THE FEASIBILITY AND DESIRABILITY OF
ALTERNATIVE TAX SYSTEMS FOR SUPERFUND
CERCLA SECTION 301(aXD(G) STUDY
Final Report
Office of Solid Waste and Emergency Response
U.S. Environmental Protection Agency
December 1984
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Substantial portions of this report were prepared by ICF Incorporated for
the U.S. Environmental Protection Agency under Contract Number 68-01-6872.
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY ES-1
1. INTRODUCTION 1-1
1.1 Organization of this Report 1-3
1.2'Major Issues and Limitations to the Analysis 1-3
1.2.1 Differing Goals 1-3
1.2.2 Limitations of the Analysis 1-4
2. ALTERNATIVE TAX SYSTEMS 2-1
2.1 Major Considerations in Designing Tax Systems 2-1
2.2 Alternative Tax Systems 2-3
2.2.1 Feedstock Taxes 2-3
2.2.2 Waste-End Taxes 2-6
2.2.3 Combination Taxes 2-8
2.2.4 Other Options 2-9
3. CRITERIA FOR EVALUATING ALTERNATIVE TAX OPTIONS 3-1
3.1 Economic Impacts 3-1
3.1.1 Microeconomic Impacts 3-1
3.1.2 Macroeconomic Impacts 3-1
3.2 Equity 3-2
3.2.1 Generic Issues 3-2
3.2.2 Types of Problems Addressed by CERCLA 3-5
3.2.3 Parties Responsible for CERCLA Spending 3-6
3.2.4 Substances Responsible for CERCLA Spending 3-8
3.2.5 Criteria for Evaluation 3-8
3.3 Economic Incentives 3-11
3.3.1 Incentives for Environmental Protection 3-11
3.3.2 Incentives for Undesirable Behavior 3-12
3.4 Revenue Generation 3-12
3.4.1 Ability to Generate Revenue 3-13
3.4.2 Predictability of Revenue-Generating Capability .... 3-13
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TABLE OF CONTENTS
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3.5 Administrative Feasibility 3-13
3.5.1 Generic Issues 3-13
3.5.2 Ability to Identify Taxable Parties 3-14
3.5.3 Ability to Identify Taxable Substances and Activities 3-14
3.5.4 Reporting and Recordkeeping Burden 3-15
3.5.5 Ability to Monitor and Enforce 3-15
3.6 Programmatic Effects 3-16
3.7 Summary 3-16
4. DESIGN OF ALTERNATIVE TAX OPTIONS 4-1
4.1 Feedstock Tax I: Modified Rates 4-1
4.2 Feedstock Tax II: Modified Rates and Substances 4-6
4.3 Waste-End Tax: Non-Incentive 4-11
4.4 Combination Tax I: Feedstock Tax and Non-Incentive
Waste-End Tax 4-19
4.5 Combination Tax II: Feedstock Tax and Incentive
Waste-End Tax 4-21
5. EVALUATION OF ALTERNATIVE TAX OPTIONS 5-1
5.1 Feedstock Tax I: Modified Rates 5-1
5.1.1 Economic Impacts 5-1
5.1.2 Equity 5-4
5.1.3 Incentives 5-6
5.1.4 Revenue Generation 5-6
5.1.5 Administrative Feasibility 5-7
5.1.6 Programmatic Effects 5-15
5.2 Feedstock Tax II: Modified Rates and Substances 5-16
5.2.1 Economic Impacts 5-16
5.2.2 Equity 5-18
5.2.3 Incentives 5-19
5.2.4 Revenue Generation 5-20
5.2.5 Administrative Feasibility 5-21
5.2.6 Programmatic Effects 5-21
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TABLE OF CONTENTS
(Continued)
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5.3 Waste-End Tax: Non-Incentive 5-21
5.3.1 Economic Impacts 5-21
5.3.2 Equity 5-22
5.3.3 Incentives 5-25
5.3.4 Revenue Generation 5-28
5.3.5 Administrative Feasibility 5-28
5.3.6 Programmatic Effects 5-32
5.4 Combination Tax I: Feedstock Tax and Non-Incentive
Waste-End Tax 5-33
5.4.1 Economic Impacts 5-33
5.4.2 Equity 5-34
5.4.3 Incentives 5-36
5.4.4 Revenue Generation 5-37
5.4.5 Administrative Feasibility 5-37
5.4.6 Programmatic Effects 5-38
5.5 Combination Tax II: Feedstock Tax and Incentive
Waste-End Tax 5-38
5.5.1 Economic Impacts 5-38
5.5.2 Equity 5-46
5.5.3 Incentives 5-49
5.5.4 Revenue Generation 5-57
5.5.5 Administrative Feasibility 5-69
APPENDIX A: "TRACEBACK" OF FEEDSTOCKS
APPENDIX B: RCRA REPORTING AND RECORDKEEPING REQUIREMENTS
AS SOURCES FOR ADMINISTRATION OF COMBINATION
TAX II, PHASES I AND II
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EXECUTIVE SUMMARY
Section 301(a)(1)(G) of CERCLA calls for a study of alternative tax
options that could be used to finance the Superfund response program. The
study examines the desirability and feasibility of five alternative tax
options with regard to six evaluative criteria. The tax options are all
designed to raise $1 billion annually. This revenue target was choosen for
illustrative purposes only and is used to ensure comparability among options.
Of note is that the choice of a revenue target, and specific tax rates,
taxable substances and tax exemptions was necessary to conduct the analysis
presented in the study and in no way constitutes an EPA recommendation about
an appropriate CERCLA tax. The five tax options considered are:
• Feedstock Tax I (Modified Rates) is a feedstock tax
that increases the existing CERCLA tax rates on the 43
substances identified in section 221 of CERCLA, The
existing tax rates were multiplied by 3.43 to raise
the level of revenue over a five year period from $1.6
to $5 billion. This feedstock tax, like the current
CERCLA tax, is imposed at the beginning of the
chemical production process and is levied on the raw
materials and primary petrochemicals believed to be
associated with the production of hazardous
substances. The tax is collected from a relatively
small number of taxpayers.
• Feedstock Tax II (Modified Rates and Substances) is a
feedstock tax that is levied on a somewhat different
set of substances than are taxed under the current
CERCLA tax. Taxable substances were selected by
examining EPA data to determine which substances have
been found at sites likely to evoke Fund spending. A
list of 48 substances were identified for taxation.
The tax rates for these substances were calculated to
reflect the frequency with which each substance was
found at sites. Tax rates were set to reach a revenue
target of $5 billion over five years.
• Waste-End Tax (Non-Incentive) is a tax on the
generation of all hazardous wastes regulated under the
Resource Conservation and Recovery Act (RCRA). Set at
a flat rate of $4.73 per ton, this tax is not designed
to create strong incentives to reduce waste generation
or to alter waste management practices. While the act
of waste generation creates a tax liability, the tax
would not be collected until the point where the waste
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is treated, stored, or disposed in order to minimize the
number of taxpayers.
• Combination Tax I (Feedstock Tax and Non-Incentive
Waste-End Tax) combines elements of both a feedstock
tax and a waste-end tax. The feedstock tax component,
designed to raise $500 million per year, is identical to
the second modified feedstock tax described above except
that the rates have been reduced by one-half. The
waste-end tax component, also intended to produce $500
million annually, is based on the waste-end tax
described above but has a tax rate of $2.37 per ton.
The rationale for combining two taxes is the ability of
the resulting tax system to simultaneously obtain the
strengths and benefits of each individual component.
There may, however, be synergistic effects which are not
experienced when using either tax by itself.
• Combination Tax II (Feedstock Tax and Incentive
Waste-End Tax) is similar to the tax described above
but raises $800 million per year from the feedstock tax
component and $200 million per year from the waste-end
tax component. There are also significant differences
in the structure of the waste-end tax component. The
waste-end tax component is to be implemented in two
phases. The first phase taxes RCRA-designated .hazardous
wastes that are land disposed or stored in surface
impoundments or waste piles for a long period of time.
The second phase, intended to create strong incentives
for reduced environmental risk, uses a complex set of
tax rates that depend on a number of environmental
factors and which rise over time.
Each tax option is analyzed in terms of:
• Economic Impacts. These impacts include price and
quantity changes for the taxed substances as well as
macroeconomic effects.
• Equity Implications. Equity is considered in terms
of both retrospective and prospective equity. The
former measures the degree to which a CERCLA tax is
levied on those industries and substances responsible
for existing Superfund sites while the latter implies
that the tax burden faced by a particular firm ought to
reflect the likelihood that its activities will provoke
Fund spending.
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• Economic Incentives. The types of incentives analyzed
include incentives created by a CERCLA tax to reduce
generated quantities of hazardous wastes, to produce a
less hazardous mix of wastes, to modify waste
management practices, or to engage in environmentally
unsound practices such as tax evasion and illicit
disposal.
• Revenue Generating Capacity. For each tax, revenue
generation is assessed in terms of the ability of the
tax to generate the requisite funds and the
predictability of the revenues generated.
• Administrative Feasibility. The administrative burden
of each tax is measured in terms of the difficulty
associated with the identification of taxable parties,
substances, and activities; the overall reporting and
recordkeeping burden imposed by the tax; and the
ability of government agencies to monitor and enforce
compliance with the tax.
