Proposed Taxes On Resin Would Exacerbate Inflation

Taxes are a necessary evil to pay for the cost of our government, but there are good taxes and bad taxes—and sometimes it can be difficult to distinguish between the two. But it is important that we do, or else we impose needless costs on our economy.

For instance, economists of all stripes tend to favor taxes on goods that impose some sort of external costs on society that are not incurred by the buyer or seller: For instance, because cars that burn gasoline emit a variety of emissions that pollute our air, most economists support having a sizable gas tax.

Without a gas tax, the total cost of a trip by car—both to the driver as well as the rest of us, who have to put up with fouler air and more congestion on the roads—could exceed the benefits from the trip, and society is worse off from it as a result. 

To that end, economists on both sides of the aisle have suggested that we consider imposing such a tax—often referred to as a Pigouvian tax—on goods that serve to increase greenhouse gas emissions as a way to combat climate change. 

Unfortunately, the dysfunctional politics of Congress these days precludes anything remotely resembling a carbon tax. Instead, the Democratic Congress and the Administration have adopted a piecemeal approach to combating climate change, with middling success. 

Most of what’s being done to reduce carbon emissions these days is coming from executive branch agencies like the SEC, but Congress has tried to do things as well: For instance, a bill currently in front of the Senate Finance Committee (where I once worked) that is part of what’s left of the Build Back Better legislation passed in the House would impose a tax on the production of polyethylene terephthalate—or PET—resin. Manufacturers use plastic resin to make plastic containers for shampoo, cleansers, and many foods and beverages, among other things. It is lightweight, durable, and meets federal safety standards to be used in packaging. 

The justification is that since it is effectively a tax on an oil by-product, it is akin to a carbon tax and something we should embrace in our attempts to reduce greenhouse gas emissions.

However, a resin tax by itself will do nothing to reduce climate change while imposing significant costs on our economy at an unpropitious time. For starters, plastic resin constitutes a small proportion of the total oil and natural gas consumed in the United States: The Energy Information Administration estimates it to be roughly two percent of the total. 

Imposing a tax that effectively covers a miniscule portion of final oil and gas consumption in a single country won’t serve to deter anything. In fact, a broad-based carbon tax in the U.S. by itself would not achieve an appreciable reduction in carbon emissions unless we negotiated similar taxes—or their equivalent—across the globe. 

But a resin tax would serve to increase the cost of a wide variety of everyday goods that use plastic in shipping, thereby worsening the current raft of inflation we are seeing in the economy. 

We have a real world experiment of how a resin tax would impact the economy: in 2016, the U.S. International Trade Commission imposed an excise tax on imported plastic resin from Canada, India, Oman, and China. While the measure was intended to support U.S. PET resin producers, it instead resulted in considerable harm for American businesses and allowed global companies to benefit. The tariff had an adverse impact on supply chains throughout the U.S., particularly for manufacturers of consumer goods who were forced to cope with increased demand for PET resin and decreased supply.

The duties clearly failed, allowing a group of international companies — based in Mexico, Thailand and Taiwan — to profit off the orders through their U.S. subsidiaries and giving them control over the entire “domestic” PET resin market. The ITC will make a decision later this month as to whether it should extend these tariffs and should consider how they have created unnecessary pain for U.S. businesses.

Economists often discuss the virtues of pursuing a second best outcome when the ideal policy isn’t politically tenable: For instance, transportation economists believe that the optimal way to pay for roads would be to charge people via a vehicle miles tax on their vehicle that accounted for road congestion and the vehicle’s pollution. Since that’s politically untenable, a gas tax—which is much less precise—is a second best solution. 

But a resin tax does not represent a second best solution: it won’t reduce carbon emissions and if the goal is to reduce plastic waste it would be far more efficient to impose a tax on bags or charge a fee for non-recyclable waste disposal. A resin tax isn’t even a third best solution—or any solution to any problem at all. 

And given the current inflationary pressures, imposing it now makes very little sense.