusable bags, even f the ncentves are fnancally equvalent. Several recent studes conduct experments that test the effectveness of economc ncentves wth these behavoral nsghts n mnd. New York Unversty s (NYU) School of Law conducted an experment n whch the unversty randomzed the framng of an ncome-contngent loan repayment program that encourages graduates to enter the publc sector. Students who receved the tuton subsdy upfront, but were told that they would need to repay the amount f they dd not enter the publc sector upon graduatng (the loss group), were more lkely to take a job n publc nterest law and more lkely to enroll at NYU than students whose loans would be repad only after enterng the publc sector (the gan group) (Feld, 2009). Usng a smlar expermental desgn, Hossan and Lst (2009) altered whether employees n a Ch- 76
105 th Annual conference on taxaton Table 5 Effect of Tax Polcy on Demand - Overall Effect (1) Dsposable (2) Reusable Post*MD -1.260*** 0.622*** 0.057 0.033 Post -0.143*** -0.037* 0.039 0.022 Black 0.077** -0.253*** 0.035 0.020 Other Race -0.081** -0.191*** 0.039 0.021 Female -0.025 0.307*** 0.029 0.016 Afternoon 0.059* 0.032* 0.035 0.019 Nght 0.129*** -0.032* 0.034 0.019 Store FE Yes Yes N 16,251 16,251 Robust standard errors n parentheses. Outcome varables: bag demand n levels. * p < 0.10, ** p < 0.05, *** p < 0.01 nese manufacturng faclty receved performance bonuses before producton that were then reduced f certan productvty quotas were not met or f they were awarded a bonus only after they reached the quota. They found that employees who receved bonuses framed as a loss were more productve than those who receved bonuses framed as a gan. Most recently, Fryer et al. (2012) tested the effectveness of a pay-for-performance program for teachers n Chcago publc schools and found that students of teachers n the loss treatment showed sgnfcant gans n readng and math, whle students of teachers n the gan treatment dd not perform any better than those whose teachers dd not receve any fnancal ncentve. Ths paper contrbutes to ths growng lterature by nvestgatng the mpact of ncentve-framng and provdes new nsghts on a varety of dmensons. To my knowledge, ths s the frst paper to determne the exstence of these behavoral mechansms n the context of prosocal envronmental behavor. Ths s also the frst study to use taxes as a polcy tool to explot the nfluence of framng. Lastly, the majorty of papers that test for loss averson n the feld provde ndvduals wth rather large ncentves. For example, the hghest performng teachers n the Chcago schools experment receved an $8,000 bonus, whch s roughly equvalent to 16 percent of the average teacher salary n the area. To put that value n context of the ncentves examned n ths paper, a customer would need to use 438 bags per day for a full year n order for these ncentves to be equvalent. Ths study provdes evdence as to whether these behavoral fndngs hold wth low-stakes ncentves. The Effect of Taxes versus Bonuses Evdence from Observatonal Data n the Washngton Metropoltan Area Unlke wth the tax polcy, I do not have data before and after the mplementaton of the bonus program; therefore, I cannot perform a dfferencen-dfferences analyss on the effectveness of the bonus polcy as I have wth the tax. However, I am able to provde a cross-sectonal comparson of the behavor of customers at stores wth dfferent polces. Of the 12 stores consdered n ths analyss, sx of them offer a 5-cent bonus per reusable bag. 22 Each store falls nto one of four polcy types. Type I stores provde no ncentves for usng a reusable bag or reducng use of dsposable bags. These are grocery store chans that do not offer a bonus and were not requred to charge a tax. Type II stores offer a bonus for reusable bag use, but do not charge a tax for dsposable bag use. Type III stores do not offer a bonus, but do charge a tax. Fnally, Type IV stores offer both a bonus for reusable bag use and charge a tax for dsposable bag use, snce all of the stores n the sample that provded a bonus pror to the tax contnued to provde a bonus after the tax was mplemented. Fgures 3a and 3b show the percent of customers usng at least one dsposable (reusable) bag by polcy type wth each bar representng a polcy-locaton-perod. For example, bonus stores n Montgomery County represent a bar n the Type II category n the pre-perod and a bar n the Type IV category n the post-perod. In fgure 3a, an average of 84.3 percent of customers use at least one dsposable bag n type I stores,.e., stores wth no ncentve polcy. Ths estmate s much hgher than that n stores wth both a tax and a bonus only 40.4 percent of customers used a dsposable bag n type IV stores. What s most strkng, however, s the comparson of stores that offer only a 5-cent ncentve but that dffer n whether the ncentve takes the form of a tax or a 77