• Programmatic Effects. Alternative tax options may
affect both federal and state regulatory programs for
the management of hazardous wastes. A CERCLA tax may
eniiance, hinder or be neutral with respect to such
programs. Similarly, a CERCLA tax may have
implications for state tax revenues and authority.
Each of these criteria is used to evaluate the five tax options included
in the study. To reiterate, the study does not recommend a particular tax
option; doing so would require a decision about the relative importance of
each criterion. Further, there are key issues which were outside the scope of
the 301(a)(1)(G) study that clearly will prove critical in the reauthorization
of CERCLA. A good example is the balance of trade effect of alternative
CERCLA taxes. As the 301(a)(1)(F) study notes, the U.S. trade balance in
chemicals has worsened in recent years. Thus, any CERCLA tax (either
feedstock or waste-end) that creates a situation where taxed U.S. chemicals
compete in world markets with untaxed foreign chemicals potentially
exacerbates the erosion of the U.S. trade balance in chemicals. In the
context of reauthorizing CERCLA, international trade effects would be an
important consideration in the design of alternate CERCLA tax options.
Despite these limitations, however, the study contains many key findings.
• Virtually any CERCLA tax designed to raise $1 billion
per year has the potential to induce changes in the
prices and quantities of the taxed substances. For
feedstock taxes, such changes are likely to occur in
the markets for primary petrochemicals and inorganic
raw materials. For a waste-end tax, these changes may
include a reduction in the quantity of wastes disposed
or generated, higher costs for on-site waste
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management and higher prices for off-site waste
management. Careful tax design can ensure that the
adverse consequences of these economic effects are
minimized and that the changes that do occur will be
consistent with overall policy goals.
The effect of the various taxes on macroeconomic
indicators such as employment and interest rates is
expected to be negligible because the $1 billion
annual tax is only a small fraction of the nation's
gross national product (0.028 percent in 1984).
The equity consequences of a particular CERCLA tax
depend in large measure on its basic design:
— A feedstock tax, because it is imposed early in
the production process, is paid at some point in
the manufacture or generation of virtually all
hazardous substances.
— A waste-end tax may not have been collected in
several situations where Superfund spending is
involved. The inadvertant spill of a non-waste
product or the illegal disposal of a hazardous
waste are two cases where the tax would not be
paid despite a Fund response.
— A firm's tax burden under a feedstock tax does not
necessarily reflect the environmental risk
associated with its waste management activities.
The tax also does not distinguish among the uses
to which a taxed substance is put, despite varying
degrees of hazard. A waste-end tax that reflects
environmental risk may provide a closer connection
between a firm's tax burden and the likelihood of
provoking fund spending.
Any CERCLA tax system may create economic incentives
for changing the behavior of firms by modifying the
relative costs of inputs to the production process
and/or the costs of hazardous waste disposal.
Feedstock taxes are generally not capable of creating
incentives for significant changes in waste management
practices. A waste-end tax, depending on its design,
may create some incentive for desirable behavior such
as reducing the volume of waste generated or
encouraging environmentally preferred waste management
methods. The tax may also induce undesirable behavior
such as failure to report waste activities and illegal
disposal of wastes. The significance of such
incentives has not been precisely estimated.
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All of the tax systems analyzed in the study appear
capable of generating $1 billion per year in
revenues. Careful design and implementation of the
tax, however, are necessary to ensure full collection
of the tax. The current CCRCLA tax demonstrates the
revenue raising potential of a feedstock tax, although
its rates are roughly one-third those necessary for a
$1 billion tax. The experience of several states
indicates that, in spite of some initial difficulty in
estimating revenues, the waste-end tax is also capable
of generating significant amounts of revenue. It is
unclear how relevant this experience would be to a $1
billion federal waste-end tax.
The current feedstock tax seems to impose only a small
administrative burden on both the taxpayer and the
IRS. Depending on the set of substances included in
the tax base, an expanded version of the current
feedstock tax is not likely to require major changes
in the existing tax collection mechanism. A waste-end
tax, particularly if it is complex, may impose an
added administrative burden both for taxpayers and for
the IRS.
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1. INTRODUCTION
Section 221 of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA or Superfund) establishes the Hazardous
Substances Response Trust Fund (Fund) that finances response actions to abate
or minimize the threat of hazardous substance releases into the
environment.- Approximately 87 percent of the revenues for the Fund have
been derived from taxes on chemical raw materials commonly referred to as
feedstocks. Section 211 of CERCLA establishes the tax rates and the tax base
that comprise the existing CERCLA feedstock tax system.
Congress adopted the feedstock tax approach to finance the Superfund
program for a variety of reasons. Generally, the feedstock tax system
appeared to be administratively feasible, reasonably equitable, and certain to
raise the level of funds needed to finance the response and enforcement
actions authorized by CERCLA. Congress did, however, recognize that an
alternative tax system may be appropriate for financing a future Superfund
program. Consequently, Congress mandated, under Section 301(a)(1)(G) of
CERCLA, that alternative tax systems be thoroughly examined near the end of
CERCLA's initial five-year authorization period.
Specifically, section 301(a)(1)(G) of CERCLA requires that the President
submit a report to Congress that assesses the feasibility and desirability of
a schedule of taxes which takes into account one or more of the following:
• the likelihood of a release of a hazardous substance;
• the degree of hazard and risk of harm to public
health, welfare, and the environment resulting from
any such release;
• incentives to proper handling, recycling,
incineration, and neutralization of hazardous wastes,
and disincentives to improper or illegal handling or
disposal of hazardous materials;
• administrative and reporting burdens on government and
industry; and
• the extent to which the tax burden falls on the
substances and parties that create the problems
addressed by the Act.
\J Response authority under CERCLA extends to releases of hazardous
substances. Hazardous substances are defined in section 101(14) of CERCLA.
These substances may be wastes (in the sense that they are by-products of the
production process with little economic value), raw materials, petrochemical
feedstocks, or final products.
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This report has been designed to fulfill the mandate under Section
301(a)(1)(G) of CERCLA. The general goal of this study is to provide Congress
with an evaluation of alternative Superfund tax systems to assist lawmakers in
reauthorizing that program. Specifically, this study evaluates the
feasibility and desirability of three alternative tax systems discussed below.
These tax systems are a modified feedstock tax, a waste-end tax, and a
combination feedstock/waste-end tax. A feedstock tax is imposed on raw
materials used to make the chemical products associated with hazardous
substance generation. A waste-end tax is imposed on the generation,
transportation, treatment, or disposal of hazardous wastes, and collected from
either generators or managers of hazardous wastes. A combination tax is
imposed on both chemical raw materials and hazardous wastes. There are many
variations or options that can be developed under each tax system. This
report evaluates the following tax options:
• Modified Feedstock Tax Options:
— Feedstock Tax I: A feedstock tax system that
adjusts existing CERCLA tax rates.
-- Feedstock Tax II: A feedstock tax system that
adjusts existing CERCLA tax rates and taxable
substances.
Waste-End Tax Option:
— Waste-End Tax: A non-incentive waste-end tax on
the disposal of hazardous substances and wastes.
• Combination Tax Options:
— Combination Tax I: A feedstock tax and non-
incentive waste-end tax on specific substances and
activities with the general goal of generating
revenue.
-- Combination Tax II: A feedstock tax and incentive
waste-end tax on specific substances and
activities with the general goals of generating
revenue and providing incentives to improve waste
management practices. Phase I is designed to
provide revenues and limited incentives; Phase II
is designed to provide revenues and strong
incentives.
Several criteria are used to evaluate these alternative tax systems. They
include: economic impacts, equity, economic incentives, revenue generation
capability, administrative feasibility, and programmatic effects. When
possible, quantitative analyses are conducted on the effects of specific tax
options. Also included is a discussion of the experiences of the States and
the Federal Government in imposing and administering similar tax systems.
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The above tax systems are not an exhaustive list of available options for
funding the Superfund program. This report does briefly discuss other
alternatives. These five options have, however, been given extensive
evaluation in this report because they have been considered to be the most
feasible alternatives or have been most frequently cited as potential sources
of revenue for this program. Please note that this report does not recommend
a specific tax option for financing a future Superfund program. Rather, it
simply provides an objective evaluation of alternative tax options to aid
Congress in reauthorizing the Superfund program.
1.1 ORGANIZATION OF THIS REPORT
The remainder of Chapter 1 describes how this report is organized and
provides a brief discussion of the major issues of, and the general
limitations to, this analysis. Chapters 2 and 3 establish the framework for
the analysis of the major CERCLA tax-related issues that are presented in
subsequent chapters. Specifically, Chapter 2 provides a general description
of the feedstock, waste-end, and combination tax systems. It also briefly
discusses other possible tax systems and explains why they are not considered
further. Chapter 3 describes the evaluative criteria that the report applies
to the alternative CERCLA tax systems. These criteria include those taken
directly from the statutory language of section 301(a)(1)(G) and others that
are also highly relevant to the evaluation of a tax system to fund CERCLA. As
indicated above, six criteria are examined: economic impacts, equity,
economic incentives, revenue generation capability, administrative
feasibility, and programmatic effects. Chapter 4 describes each of the five
tax options identified above. Chapter 5 evaluates each tax option using the
criteria developed in Chapter 3.
1.2 MAJOR ISSUES AND LIMITATIONS TO THE ANALYSIS
This section presents two issues that are important to consider when using
the information contained in this report to compare the different tax systems
for funding the Superfund program. They are the differing goals of the
various criteria used for this analysis and the limitations of the data and
analytical tools available to support the analysis.
