Federal plastics tax is not a good revenue booster

One of the Senate introduce to pay for the Build Back Better Act is a federal excise tax on new plastics, which are plastics that are not reprocessed or recovered. The tax would be $0.20 per pound of virgin plastic used to make single-use plastic products. While few details have been released about this pay-for, a similar tax proposal, the REDUCE law, was introduced earlier this year by Senator Sheldon Whitehouse (D-RI). The plastics industry claims the tax would rise $120 billion over 10 years.

In the REDUCE Act, rates start at $0.10 per pound in the first year and grow to $0.20 per pound in the third year. It would automatically increase with inflation in the following years.

There are numerous problems with excise tax on new plastics as a source of revenue for unrelated spending priorities. First, the tax base is extremely narrow. The taxable items are virgin plastic resin itself, along with packaging, food service products, beverage containers and bags of virgin plastic resin, based on the amount in each product.

Not only is that no tax on waste, it’s not even a tax on plastic. Under the REDUCE Act’s definition of taxable plastic, all recycled plastics and all non-gas or petroleum-based plastics are exempt. Although recycled plastic products and cellulose acetate products (plastic made from plant-based materials) also pollute, they are not included in the tax base.

While economic incentives can positively impact the viability of the recycled plastics market, it is less certain whether a federal tax alone would have a significant impact on waste. For example, a federal tax does nothing to improve local collection and recycling schemes, which must be upgraded to produce competing recycled resin, and perhaps not enough to make these processes viable on their own. Without the availability of a competitive alternative, manufacturers would not be incentivized to make the investments in manufacturing processes necessary to rely on recycled plastics. In addition, a narrow tax base leads to a lack of income stability and increases the non-neutrality of taxes.

As with many other excise taxes, the tax is regressive. It is technically levied on manufacturers and importers of plastic products, but the additional costs will be passed on to consumers of single-use plastic products, driving up the prices of everyday items. It is unlikely that a single US consumer will not purchase products made from or packaged in single-use plastic.

Regressive taxes are not always bad taxes, but lawmakers should consider this aspect when designing them. As an income tool for a major spending plan, how the tax is distributed matters, especially in light of President Bidens’ pledge not to raise taxes on Americans earning less than $400,000 a year.

Because the plastic tax is presumably intended to internalize the externalities of plastic production and not just generate revenue, the previous attempt to tax plastic, the REDUCE Act, contained a number of exclusions. For example, that bill offers a discount on products regulated as drugs by the Food & Drug Administration (FDA) as it would be undesirable for manufacturers to skimp on plastic at the expense of hygiene or poor packaging of sterilized products, and there is no reason to punish companies that use plastic for such purposes.

Rather than just exempting FDA-regulated products from the basics, the bill offers a discount. In other words, companies would still have to file a declaration even when they manufacture or import exempt products, adding unnecessary complexity and cost to the system. In addition, there are many other industries with products of great social importance, and where the use of virgin plastics is unavoidable, that do not receive an exemption.

Unnecessary reporting requirements are not the only complexity issue. Since importers are also liable, there may be an information gap. If an importer cannot (or will not) provide information about the taxable plastic content in the imported items, a tax of 10 percent of the value of the product will be levied.

The REDUCE Act would have allocated the revenues to the Plastic Waste Reduction Fund, which is tasked with financing activities to improve recycling and reduce waste. Such an allocation could make sense, although the narrow tax base makes the design non-neutral. As compensation in the Senate plan, however, the tax revenue would be unrelated to its ostensive purpose. Since the tax was originally intended to discourage the use of taxable plastics, it should not be relied upon to fund recurring expenditure programs.

States have gone in a different direction when it comes to plastics and taxes. Instead of simply levying excise duty, Maine and Oregon have imposed Extended Producer Responsibility (EPR) schemes for packaging and plastics. While rules and regulations for both frameworks are still under development, such schemes, if well designed, offer a greater chance of reducing waste. Of course, if poorly designed, EPR schemes will share federal tax flaws.

Ultimately, though, increasing the cost of manufacturing and using plastics will increase the prices of millions of everyday items. Legislators should take this feature of the tax into account when imposing it.