NATIONAL TAX ASSOCIATION proceedngs Fgure 3: Demand by Store Polcy 78
105 th Annual conference on taxaton bonus. Customers n stores wth only a tax used a dsposable bag 40.8 percent of the tme, smlar to customers n stores offerng both a tax and a bonus. However, customers n stores that offered only a bonus used a dsposable bag 81.9 percent of the tme. Ths estmate s much closer to the percent of customers usng a dsposable bag n stores that provded no ncentve than t s to stores offerng an ncentve of the same amount, but n the form of a tax nstead of a bonus. Fgure 3b tells a smlar story for the proporton of customers usng a reusable bag. Customers shoppng n stores wth both a bonus and a tax used a reusable bag 47.8 percent of the tme, whch s smlar to, though statstcally sgnfcantly larger than, the 44.2 percent of customers who used a reusable bag n stores that charge a tax but do not provde a bonus. However, only 15.4 percent of customers brng a reusable bag n stores that offer a bonus only. Ths estmate s much smaller than that n stores that charge a tax, though only slghtly larger than the 13.1 percent of customers who shop at stores wth no ncentve polces. 23 I then consder a smlar analyss usng a regresson framework wth the followng econometrc model that allows me to control for factors that mght confound the smple comparson of means: Y = θ + θ Tax + θ Bonus + λx + ε. 0 1 2 Y s a measure of bag demand; Tax s an ndcator for whether a store charges a 5-cent tax; Bonus s an ndcator for whether the store offers a 5-cent bonus for reusable bag use; and X s a set of controls, ncludng ndvdual-level demographcs, tme of day, and store locaton. If I assume that, condtonal on these controls, there are no unobservable dfferences between the customers of bonus and non-bonus stores that would affect ther response to the two types of ncentves or to ther demand n the absence of a bag regulaton, I can nterpret estmates of q 1 as the effect of the tax polcy and q 2 as the effect of the bonus polcy. Table 6 presents the results for dsposable and reusable bag use on the extensve margn. Columns 2 and 4 control for ndvdual demographc characterstcs and tme of day whle columns 1 and 3 do not. As wth the evaluaton of the tax polcy n table 4, men and mnorty racal groups are more lkely to use dsposable bags, but the ncluson of these controls does not change the estmates of the effect of the tax or bonus polces. Customers are sgnfcantly less lkely to use a dsposable bag n stores that charge a tax 44.5 percentage ponts lower whereas customers shoppng at stores that offer a bonus program do not dffer sgnfcantly from those shoppng at stores wthout the program. Whle customers are sgnfcantly less lkely to use a reusable bag n both tax and bonus stores than n stores that offered no ncentve, the magntude of dfference s much larger n tax stores than n bonus stores 32.7 versus 2.9 percentage ponts. 24 As mentoned before, I do not have a natural experment around the mplementaton of the bonus, so the comparsons n ths secton should not be nterpreted as a causal relatonshp. If customers choose to shop at the store closest to where they lve and stores that offer a bonus program are located n areas where customers are less lkely to use a reusable bag regardless of the ncentve polcy, then the tax and bonus polces could be equally effectve, and the results n ths paper could stll be observed. However, gven that many of the stores n the sample that offer a bonus program are wthn a 10 mnute walk from those that do not, t s unlkely that dfferences n local demographcs are drvng the results. Smlarly, one mght expect that customers who already brng reusable bags mght choose to shop at stores that reward them for dong so. However, ths pattern would lkely bas my approach aganst fndng evdence of loss averson. Survey Measure of Polcy Effectveness To nvestgate loss averson wthout assumng comparablty between customers at bonus and non-bonus stores, I surveyed grocery store customers about how they would respond to a hypothetcal tax or bonus polcy. I asked respondents f a 5-cent ncentve nfluenced ther decson to brng a reusable bag when shoppng at that store, randomzng whether the ncentve was framed as a tax or a bonus. 25 Partcpants were nstructed to gve one of the followng fve responses: defntely, qute a bt, somewhat, very lttle, or not at all. Table 7 presents results of the followng lnear probablty model: Y = θ + θ Tax + θ Bonus + λx + ε. 0 1 2 where Y s the probablty that the survey partcpant responded that the ncentve would defntely nfluence hs decson to brng a reusable bag or nfluence hs decson qute a bt (the top two categores); Tax s an ndcator varable that takes the value of one f the partcpant was asked about 79