1.2.1 Differing Goals
As discussed in Chapter 3, none of the three tax systems evaluated in this
report can fully meet all the criteria, or goals, suggested by Congress in
section 301(a)(1)(G). For example, one tax system may provide incentives for
firms to use better waste management practices, while another tax system may
provide a more reliable source of revenues for the Superfund program.
Attempting to achieve several goals with one tax system may, in fact, cause
negative results. For instance, a tax collected from only a few firms to
achieve administrative simplicity may be relatively inequitable because all
those who contribute to the hazardous substance release problems addressed by
CERCLA would not be taxed. A tax on disposed wastes that is designed to
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provide an incentive for firms to reduce the amount of waste produced may
result in less revenue because, if the incentive goals are met, less waste
will be disposed. The tradeoff between increasing revenue generating capacity
and the creation of incentives that will reduce the tax base must be taken
into account when designing a tax system that seeks to maximize the
realization of both goals.
Thus, all the criteria listed in Section 301(a)(1)(G) may be very
difficult to achieve with only one tax and may require the addition of other
types of taxes or regulations to ensure that all goals are met to the greatest
degree possible. Before deciding which tax should fund the Superfund program,
Congress must decide the relative importance of the criteria. .This report
only discusses each tax system's ability to achieve the criteria; it does not
recommend which tax system should be used to fund the Superfund program.
1.2.2 Limitations of the Analysis
The 301(a)(1)(G) Study does not discuss international trade issues that
are associated with a CERCLA tax. The balance-of-trade effects of the current
feedstock tax are, however, the subject of the 301(a)(1)(F) report. In the
context of reauthorizing CERCLA, international trade effects would be an
important consideration in the design of alternate CERCLA tax options.
As reported in the 301(a)(1)(F) report, four factors dominate the current
erosion of the U.S. trade balance in chemicals: (1) decontrol of crude oil in
the United States in the late 1970s, (2) the emergence of new petrochemical
capacity in energy-rich countries such as Canada and Saudi Arabia, (3) the
relative strength of the dollar, and (4) the global recession of the early
1980s. However, any CERCLA tax (either feedstock or waste-end) that creates a
situation where taxed U.S. chemicals compete in world markets with untaxed
foreign chemicals potentially exacerbates the erosion of the U.S. trade
balance in chemicals.
Thus, foreign trade issues ultimately need to be considered very carefully
in designing alternate CERCLA tax options. However, because the vast majority
of domestic chemical production is consumed domestically, it is perhaps most
logical to proceed in a fashion that first evaluates tax options according to
the criteria established in Section 301(a}(1')(G) and in this report, and then
consider international trade issues with respect to a narrower set of tax
options. This is the case because economic analysis of all of the world
markets potentially affected by feedstock and/or waste-end taxes is a
resource- intensive exercise requiring analysis of export trends, import
trends, estimates of comparative advantage, and world supply and demand
trends. Such analyses are somewhat distant from the issues raised in Section
301(a)(1)(G) and thus are better addressed elsewhere. Suffice it to say that
ultimately both feedstock taxes and waste-end taxes need to be analyzed from
an international trade perspective because both potentially burden domestic
industry relative to its foreign competition; the analysis in the Section
301(a)(1)(F) study provides the point of departure for performing such
analyses.
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Some of the analysis in this report is of a preliminary nature. Federal
and State hazardous waste tax systems have only been in place for a few years
and the information needed to evaluate them is only now becoming available in
sufficient scope to support meaningful analysis. Furthermore, the
quantitative tools necessary to predict accurately the effects of the various
tax systems and different tax revenue targets are mostly in the developmental
stage. Indeed, even in areas where sophisticated modeling tools are available
(e.g., domestic chemical production) there are often subtle or complex factors
which, by design, are not included. For example, a sophisticated simulation
of the increasing internationalization of the world chemical trade would
require both a significant data collection effort and the development of an
analytic framework.
Because the necessary data and analytic techniques are not consistently
available for each of the tax systems discussed here, it is difficult to
provide parallel analyses of the systems. For these reasons, this report
includes a comparative analysis that is somewhat uneven and incomplete. Until
further research enhances our understanding of the complex behavioral changes
that may result from the imposition of environmental taxes, precise
conclusions cannot be drawn about the ability of each tax system to meet the
criteria and the tradeoffs among the criteria. The report will present the
information and insights that are available for the tax systems considered and
point out the types of data and analytic tools that are needed to advance our
understanding of the various systems.
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2. ALTERNATIVE TAX SYSTEMS
The purpose of this chapter is to describe, in general terms, the tax
systems that will be evaluated in detail in the remaining chapters of this
report. A variety of tax systems have been considered to finance the
Hazardous Substances Response Trust Fund. Section 2.1 discusses the major
considerations in designing tax systems. Sections 2.2.1, 2.2.2, and 2.2.3,
respectively, discuss the three tax systems most frequently considered:
feedstock taxes, waste-end taxes, and combination taxes. Section 2.2.4
reviews other alternatives: transfer taxes, sales taxes, value-added taxes,
and surcharges on insurance premiums. These latter alternatives are evaluated
briefly but are not addressed in subsequent chapters.
2.1 MAJOR CONSIDERATIONS IN DESIGNING TAX SYSTEMS
The construction of a tax system requires policy decisions on:
• The type of tax — where the tax is levied in the
production process;
• A revenue target — the amount of funds to be
collected annually;
• The tax base — the substances, activities, or parties
that are taxed;
• The tax bill ~ the annual revenues collected from
each substance, activity, or party; and
• The tax rate -- the per unit charge levied upon the
substance, activity, or party in the tax base.
A fundamental decision that must be made early in the design of a tax is
whether to levy the tax at the beginning or end of the production process.
The rationale for levying the tax early in this process is two-fold. First,
this approach reduces the number of taxpayers, thereby limiting the
administrative burden of tax payment and collection. Second, it theoretically
allows the tax burden to be passed through in varying degrees, via the sales
price, to a broad base of consumers who may, in turn, generate the hazardous
substances through subsequent processing.
The rationale for levying the tax late in the production process is also
two-fold. First, because the tax is levied directly upon the substances that
create a large part of the problem addressed by CERCLA, this type of levy
links the problem to its most proximate cause. That is, it places the costs
of cleanup on industries that produce and manage hazardous substances- and
\J Section 101(14) of CERCLA delineates those hazardous substances to be
cleaned up by the Fund. A significant portion of these are RCRA designated
hazardous wastes. Thus, those substances taxed are the substances most likely
to be found at cleanup sites.
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relates the quantity of hazardous substances produced or disposed to the
amount of revenue generated for cleanup. Second, it may create incentives to
reduce the volume of substances generated or to induce more desirable
management practices.
The selection of a revenue target depends upon such considerations as:
• the size of the problem to be addressed, and
• the speed with which the problem is to be addressed.
A discussion of various aspects of the size of the problem are the subject of
other CERCLA Section 301 studies.£' Below, for the purposes of
illustration, a $1 billion annual Fund size is assumed.
Determining the tax base involves deciding:
• what substances to tax,
what activities to tax, and
• which parties to tax.
The first decision in setting up a tax is to decide what substances to
tax. Substances are, in principle, selected for taxation on environmental
grounds (i.e., because they contribute to the problems CERCLA was designed to
address). In practice, there may be ambiguities and uncertainties about
whether a substance should be included, or it may be administratively
difficult to tax a particular substance.
The second decision in delineating the taxable base is to determine which
activities to tax. The specification of an activity as taxable does not mean
the activity itself is necessarily undesirable; rather, the activity is the
point at which tax liability is imposed on a taxable substance. Three issues
that may be considered in delineating taxable activities are (a) the extent to
which the specified activities capture all or most quantities of a taxable
substance; (b) the administrative ease for the taxpayer and tax collector of
assessing or collecting a tax on the activities; and (c) the activities'
contribution to the problem addressed by CERCLA.
The third decision in choosing a tax base is to determine which parties to
tax. Three criteria may be considered here. They are (a) administrative
ease; (b) the degree to which the products manufactured by these parties are
used in the production of hazardous substances by their own and other
industries; and (c) the parties' contribution to the problem addressed by
CERCLA.
2/ These studies are authorized under CERCLA sections 301(a)(1)(A) and
(C). The "A" Study examines the overall effectiveness of the Superfund
program. The "C" Study examines the magnitude of the hazardous substance
release problem.
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Determining tax bills and tax rates are interdependent decisions. That
is, by selecting a tax rate, its corresponding bill may be found by
multiplying the rate by the expected quantity of production. Alternatively,
by specifying a tax bill, a rate may be determined by simple division.
Tax bills can be an effective tool to achieve equity among taxpaying
parties in a tax base. To achieve this equity, substances that are considered
to be particularly difficult to clean up could carry a relatively high bill,
while substances that are less costly to clean up could have relatively low
bills. Rates consistent with these bills could then be found. In some cases,
tax rate caps may be used. For example, a tax rate cap expressed as a
percentage of a taxed substance's price may serve to limit the adverse
economic consequences of the tax. If a rate cap is used, however, it is
unlikely that, for particular substance, a tax set at the maximum level will
generate revenue sufficient to meet the substance's tax bill.
Tax rates, on the other hand, can be an effective tool to generate
incentives to change future use and handling of hazardous materials. Rates
may be set, for example, to discourage the use of landfills. Bills consistent
with these rates could then be calculated. Unfortunately, there is not
necessarily a connection between rates that reflect a firm's likely
responsibility for causing fund expenditures and rates that send effective
signals to change behavior.
