Economy / Environment / Fiscal policy / Tax / Taxes

Exchanging Trash for Treasure

The Michigan state government recently stumbled across a startling statistic. Over the past decade its revenue streams were $8-10 million below what it expected. The cause? Residents of nearby states have been smuggling millions of bottles and cans into Michigan, taking advantage of its nation-leading 10-cent bottle refund.

Michigan is one of 10 states nationwide that offers a deposit-refund system for beverage containers. But at a dime per bottle, Michigan’s program is by far the most generous – at least to customers from other states.

The unwitting generosity comes at the expense of Michigan’s Department of Agriculture and Urban Development, the agency set to receive the excess recycling funds. With a budget of just over $84 million, the extra funds could go a long way toward the conservation of Michigan’s forests, rivers, and lakes.

To recoup some of these funds, the state is exploring technological and procedural improvements to prevent smugglers from lining their own pockets. Equipment that rejects out-of-state bottles, machines that require personal information before refunding, and quotas limiting the daily number of returnable bottles are all being discussed.

But in order to truly take a sip out of the Coke can of crime, there needs to be a coordinated effort to expand the scope of the deposit-refund system nationwide.

How Does it Work?

Imagine a buying scenario with three players and a five-cent deposit amount. The consumer is looking to buy bottled water from the supermarket (Safeway) who gets their water from a distributer (Poland Springs).

Safeway anticipates the consumer’s demand for bottled water and orders a shipment of bottles from Poland Springs. Because of the deposit-refund law, Poland Springs charges Safeway a five-cent deposit per bottle. Safeway passes this cost onto the consumer who, if behaving rationally, will choose to return his bottles and earn a refund.

If the consumer returns his bottles to Safeway, Safeway will refund the consumer the extra five cents it charged per bottle. In turn, Safeway will have that same nickel refunded by Poland Springs.

If every consumer returned every bottle, no one would be any better or worse off. In reality, this is not the case. Consumers who do not recycle their bottles essentially forfeit their five-cent deposit.

This results in a pool of income that can be divvied up in an endless number of ways. In states like Connecticut, all the money is given to the state government. In contrast, Iowa gives all the money to beverage distributors like Poland Springs. In between are states like New York, where the money is split between the government and the distributors, and California, where the money is used to cover program administration costs.

Is it Effective?

In short, yes. In 2010, Americans generated about 250 million tons of trash and recycled roughly 34 percent of that material. However, in states with deposit-refund schemes, recycling rates averaged roughly 80 percent. In Michigan, the state with the highest deposits, the recycling rate was a sparkling 97 percent.

All that recycling has made a visible difference in the states that have these container laws. New York, for example, reduced container litter by an estimated 70-80 percent after it adopted the deposit-refund system in 1982. Other studies have found roadside litter reduced by 30-64 percent in states that adopted similar laws.

Most strikingly, these social benefits are accrued at little to no cost to taxpayers. Among policies aimed at achieving the socially optimal level of recycling, the deposit-refund system has been shown to be more economically efficient than waste disposal fees, product taxes, and recycling subsidies.

That is because the deposit-refund system increases the incentive to dispose of bottles correctly without distorting purchasing decisions by consumers. In Massachusetts, for example, the introduction of a deposit-refund system did not result in any increase in the price of bottled beverages relative to other states. And because the five-cent fee was imposed on all bottled beverages, there was no change in the types of beverages consumers chose to drink.

Beyond being the most efficient way to incentivize recycling, the deposit-refund may actually yield positive economic benefits. In 2007, after 25 years of employing the deposit-refund system, New York officials estimated that manufacturers and distributors had retained $1.6 billion in unclaimed refunds.

Similarly, a study assessing the possible effects of a deposit-refund system in Texas estimated that the program could increase yearly revenues by roughly $220 million and add almost 1,400 jobs by 2025. Some of those revenues will come from unclaimed refunds, but a bulk of the revenue will come from the increased sale of scrap and recycled material.

For states like Michigan that already employ the deposit-refund system, a more widespread program would be an economic boon. Residents of other states would no longer have an incentive to hop state lines to return cans and bottles. Michigan could finally take full advantage of the extra $8-10 million it is rightfully owed.

In other words, one state’s trash will finally become that state’s treasure.

 

IMG_8074 by Gordon Tarpley is licensed under CC BY 2.0

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