A tool is an insult for a person who is a jerk with a high opinion of themselves. Appending bag to tool is an enhancer to the original insult, like douche vs douchebag.

You also get things like jerkbag or dirtbag or dickbag. I think I've seen people write "so and so is a bag," so the exact nature of the insult is evolving.

Bag is evocative of scrotum, but I don't think it originally evolved that way. Although scrotebag is a pretty good insult