2.2 ALTERNATIVE TAX SYSTEMS
2.2.1 Feedstock Taxes
A feedstock tax is imposed at the beginning of the production process on
the raw materials that are the basic building blocks of chemical products.
The hazardous substances and wastes involved in the problem addressed by
CERCLA are frequently byproducts of the production processes that use these
raw materials. The present CERCLA tax is a feedstock tax. Modifications to
the CERCLA tax could add or delete substances, change the definition of
taxable activities, and as a result, change the number of taxable parties,
adjust tax rates, and create or remove exemptions.
Taxable Substances. The present CERCLA tax is a feedstock tax levied on
11 primary petrochemicals, 31 inorganic raw materials, imported petroleum
products, and crude oil produced domestically or imported. In 1980, these
petrochemicals and inorganic raw materials were chosen because they met two or
more of the following criteria: (a) the substance is hazardous in a number of
forms (i.e., as raw materials, intermediates, or final products); (b) the
substance is hazardous when released; (c) hazardous substances are generated
in the production of any form of the substance; (d) the substance is capable
of increasing the hazard potential of other materials; and (e) the substance
is produced nationally in significant amounts. Crude oil was taxed because of
the high incidence of waste oils and petroleum refining wastes found in
releases covered by CERCLA.±!
3/ Senate Comm. on Environment and Public Works, "Report to Accompany
S.1480, Environmental Emergency Response Act, S.REP.NO. 96-848," 96th Cong.,
2d Sess. p. 20 (1980).
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Any new variation of a feedstock tax could add or delete substances.
These additions or deletions could be the result of applying the above
criteria to a new data base or the development of new criteria. For example,
the Hazard Ranking System (HRS) data base, which did not exist when CERCLA was
enacted, is now available.- This data base and other knowledge and
experience gained since CERCLA was enacted in 1980 can provide useful
information and insights for adjusting the tax base.
Taxable Activities. The current CERCLA tax is levied on chemicals when
they are sold, used, or imported; on crude oil whepit is received at the
refinery; and on petroleum products when imported.2' The CERCLA tax is
filed and paid using IRS Form 6627 in conjunction with the standard Quarterly
Federal Excise tax return IRS Form 720. The records maintained by taxpayers
are the standard receipts, invoices, etc. that accompany these business
transactions. With respect to opportunities for tax avoidance, the CERCLA tax
system eliminates any advantages that might otherwise have been realized by
vertically integrated companies by taxing the use as well as the sale of
taxable substances. CERCLA section 211 states "if any person manufactures,
produces, or imports a taxable chemical and uses such chemicals, then such
person shall be liable for tax under section 211 in the same manner as if such
chemical were sold by such person."
Modifications to the current CERCLA tax could change or clarify the
definition of taxable activities. The Internal Revenue Service, for example,
initially found provisions of the existing law difficult to interpret. This
was especially the case for substances that are added to gasoline (e.g.,
benzene, toluene, and xylene). This difficulty in interpretation resulted in
a legislative change, the Tax Reform Act of 1984, that removed the ambiguities
that existed over whether adding substances to gasoline is a taxable act.
Taxable Parties. The current CERCLA feedstock tax is paid by
approximately 496 major producers, importers, and exporters of taxable
substances.- The tax is paid by companies involved primarily in the
organic and inorganic chemicals, petroleum refining, and heavy metals
industries. Almost all hazardous substances are either products of these
industries or are generated by using their products. These industries
4/ The HRS was formulated in response to CERCLA section 105(8), which
requires the development of a system to set priorities among sites requiring
cleanup. State and regional personnel have evaluated about 1,732 sites using
the HRS and information about these sites is contained in the HRS data base.
5/ CERCLA, section 211.
6/ U.S. Congress, Joint Committee on Taxation, "Background and Issues
Relating to H.R. 5640, the Superfund Expansion and Protection Act of 1984,"
JCS-27-84, July 23, 1984.
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produced approximately 93 percent of all the hazardous wastes generated in
1981. The chemical and petroleum industries produced 71 percent of the
hazardous wastes generated in 1981.!•'
Modifications to the current CERCLA tax that change the number of
substances taxed or the definition of the taxable act could change the number
of taxable parties.
Tax Rates. When CERCLA was enacted, there was insufficient information
about the composition of hazardous substances at sites where CERCLA responses
would occur. Therefore, tax rates under the Act were based on estimates of
the chemical composition of wastes being generated by broad industry sectors
as a surrogate for the composition of wastes at sites. A determination was
made of the percentage share of total revenues to be raised from producers of
organic chemicals (65 percent), inorganic raw materials (20 percent), and
crude oil (15 percent), with each group's share reflecting the estimated
volume of its product in total hazardous waste generation. Next, rates were
calculated for each of the three groups of producers that would raise that
group's portion of total revenues. These rates were then used to set the tax
rate for feedstocks within each group. The rate for an individual substance
was adjusted if it exceeded rate limits designed to prevent undesirable
economic effects.-
The current feedstock tax may inequitably distribute the tax burden
because higher rates are assigned to feedstocks that are used by generators of
large amounts of hazardous wastes, regardless of whether the substances are
found at sites requiring CERCLA response. A modification to the current
feedstock tax could establish rates based on a more direct relationship
between the tax burden borne by a particular feedstock and the likelihood that
it is used to produce the substances found at such sites.
Exemptions. The current CERCLA tax specifically exempts the following
substances from taxation: methane and butane when used as fuel, taxable
substances when used in the fertilizer industry, substances derived from coal,
and sulfuric acid produced as a byproduct of pollution control equipment.2'
V WESTAT Research, Inc., "National Survey of Hazardous Waste Generators
and Treatment, Storage, and Disposal Facilities Regulated under RCRA in 1981,"
prepared for the Office of Solid Waste, EPA, April 20, 1984.
8/ Senate Cotnm. on Environment and Public Works, "Report to Accompany
S.1480, Environmental Emergency Response Act, S.REF.NO. 96-848, 96th Cong,. 2d
Sess. p. 20 (1980).
9/ CERCLA does not specifically exempt benzene, toluene, and xylene when
used as fuels. However, the statute may be interpreted to have intended to
exempt these substances for the same reasons as it does methane and butane
when used as fuels. This issue was resolved by the Tax_Reform_Act_of_1984
when benzene, toluene, and xylene were specifically exempted.
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Other substances are exempted by omission from the specified tax base. Some
examples are metals and non-metallic minerals whose production generates
hazardous waste or from which hazardous substances are derived, such as lead,
zinc, copper, selenium, asbestos, and manganese. Any new variation of a
feedstock tax could eliminate exemptions on certain substances. Tax
exemptions for copper, lead, zinc, coal-derived substances, and recycled
metals are the subjects of studies authorized under sections 301(a)(1)(H) and
301(a)(1)(I) of CERCLA.
2.2.2 Waste-End Taxes
A waste-end tax is a tax levied late in the chain of production on
hazardous substances when they are generated, transported, treated, or
disposed. The most commonly considered waste-end tax designs are based on
volumes of waste generated or, alternatively, volumes disposed. Taxes on
volumes generated may be collected either from the generators or from
treatment, storage, or disposal facilities, while disposal taxes are collected
at the point of disposal.
Taxable Substances. Wastes are, in principle, selected for taxation
because they contribute to the hazardous substance release problem. Most
States with waste-end taxes use as a base the wastes defined by Federal
statutes as hazardous and expand or modify the base depending on the types of
wastes at sites in the State. The Resource Conservation and Recovery Act
(RCRA), which regulates the handling of hazardous waste from the point of
generation through disposal, defines wastes as hazardous by listing
substances, listing industrial waste streams, or by virtue of specified
characteristics.
Pursuant to section 3001 of RCRA, 40 CFR 261 lists approximately 450
substances designated as hazardous. RCRA waste streams are those industrial
process streams that have been identified as containing specific hazardous
constituents. EPA has identified approximately 16 hazardous waste streams
from nonspecific sources (i.e., an industrial process that involves a certain
operation, such as electroplating) and approximately 70 hazardous waste
streams from specific sources (e.g., production of organic chemicals,
pesticides, explosives, or petroleum refining). Characteristic wastes are
those wastes that exhibit any one of four hazardous characteristics:
ignitability, corrosivity, reactivity, or extraction procedure (EP)
toxicity.— Any waste that exhibits any of these characteristics is
considered hazardous, whether or not it is a listed waste.
Taxable Activities. Waste-end tax systems may vary according to the
delineation of taxable activities. Wastes may be generated, transported,
_10/ EPA has set up an extraction procedure (EP) test for toxicity. The,
level of toxicity is measured by the presence of specified toxic materials in
concentrations greater than permitted. Specifications and permitted levels
are defined in 40 CFR 261.24.
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stored, treated, or disposed of permanently in a multitude of ways. There is
a Justification for imposing a tax at each step in the waste management
process. For example, the generation of hazardous wastes may be taxed because
all wastes pose a potential threat, regardless of how they are managed. The
transportation of hazardous wastes may be taxed because of the potential for
releases or spills during transfer or en route. Similarly, temporary storage
poses some risk of release because storage facilities are often not designed
for maximum security. Taxation of such facilities may remove the incentive to
store wastes indefinitely to avoid a tax on final disposal. The treatment of
hazardous wastes may be taxed because hazardous substances may be released
into the environment during the treatment process. The disposal of hazardous
wastes may be taxed because even after disposal, serious adverse environmental
consequences may result from the release of hazardous substances from a
disposal facility.
