For better or for worse, tax policy, aside from raising revenues for governments, can have a direct effect on societal behaviour.
Two recent examples, one from Canada and one from the United States, show just how such policies not only affect decisions individuals make, but can lead to tragic consequences.
For better On June 1, a Toronto bylaw came into force that requires city businesses to begin charging 5¢ for single-use plastic bags. While technically not a tax, as the revenues from the bag fee can be kept by the retailer, the imposition of even a small fee has already begun changing consumer behaviour --and not just in Toronto.
Montreal-based grocery giant Metro announced that the distribution of single-use grocery bags decreased by 70% at Metro grocery stores across Quebec and Ontario only four weeks after implementing a 5¢ plastic bag charge, while demand for reusable bags has increased by 500%.
The move was lauded by the Fondation quebecoise en environnement. "We have been promoting this ecofriendly measure for two years now and encourage consumers to choose reusable bags. We are certain that many other companies will follow Metro's example," said Claude Hill, the Fondation's vice-president of Finance.
For worse Tax policy, however, can also have a very different effect, as some experts are saying that a U. S. tax shelter may have partially contributed to last month's horrific Washington subway accident.
The tax shelter may have discouraged Washington's Metro from upgrading their subway cars.
The National Transportation Safety Board repeatedly urged Metro to replace or retrofit the older cars, but it refused, stating it was "constrained by tax advantage leases, which require that [it] keep the ... cars in service at least until the end of 2014."
In a typical tax-advantaged lease, equipment is purchased by a nonprofit entity and then sold to a taxable third-party and leased back. The third-party gets to claim tax depreciation on the cost of the equipment which it can use to reduce its taxable income. The non-profit entity, which is tax-exempt, receives cash in return.
According to Sarah Lawsky, a law professor at George Washington University, these "sale-leasebacks, which are purely tax-motivated transactions, may have locked Metro into using outdated and unsafe equipment."
The U. S. Congress shut down these "Sale-In-Lease-Outs" in 2004, but the legislation didn't cover existing leases.
In late June, Republican senator Chuck Grassley wrote to House Majority Leader Steny Hoyer requesting that language in any proposal to give the Washington Metro more funds would ensure that the money is used for upgrade of subway equipment and not to pay off the transit agencies' obligations to corporations, who use the agreements as tax shelters.