Dollar Coins: Or, In Other Words, a New Tax

This post is by staff writer Sarah Gilbert.

“You need 75 more cents!” the woman at our favorite burger joint, Little Big Burger, said brightly after I sent my 9-year-old to order another serving of truffle oil fries with all the change I could find in my bag. Thankfully, I knew I'd sent enough money: I'd stashed a dollar coin in my bag, saving the Abraham Lincoln because, well, Lincoln. These fries were just good enough to let Lincoln go.

Dollar coins are not that popular I'm used to this. I love the dollar coins and always have; they're so close in size and, if you leave them in your bag long enough, color to the quarters, all but the most discerning cashier will count them as 25 cents' worth. And you rarely see them, as the dollar coins have not exactly flown out of bank coffers. They're just not that popular.

Over the past few years, there has been something of a kerfuffle (in the small world of economics and coin geeks) over the politics of the dollar coin. A well-meaning bill passed by Congress several years ago has meant the U.S. Mint has been legally forced to make dollar coins by the hundreds of millions - more than a billion in coins is stuck in a vault somewhere in Baltimore. They've been piling up and, though the Treasury Department made steps to reduce production considerably after the news broke, there's still the problem of the coins just… sitting there. Gathering dust and no interest and lots of expense to guard them.

Dollar coins are sturdy: We'll give them that The background is that dollar coins last a lot longer than bills, for obvious reasons: a coin can stay in circulation for 30 years or more (remember my story about coins older than me?), whereas a dollar bill lasts only a few years.

U.S. bills are sturdy too, with their high-tech design and exclusive cotton-linen blend paper. U.S. one-dollar bills last 22 months, a little longer than five-dollar and 10-dollar bills (16 and 18 months, respectively) and far longer than Euros or other note currencies. Douglas Crane of Crane & Co., the company responsible for making the paper that backs greenbacks, told NPR, “U.S. currency: It's some of the most durable banknotes on the planet.” Other currencies, like the Canadian dollar when it was replaced in 1987, will fall apart or need to be taken out of circulation in as little as three months.

Supporters of coins (and promoters of copper mines) say it's about tax dollars, and saving them It's totally a coincidence, right? That the promoters of the bill to replace dollar bills with the coins - Tom Harkin, a Democrat from Iowa, and John McCain, a Republican from Arizona - also happen to be from states where coins are big business? Arizona is lush with copper mines, and Iowa is home to a producer of the metal plates the U.S. Mint uses to make coins.

OK, obviously: these politicians are quite probably interested in the issue because it's good for their big business constituents. But at first look the deal seems like a good one. It's a small amount of difference, but it's a difference indeed: the variable cost of dollar bills is 2.7 cents and the variable cost of coins is 15 cents. When you amortize the cost of bills vs. coins over the General Accounting Office's assumed lifespan (40 months vs. 34 years), coins come out cheaper. Simple, right?

And then there's the seigniorage! If it wasn't awesome enough saving all those tax dollars, then there's the seigniorage. That's the interest the government makes on bonds that it sells in exchange for new currency. You see, when you replace bills with coins, people do this: take them home and set them on the dresser. Fish them out of their pockets and put them in a jar. Toss them in a receptacle in the car. Fail to carry them around. Don't spend them.

ERRRRTTTT. (That's the sound of something screeching to a halt.) What looks like a mild amount of savings to the people like me who are always rooting around in the bottom of a bag or back of a drawer for a few quarters for truffle oil fries or a thermos of coffee looks like an extra tax to other people. That's right: you're paying the government for the privilege of issuing you super durable coins that you don't really want to begin with.

The GAO decided that it would be better to switch to coins, but not because of production costs - for the seigniorage benefits alone. And an update to the report in February 2012 pointed out that, thanks to the long-lasting U.S. dollar (which just keeps on aging better as new technology and better paper is developed), and because so many assumptions were made, it's altogether possible that the result could be quite different.

It's not so good for you and me The net result might be good for the government. (Or it might not. There is definitely much disagreement here - there's a whole keep-the-bill movement that is supported by, among others, most vending machine companies, bars, taxi companies, Crane & Co., and coin-operated laundries, all of which would theoretically have expenses associated with the switch. And then there is the tip situation - presumably, when we tossed our coins out of our pocket we'd only be left with fivers, which we'd be too stingy to use as tips.) But everyone can agree that it's not good for us.

Switching to dollar coins effectively taxes us. And it taxes us because of our stubborn, trenchant, unavoidable dislike for the jingling.

Planet Money's in-depth report on the subject - which inspired me to think more deeply about this - came to the conclusion that bills are better. “It's effectively a tax on people who hold coins in jars at home,” said David Kestenbaum. The professor they consulted, Robert Whaples of Wake Forest University, said skeptically, “the government can make profits in all sorts of bad ways. People are going to be putting them on top of their bureaus instead of spending them for transactions and that seems like a big waste of resources to me. This does not seem like a good way to raise money.”

Got coins? At least be thoughtful about it. Maybe you're weird like me and you just think the dollar coins rock. (I think it's the Portland-native in me: hell-bent on being different, setting a trend even if no one will ever follow.) Maybe you're the sort who runs out of money from time to time, like me, and you like that bottom-of-the-bag cushion. And maybe you're not going to get to choose: McCain and Harkin and their metallurgical constituents might win out in Congress and the dollar coin will become the law of the land.

When it comes, though, think about it: don't let them pile up. Use them. Put them back in the bank to earn interest. Don't let the government get its taxes in these silly, quite literally nickle-ing and dime-ing ways. Or look at them in a jar on your dresser and, at the very least, recognize them for what they are: a little, tiny, tax.

How about you? Do you like or avoid the dollar coins? What do you think the government should do?

Note: I edited the post to reflect that Canadian currency was not replaced “recently.” - Sarah

The original article can be found at Coins: Or, In Other Words, a New Tax