Taxable Parties. The issue of who pays the tax is linked to the
definition of activities. Generators could pay the tax on the generation of
wastes, regardless of the treatment, storage, or disposal method. Another
alternative may place the tax on the party receiving the waste for treatment,
storage, or disposal. For example, facility operators may pay a tax on all
wastes received for disposal in a landfill or other disposal facility. This
tax is often passed back to the generator in the form of higher disposal
costs. Alternatively, generators may be taxed directly on the wastes they
submit for disposal. A few waste-end tax schemes hold the generator
responsible for taxes assessed at each step of the management process (e.g.,
storage, treatment, transportation, disposal), requiring the generator to
track the wastes from generation to final disposal and determine the total tax
liability on those wastes.
Tax Rates. Waste-end tax rates may be flat or graduated. A flat rate tax
is the simplest to implement. It is generally applied to the volume or weight
of wastes generated, transported, stored, treated, or disposed. The tax rate
may vary for different activities (e.g., $2 per ton of wastes generated, $0.50
per 100 ton-miles transported, $10 per ton disposed) but is the same for all
wastes involved in the taxable activity. The current CERCLA Post-Closure
Liability Tax Fund tax of $2,13 per dry weight ton of waste received at a
disposal facility is an example of a flat rate waste-end tax. A waste-end tax
may also be imposed as a percentage surcharge on the price of waste disposal.
In any case, the taxpayer may apply one rate to all wastes subject to the tax.
Graduated tax rates are more complex and may vary with a variety of
factors. Among existing State waste-end taxes, rates have been graduated
based on:
• The physical, chemical, or biological characteristics
of the waste;
• The risk involved in the method by which the waste is
managed (e.g., land disposal, treatment, incineration,
deep-well injection);
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• The quality of technology of the facility; and
• The environment in which the waste is managed (e.g.,
urban or rural, arid regions, over a major ground
water aquifer).
Exemptions. In any waste-end tax system, exemptions can be made in order
to make the tax system more equitable or easier to administer, or to encourage
desirable waste management practices. Exemptions can apply to specific
parties, specific substances, or specific activities. Parties exempted from
taxation may include small generators and public entities such as publicly
operated waste water treatment facilities. Certain substances may be excluded
from taxation as well. Many States exempt all substances explicitly exempted
under RCRA. Other examples are drilling muds, mining wastes, and wastes from
certain production processes (e.g., mining, resource recovery, and energy
production). Exemptions or special provisions may be made for specific
activities or disposal methods; some examples are recycling, deep-well
injection, or discharges from publicly owned treatment works.
2.2.3 Combination Taxes
A combination tax combines a feedstock tax with a waste-end tax to capture
the strengths of each system. Specifically, a combination tax combines the
superior ability of the waste-end tax to provide incentives for better waste
management practices with the success of the feedstock tax as a reliable
system for guaranteeing revenues.
Thus, a combination tax will tax two different types of activities. The
type of activity taxed with the waste-end portion depends on the type of
incentive that is intended. For example, if a primary goal of the tax system
is to influence the method of waste disposal, the combination tax could have
as one taxable activity the production of a feedstock and as its second
taxable activity the disposal of waste. To create an incentive against land
disposal, land disposal would bear a higher tax rate than would other disposal
practices. On the other hand, if the goal is to influence the amount of
hazardous substances produced, the generation of large volumes of substances
would be taxed at a higher rate than low volumes as the second taxable
activity.
A combination tax can be evaluated using the same criteria as feedstock
taxes and waste-end taxes, as discussed above. There are, however, two
additional issues that must be considered: synergistic effects and sequential
taxation. First, in evaluating a combination tax, it is important to
determine whether its effects are less than, greater than, or the same as the
summed effects of the components (i.e., feedstock tax and waste-end tax).
That is, there is a need to determine if there are synergistic effects.
Second, the establishment of a combination tax might subject firms to
sequential taxation by requiring affected firms to pay both a feedstock tax
and a waste-end tax. These issues are discussed in Chapter 5.
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2.2.4 Other Options
This section describes and briefly evaluates several other tax systems
that have been proposed or are in place in various States: (1) a transfer
tax, (2) sales-based taxes, (3) a value-added tax, and (4) a surcharge on
insurance premiums.
Transfer Tax. A transfer tax is a tax on the transfer of designated
hazardous substances. The transfer may be between transportation modes (e.g.,
from a railroad car to a truck), between facilities (e.g., from a
manufacturing plant to a storage facility), or between a transportation mode
and a facility (e.g., from a ship to a processing facility). A transfer tax
taxes the inputs to, not the substances resulting from, a production process.
Four States, New Jersey, New Hampshire, Florida, and Maine, have used transfer
taxes to fund their hazardous waste programs. The tax is paid directly by
owners of the hazardous substances or by owners or operators of transportation
modes and facilities that handle taxed substances. When paid by the latter,
some portion may be passed on to the users of the hazardous substances. The
tax is usually levied on the basis of volume and paid when the substances are
first received for storage, refinement, or domestic or foreign transport.
Two disadvantages of a transfer tax are administrative complexity and long
start-up periods for tax collection. The administrative difficulties include
identifying and tracking the number of transfers, the extensive recordkeeping
required to avoid double taxation, and the difficulty of monitoring compliance.
Delays in the start-up periods for tax collection result from the difficulty
in identifying the taxpayers, which is a problem for most tax systems in their
initial years. Largely for these reasons, a transfer tax has not been used
for funding CERCLA.
Sales-Based Tax Systems. There are two main types of sales-based tax
systems: a tax levied on the revenues from the sale of designated products
and a tax levied on the sales revenues of firms in designated industries. The
former calls for either a flat rate or ad valorem tax on the sales value of
final products of designated substances. The latter tax, generally referred
to as a gross receipts tax, would be levied either on "gross receipts" of the
firms in industries that contribute to the hazardous substances problem, or
alternatively, on all firms above a certain size.
Among the tax options, a flat rate or ad valorem tax on the final products
of hazardous substances would be the most complicated to administer because of
the large number of products and sales points (every time the product passed a
point in the production process, a tax would be due; e.g., from primary
manufacturer to transporter to specialty manufacturer to transporter to
wholesaler and so on), the problems of distinguishing between taxable and
non-taxable items, and the need to determine which products are made from
hazardous substances. As with a transfer tax, the administrative complexities
would delay implementation and the subsequent collection of tax revenues. One
inherent problem with such a tax is that it assumes implicitly that
higher-valued products are more hazardous and does not distinguish between
products composed of different percentages of hazardous substances.
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A gross receipts tax does not present the same administrative complexity
as a tax on the sales of designated hazardous substances. Moreover, this type
of tax provides a stable tax base and assures a predictable flow of funds. It
is difficult to determine the equity of this or any other tax system. A gross
receipts tax, broadly construed, would tax the gross receipts of every
business (corporate and non-corporate). This inequity is mitigated somewhat
by the low tax rates that could result from such a broad base of taxpayers.
Therefore, such a tax is not likely to create significant adverse economic
effects. Also, a gross receipts tax would be unlikely to generate strong
signals to change hazardous waste management practices.
Value-Added Tax. A value-added tax is a tax paid on gross receipts less
purchased materials of all domestic producers of intermediate and final
products involving hazardous substances. Importers would pay a percentage of
the declared commercial value of these products. There are three major
drawbacks to a value-added tax relating to both administration and equity.
From an administrative viewpoint, a value-added tax would be extremely
complex. The large number of products and sales points would present problems
identical to those discussed under the sales-based tax systems. A second
weakness is that the tax base has no demonstrated relationship to the problems
addressed by Superfund in that the tax is levied on the amount of labor,
capital, and other self-supplied inputs rather than the sale, use, or
consequences of using hazardous substances. Finally, a value-added tax
inequitably taxes vertically integrated companies, which add more value than
non-integrated companies, but do not necessarily contribute more to the
problems addressed by Superfund.
Surcharge on Insurance Premiums. The last alternative examined is a
surcharge on the insurance premiums paid by generators and transporters of
hazardous substances and by generators, transporters, treaters, storers, and
disposers of hazardous wastes. Advocates of this mechanism reason that
because insurance premiums are based on the degree of risk or hazard, a
surcharge on the premium would result in a funding scheme based on the degree
of risk or hazard. While logical on the surface, this alternative has its
shortcomings. From an equity point of view, the level of tax paid would
depend on whether a firm carried insurance and on the amount and type carried,
rather than its degree of contribution to the hazardous substances problem.
From an administrative standpoint, it would'be difficult for taxpayers to
apportion premium payments to hazardous substances in cases where the firms
carry all-peril insurance. Finally, a surcharge on insurance premiums may not
provide adequate revenues because many companies self-insure and many more
would be encouraged to do so if such a system were imposed.
Although these four alternatives have some strengths, and variations of
them are effectively used in many States, their advantages appear to be
insufficient to overcome their weaknesses as options for funding a Federal
response program of the scale anticipated for a reauthorized CERCLA.
Consequently, these alternatives are not considered further in this report.
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3. CRITERIA FOR EVALUATING ALTERNATIVE TAX OPTIONS
Section 301(a)(1)(G) of CERCLA defines several criteria to be used in the
evaluation of alternative tax systems designed to raise revenues for the
Hazardous Substance Response Trust Fund. These criteria are used to highlight
the advantages and disadvantages of the five tax options considered in
Chapters 4 and 5 of this report. This chapter briefly discusses each
criterion in the following order: economic impacts, equity, economic
incentives, revenue generation, administrative feasibility, and programmatic
effects. The final section presents a summary of the key issues discussed in
this chapter.
3.1 ECONOMIC IMPACTS
The economic impacts of a CERCLA tax may be significant. To evaluate
these impacts, a distinction is made between microeconomic and macroeconomic
effects. Each type of effect is discussed in turn.
3.1.1 Microeconomic Impacts
Because it will effectively change the cost of doing business for several
types of firms, a CERCLA tax has the potential to cause changes in the prices
of goods and services as well as the amounts of goods and services produced
and sold. The resulting effects on business revenues and household incomes
may cause some entities to fare better and others to be worse off. Analysis
of these microeconomic effects is essential to understanding the equity,
economic incentives, and revenue generation aspects of alternative CERCLA tax
systems.
A quantitative and complete analysis of these effects would require
sophisticated econometric tools and highly disaggregated data. The data and
analytic tools necessary for a detailed microeconomic impact analysis were
generally not available for this study. There are, however, three
exceptions. The analyses of the two modified feedstock taxes presented in
Sections 5.1.1 and 5.2.1 use an econometric model to project changes in the
prices and quantities of certain taxed feedstocks. In Section 5.5.1, a
simulation model is used to evaluate the costs of different hazardous waste
management options and estimate the effects of a waste-end tax on selected
industries. In all cases, however, effects on firms and consumers are not
estimated. The level of detail of this analysis does not imply that the latter
issues are unimportant or that the effects are expected to be small; rather,
it reflects the current inability to perform these analyses given data
limitations.
3.1.2 Macroeconomic Impacts
Depending on the amount of revenue raised by a CERCLA tax, it is possible
that significant effects could be felt in the macroeconomy. These effects
include changes in output, employment, and price levels.
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The most precise method of estimating macroeconomic effects involves the
use of a large computerized simulation model of the U.S. economy. For the
purposes of this analysis, all of the taxes considered here are designed to
raise $1 billion annually. This amount, while large, is small when compared
with the projected 1984 Gross National Product of approximately $3.6 trillion
(0.028 percent). Thus, it is unlikely that such a tax would have a
significant measurable effect when simulated in a macroeconomic model of the
U.S. economy. Further, if it is assumed that the tax revenues would have been
spent by the entities that paid the tax, the tax would not produce a change in-
total spending in the economy, although some change in investment patterns
would probably be observed. Most important, there is no a priori reason to
expect that the different taxes would have different macroeconomic effects.
Hence, the consequences of particular CERCLA taxes considered here are very
likely to be of little macroeconomic significance and are unlikely to differ
among tax options.
3.2 EQUITY
A key criterion in evaluating alternative CERCLA tax systems involves an
assessment of their relative equity or fairness. For the purposes of this
analysis, equity is defined as the extent to which the tax burden falls on the
parties and substances that create the problems addressed by CERCLA. Because
the distribution of the tax burden will not be the same for each CERCLA tax
discussed in this report, equity concerns are an important consideration.
Section 3.2.1 considers three generic equity issues: the link between current
taxpayers and responsibility for the problems that CERCLA was intended to
remedy, a conceptual definition of equity, and the relationship between a
CERCLA tax and the CERCLA cost recovery mechanism. Section 3-2.2 discusses
what is meant by the problems addressed by CERCLA. Section 3-2.3 examines the
determination of the parties responsible for Fund spending, Section 3.2.4
examines the definition of substances responsible for CERCLA spending.
Finally, Section 3-2.5 presents specific criteria for evaluating equity
considerations under each alternative CERCLA tax option.
3.2.1 Generic Issues
Past Problems and Current Taxpayers. An inherent feature of any tax used
to finance the Fund is that revenues are collected from currently operating
firms, despite the fact that the Superfund program is aimed primarily at
cleaning up sites created by firms operating in the past. To the extent that
responsible firms can be identified, they may be persuaded to undertake site
cleanup. They may also be subject to legal action under CERCLA's liability
provisions so that the costs of cleanup can be recovered.- It is not
possible, however, to raise all of the needed revenues from cost recovery
alone. Indeed, the inability to identify responsible parties was one of the
primary reasons that Congress passed CERCLA. Consequently, some method of
raising revenue from currently operating firms is necessary. Further, any
attempt to link a firm's tax liability to its previous behavior is likely to
I/ CERCLA, section 107.
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be problematic for two reasons. First, information about past activities
needed for tax design (or, for that matter, for cost recovery efforts) is
often impossible to obtain. Second, the group of firms potentially
responsible for the problem is not necessarily the same as the group of
currently operating firms. Each of these two issues is discussed in turn.
First, information about the past activities of responsible parties that
is sufficient to operate a tax system is generally not available. Even though
legal action has been taken against some firms responsible for CERCLA
cleanups, it is virtually impossible to assign responsibility for all Fund
activities to specific firms. Further, even if such firms could be
identified, a basis for assigning tax liability is similarly unavailable.
Experience has shown that many of these firms have not kept records about
their waste management activities., In addition, the problem of gathering such
information is exacerbated by the large number of firms involved. In 1981
alone, over 14,000 facilities generated significant quantities of hazardous
wastes and well over 4,000 were engaged in the treatment, storage or disposal
of wastes.-' To ascertain both which of the firms operating these
facilities are responsible for past waste generation and the degree to which
each should be taxed, is not feasible with the information currently available.
The second difficulty in designing a tax based on a firm's past practices
concerns the turnover among potentially responsible firms. If responsiblity
refers to firms that generated, transported, disposed, or otherwise handled
hazardous substances in the past, there can be little doubt that several
thousand firms are potentially responsible. While the largest of the chemical
firms have been in business for a substantial length of time, many of the
other firms that are somehow involved with hazardous substances are likely to
have begun operations recently or have ceased operation at some time after
contributing to the problems addressed by CERCLA. Consequently, there cannot
be a direct match between all of today's firms and the problems created in the
past.
Congress recognized the nature of this problem when it first adopted
CERCLA in 1980. Rather than focus on the particular responsibility of
individual firms, the legislative debate indicates that Congress determined
that the CERCLA tax was generally equitable because it applied to the chemical
industry as a whole. The rationale for this approach seems to be that, at a
broad industrial level, responsibility for past problems can be assigned and
that it is more equitable for the tax burden to fall on these industries and
their customers than on the public at large. This implies a policy Judgment to
tax currently operating firms to pay for the remediation of problems created
in the past by the industry of which they are a part. Congress has treated
other problems in a similar fashion. For example, under the Black Lung
Benefits Revenue Act (Public Law 95-239) • all current coal producers are taxed
in order to pay benefits to those miners who had contracted black lung disease
prior to 1970. Similarly, the Surface Mining Control and Reclamation Act
2/ Westat, 198U, OJD. cit.
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(Public Law 95-87) taxes today's mining firms in order to clean up abandoned
mines. In Section 3.2.5, specific criteria are suggested that can be used to
measure the equity of the match between current taxpayers and past problems.
Definition of Equity. In section 301(a)(1)(G) of CERCLA, Congress
directed that alternative CERCLA tax systems be evaluated according to the
degree to which they take into account:
• The likelihood of a release of a hazardous substance;
• The degree of hazard and risk of harm to public
health, welfare, and the environment resulting from
any such release; and
The extent to which the tax burden falls on the
substances and parties that create the problems
addressed by CERCLA.
The first two criteria relate to the notion of social cost, which represents
the effect on society of all environmental and health risks and the dangers
associated with hazardous substance sites. The third criterion, however,
reflects the actual cost of cleanup activities. The difference between the
two types of cost arises because these risks and dangers have a cost that is
not reflected in the engineering and construction costs of cleanup. In
general, to the extent that a tax option reflects these three criteria, both
incentive and equity objectives may be satisfied. Incentive issues are fully
discussed in Section 3-3. For the purposes of this discussion, we focus on
the equity implications of this statutory language.
The notion of incorporating social costs into a CERCLA tax applies
primarily to firms' on-going activities. If a firm is engaged in activities
which threaten the environment, it seems equitable that it ought to pay a
higher tax than a firm operating in a more environmentally safe manner. A tax
reflecting social costs, however, will not necessarily put an appropriate
burden on firms whose prior behavior has produced hazardous waste sites.
Because the vast majority of the sites to be cleaned up over the next several
years were created at some point in the past, the third criteria provides an
important link to such firms by calling for the tax burden to fall on those
responsible for the problems addressed by CERCLA, regardless of when those
problems were created. In short, equity requires both that a firm's tax
burden reflect the riskiness of its activities and that firms responsible for
the sites to be cleaned up by the Fund pay for the costs of doing so.
Equity of Enforcement Activities. A third generic equity issue arises
because, in addition to creating a tax system, CERCLA authorizes EPA to take
legal action against responsible parties and make attempts to persuade
responsible parties to enter into voluntary clean-up agreements.3-' When a
waste site is located, EPA attempts to identify those firms (which can be
3_/ CERCLA, section 107.
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found) that may have generated, disposed, or managed the wastes present at the
site. Because of the nature of all of the tax options under consideration in
this report, it is likely that some taxpayers may also be subject to a
recovery or enforcement action. At first glance, such firms may seem to be
inequitably taxed twice under this policy. This may not, however, be a
significant equity problem because to the extent that successful enforcement
and recoveries provide money for cleanup actions, less revenue will be needed
for the cleanup program, and tax rates can be set by Congress at a lower
level. The combined effect of the tax system and the enforcement program is
to increase the burden on firms subject to successful recovery efforts (those
firms that can be demonstrably linked to a specific case of Fund spending),
while reducing the cost to firms that are not subjected to a recovery action.
Thus, the enforcement provisions of CERCLA enhance the equity of its tax
system.
3.2.2 Types of Problems Addressed by CERCLA
To match the firms paying a CERCLA tax to their contribution to the
problem, it is necessary to define the problems addressed by CERCLA.
Generally, CERCLA authorizes payments for the cleanup of hazardous substances,
regardless of how they enter the environment. The substances addressed by
CERCLA fall into two categories:
• Substances that have already been released into the
environment and that are currently awaiting detection
and/or cleanup; and
• Substances that have not yet entered the environment
but that will be released at some point in the future.
The distinction between these two types of substances is important because
of key equity implications. The most expensive CERCLA activities over the
next several years will involve the cleanup of hazardous substances that wer-e
both manufactured and disposed of at some point in the past. Thus, the
cleanup of existing sites inescapably involves a retrospective solution with
current taxpayers paying to solve a problem created in previous years. As
such, the tax can have no effect on the behavior that contributed to the
problem and, as noted in Section 3.2.1, there is an inevitable mismatch
between some of the beneficiaries of cheap and easy waste disposal (i.e.,
parties responsible for creating existing sites) and some of those parties
bearing the current tax. A firm's tax burden will reflect the extent to which
it currently engages in the taxed activity and may or may not be directly
related to its contribution to existing hazardous substance releases requiring
a Fund-financed response.
For substances yet to enter the environment, the equity issues are of a
different nature. To the extent that the Fund cleans up these substances,
there can be a much better match between the taxpayers and those responsible
for Fund spending. First, the identification of responsible parties should
prove more successful than in the past because of Federal and State regulatory
programs such as RCRA. Second, an individual firm's tax burden can reflect
its behavior. If the CERCLA tax is levied on activities likely to provoke
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Fund spending, a firm producing hazardous substances or acting in a way that
threatens the environment will face a higher tax bill than it would otherwise.
The equity of a particular CERCLA tax thus depends on how well it reaches
the parties responsible for CERCLA spending. Thus, careful attention must be
paid to the tradeoffs involved in designing a tax so that it will reach those
responsible for past problems while simultaneously raising money in an
equitable fashion to cover future releases of substances that have not been
placed in the ground yet. In particular, it must be noted that for the next
several years, the CERCLA program will deal almost exclusively with sites that
currently exist. To some extent, a combination tax can be used to mediate
this tradeoff by combining a tax that reaches those responsible for past
problems with a tax levied on current activities that threaten the
environment. Section 3.2.5 presents specific criteria for use in the
evaluation of this aspect of the alternative CERCLA tax options.
3.2.3 Parties Responsible for CERCLA Spending
To determine which parties are responsible for CERCLA spending, and thus
appropriate taxpayers, a specific definition of the party responsible for
expenditures from the Fund is necessary. In this context, the term
responsible party does not imply liability under CERCLA's enforcement
activities; rather, it refers to the equity of choosing a. particular set of
firms as CERCLA taxpayers. This definition can be approached from several
points of view, including both economic and legal theories. From an economic
perspective, the ultimate effects of a firm's profits and losses are not felt
by the firm itself; instead, they are passed on to the individuals associated
with the firm including its consumers, stockholders, and employees. From this
perspective, the distribution, or incidence, of either a tax on the firm or
the benefits of cheap waste disposal can be analyzed in terms of the effects
felt by the individuals associated with the firm. Legal theory, on the other
hand, suggests that a firm is a distinct entity that can be held responsible
for its activities. Thus, benefits and liabilities are attributed directly to
the firm, regardless of the mix of individuals associated with it. Each
perspective is discussed in more detail below.
From the economic perspective, taxes may ultimately be paid by several
persons, including those who are not statutbrily liable for the tax payment.
The economic incidence of a tax is determined by which of three general
methods a taxed firm uses to raise the money to pay its tax liabilities:
• The firm may increase the prices of its products
beyond what it otherwise would have charged and thus
pass part of the tax to its consumers. If the
consumer is a firm, it too may shift the burden
through the same mechanism.
• The firm may make lower dividend payments to its
stockholders than it otherwise would have or it may
pay the tax out of retained earnings. In either case,
the firm's owners (i.e., its stockholders) bear part
of the tax burden.
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• The firm may pay lower salaries to its employees
(including its managers) than it otherwise would
have. It may also hire fewer workers. The firm thus
shifts the tax burden to its employees and potential
employees in the form of lower incomes.
Economic incidence, therefore, reflects the degree to which all persons are
ultimately affected by a tax. This concept does not treat the firm as a
single entity; instead, the firm is disaggregated into the individuals
connected with its economic activity.
The legal definition of a responsible party manifests itself in tort
liability, tax law, and corporate law. The focus of equity in this instance
is the business as a responsible entity rather than the individuals who are
associated with it. These legal precedents suggest that equity may be served
by treating firms in this fashion. The law has traditionally distinguished
between firms as unique entities and the individuals associated with them.
Under tax law, for example, any effort to assess a corporation's
responsibility to pay a tax does not necessarily extend to its consumers,
stockholders, or employees. Only if criminal activities are involved does the
search for responsible parties extend to particular individuals.
The key difference between the legal and economic perspectives on the
equity of tax burdens, therefore, is that the former leads to the conclusion
that if a firm undertook a particular activity (e.g., irresponsible waste
disposal), it ought to be liable for payment regardless of when the action was
committed. In contrast, the economic perspective suggests that a fim is a
continually changing collection of individuals, many of whom may not be
parties to the consequences of the firm's past actions and who should not
necessarily be burdened economically for the actions of their predecessors.
The difference between the legal and economic definitions of responsible
parties is important primarily because of the two types of problems acdressed
by CERCLA (see Section 3.2.2). For existing releases (i.e., those that were
created by firms at some point in the past) under the economic perspective, it
would be very difficult to match the economic incidence of a CERCLA tax to the
incidence of benefits resulting from waste disposal activities because the
stockholders, employees, and consumers of firms engaging in such activities
are likely to have changed over time. Further, the market conditions that
determine how profits and costs are shared among stockholders, consumers, and
employees may also have changed. From a legal perspective, however, it
doesn't matter that the individuals associated with firms have changed. To
the extent that firms that have contributed to existing releases are still in
operation, it is appropriate that they bear the burden of cleanup.
The issue is less important when considering the cleanup of releases that
are not causing environmental problems at present. This is because the legal
and economic perspectives do not diverge on this issue. To the extent that a
CERCLA tax or cost recovery mechanism raises revenues from firms that are
likely to contribute to future Fund spending, there is a clear connection,
from both the economic and legal perspectives, between the taxpayers and their
responsibility.
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3.2.4 Substances Responsible for CERCLA Spending
An analysis of the particular substances associated with Fund cleanup
activities is important for several reasons. First, section 301(a)(1)(G)
requires an analysis of the extent to which the tax burden falls on the
substances that have created the problems addressed by CERCLA. Further,
because a direct link cannot always be established between current taxpayers
and responsibility for Fund spending, it may prove useful to analyze hazardous
substances rather than the parties responsible for their management. In
particular, at sites where identification of responsible parties may be
impossible, an analysis of substances may provide the only information
available. Finally, because a firm's tax bill and the threat that the firm's
releases pose to the environment will reflect the volume and mix of substances
it handles, an understanding of the link between substances and taxpayers is
important. Note that in many cases, an analysis of substances is simply a
proxy for the analysis of the responsibility of particular firms.
3.2.5 Criteria for Evaluation
As noted in Section 3.2.2, the equity of a particular CERCLA tax option
depends on the degree to which it reaches both those responsible for existing
Superfund sites and those likely to create new sites. The equity evaluation
of alternative CERCLA tax options therefore consists of two parts. The first
is an evaluation of "retrospective" equity. As defined below, the
retrospective equity of a particular tax depends on the degree to which it
falls on the industries and substances responsible for existing Superfund
sites (i.e., sites where the substances have already entered the
environment). The second equity consideration involves "prospective" equity.
Prospective equity means the degree to which the tax burden felt by any
individual firm reflects the likelihood that its activities will create a site
requiring Fund spending in the future.
Retrospective Equity. In computing tax liability, responsibility for
existing hazardous substance sites often cannot be assigned to particular
firms. Thus, the equity of alternative CERCLA tax options must be evaluated
in some other way. This analysis focuses on the degree to which different tax
options impose a burden on the broad industrial categories responsible for
creating existing sites. Evidence available for 1981 indicates that 93
percent of all hazardous wastes were generated by the chemical, petroleum
refining and metal processing industries.-' Consequently, one aspect of
retrospective equity is the degree to which a tax falls primarily on the
industries listed above.
4/ Westat, 1984, op. cit., p. 140. These industries are: Chemicals and
Allied Products (SIC 28), Petroleum Refining (SIC 29), Primary Metals (SIC
33), Fabricated Metal Products (SIC 34), Machinery except Electrical (SIC 35),
Electrical and Electronic Machinery (SIC 36), and Transportation Equipment
(SIC 37). The Westat Survey only covered RCRA regulated waste and thus omits
non-waste hazardous substances. Producers of such substances are, however,
likely to also be in one of these seven SICs.
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A second aspect of retrospective equity focuses on the substances that are
involved in Fund spending. CERCLA section 301(a)(1)(G) indicates that the tax
on particular substances should represent the contribution of each to the
problems at sites requiring Fund expenditures. As noted previously, the
analysis of particular substances can serve as a proxy for analyzing the tax
burden on particular firms. To that end, a CERCLA tax will be judged
retrospectively equitable if it is levied in appropriate proportions on the
substances that have caused Fund spending.
There are several ways of categorizing the substances responsible for
Superfund spending. To begin with, a choice must be made between basing the
desired set of substances on the substances actually found at Superfund sites
or on the types of hazardous substances that are currently being generated.
In particular, it is quite difficult to determine the appropriate set of
substances so that both a waste-end tax and a feedstock tax can compared
directly. This is because during the production process, many of the chemical
attributes of substances are changed. Furthermore, currently available data
about hazardous waste streams are not precise enough to allow the constituent
chemicals used in these substances' manufacture to be traced.
For the purposes of this analysis, data are available to classify
hazardous substances in two ways. First, substances can be described in terms
of broad categories. Based on an analysis of existing Superfund sites
described in Section 4.1.1, the chemical constituents of the substances found
at these sites are distributed, on the basis of how frequently they have been
found at Superfund sites, in the following manner: 38 percent organic
chemicals, 59 percent inorganic chemicals, and 3 percent crude oil.5' This
compares to hazardous wastes generated, which on a weight basis are 31 percent
organic; 69 percent inorganic and less than one percent crude oil,- Thus,
the distribution of the tax burden among broad chemical categories under each
tax will be compared to these data.- To the extent that the distribution
5/ Absent additional data on volume, concentration, and difficulty of
cleanup, the frequency with which substances have been found at Superfund
sites does not necessarily reflect these substances' responsibility for Fund
spending. However, because frequency data are all that is available for a
large number of sites, we have chosen to use them as a rough proxy for
"contribution."
6/ ICF Incorporated analysis of data gathered by Westat, Inc. (see Westat,
op. cit.).
7/ These data may be somewhat misleading because the figures for crude oil
may be underrepresented. In general, the HRS data base does not include
information about the presence of crude oil at hazardous waste sites; thus,
its contribution to the problem may be somewhat understated. Similarly, crude
oil is rarely generated as a hazardous waste and hence does not constitute a
major fraction of estimated waste volumes. Finally, because cost recovery
efforts are not permitted against generators or disposers of crude oil, it may
be equitable to tax crude oil at a higher rate than suggested by the data.
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is similar, the tax will be Judged to be retrospectively equitable. Second,
information on the substances found at Superfund sites was disaggregated to
produce a list of the chemical feedstocks that were used in their production.
As described in Section H.1.2, a list of responsible feedstocks was created.
Because it has not been possible to trace the mix of hazardous substances
generated on a nationwide basis back to their constituent feedstocks and
because a waste-end tax is not intended to place a tax burden on feedstocks,
the list of responsible feedstocks is used only to evaluate alternative
feedstock taxes and is not used to analyze the waste-end tax.
The criteria used to measure retrospective equity are only a surrogate for
assessing responsibility for existing releases. The broad categories of
industries and substances do not allow refined estimates to be made of the
appropriateness of the tax burden felt by individual firms. They do, however,
permit an evaluation of the "rough justice" of particular taxes. The absence
of information detailed enough to create a perfect match between taxpayers and
responsible parties also does not mean that all taxes are equally equitable
from a retrospective perspective. The criteria offered above are meant to
serve as a proxy for a more accurate, but unavailable, measurement of the
degree to which the CERCLA tax burden is felt by the parties responsible for
Fund spending at existing sites.
Prospective Equity; The match between the burden of a CERCLA tax and a
particular firm's responsibility for releases that have not yet occurred is
likely to be much better than the connection between a firm's tax liability
and its responsibility for existing releases. This is true for at least two
reasons. First, information about a firm's hazardous substance production and
management activities is more likely to be available today than in the past as
the result of State and Federal regulatory programs. Second, firms' decisions
about their future hazardous substance activities, unlike their previous
behavior, can still be influenced. Thus, if a firm chooses to engage in a
more environmentally risky practice, the opportunity exists to adjust the tax
burden accordingly. The prospective equity of alternative CIRCLA tax systems
will thus be Judged in light of how well each creates a tax liability for
particular firms that reflects the likelihood of causing future expenditures
from the Superfund.
In particular, two types of discrepancies between tax liability and
responsibility for Fund spending will be assessed. The first is
overinclusiveness. If a tax is overly inclusive, it will be borne (1) by
those who are not likely to cause future Fund spending or (2) at a level
higher than is commensurate with the risk of provoking such spending. For
example, if a tax were placed on a non-hazardous substance that had no
connection to the types of sites cleaned up by the Superfund program, the tax
would be considered to be overly inclusive. Similarly, two substances might
bear an equal tax burden while not constituting an equal threat to the
environment. Assuming that the tax burden reflects the threat posed by the
more hazardous substance, the less hazardous substance is being overtaxed.
The second potential discrepancy arises if a CERCLA tax excludes more
hazardous substances or activities than is warranted. For example, if a
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hazardous substance that is likely to provoke Fund spending goes untaxed, the
tax base may be inequitably narrow. Likewise, if a the tax on a specific
substance or activity is lower than the cost to the Superfund of cleaning it
up when released, then the tax may be inequitably low. In short, prospective
equity calls for a clear match between the likelihood of causing Fund spending
and the tax imposed on specific activities and substances. This match may be
hampered if the tax is either too broad (thus creating a tax burden higher
than it ought to be) or too narrow (thus producing a tax burden that is too
low). Chapter 5 evaluates each alternative CERCLA tax option accordingly.
3.3 ECONOMIC INCENTIVES
Any CERCLA tax system may, if rates are sufficiently high, create
incentives for changes in the behavior of firms by modifying either the
relative costs of inputs to the production process or the cost of hazardous
substance disposal, or both. The strength of the incentives created by the
tax system will be determined by the options available to firms (i.e.,
including the taxed activity and its alternatives), the relative cost of the
options, and the tax rates. The ability of a tax system to create economic
incentives or disincentives for performing certain activities means that a tax
system may be used as a policy tool to induce desirable changes in industry
behavior. One use of a tax, discussed in Section 3.3.1, is to create
incentives that cause firms to act in a manner that minimizes the burden of
hazardous substances on society. A tax system may also unintentionally create
incentives for undesirable behavior, as discussed in Section 3.3.2.
3.3.1 Incentives for Environmental Protection
A CERCLA tax designed to produce incentives for firms to act in an
environmentally safe manner may have several effects. For example, by
shifting the relative production costs in an industry, a CERCLA tax system may
induce changes: in the level and mix of final products scld; in the
production processes used; in the amount and types of wastes produced; and, in
the waste treatment and disposal methods used. If CERCLA tax rates are set
with the intent of creating incentives for desirable behavior, these changes
may take several forms as discussed below.
First, there may be a shift to better treatment and disposal practices. A
tax system can induce behavioral changes by altering the relative cost of
waste management practices such as incineration, recycling, treatment, or land
disposal. It should be recognized that the strength of the incentive may
change over time as technology improvements change the costs of alternate
management practices. Of note is the likelihood that the tax itself will spur
research and development into new technologies.
Second, there may be a reduction in the total quantity of hazardous
substances generated if industry reduces its production or switches to
processes that generate fewer such substances. In other words,s in order to
minimize its tax liability, a firm may modify its production process to limit
its use of taxed feedstocks and/or its generation of taxed substances. A firm
may also cut its level of production to achieve the same end.
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Third, the level of hazard of generated substances may be reduced because
of changes in the mix of hazardous substances generated as intermediate
products, as final products, and as wastes. For example, a tax rate that is
graduated by degree of hazard may lead to a reduction in the overall hazard of
the substances generated as products and wastes. On the other hand, if some
hazardous substances are exempted from the tax, firms may shift to new
production processes that involve these untaxed hazardous substances.
The degree to which tax incentives can induce the types of changes
described above depends on a complex interaction between the tax,.market
conditions, and production processes. While detailed information on this
interaction is not available for all of the tax systems under consideration,
each CERCLA tax option is evaluated to determine its incentives for:
• A shift to better treatment and disposal practices;
• A reduction in the volume of hazardous substances
produced; and
• A reduction in the hazardousness of substances
produced.
3.3.2 Incentives for Undesirable Behavior
Because a CERCLA tax will impose a burden on those who pay the tax, it may
create incentives for evasion. For example, a firm may seek to reduce its tax
liability by failing to report its activities. Similarly, if a tax system
were to create incentives for firms to dispose of wastes in an unsafe manner
(for example, by unauthorized discharges to sewers or by blending hazardous
wastes with non-hazardous substances or wastes), it might lead to a reduction
in the quality of waste management and cause an increased threat to public
health and the environment. The incentive for evasion is likely to vary with
the type of tax and tax rates imposed. Each potential CERCLA tax option is
analyzed to determine the degree to which it creates incentives to evade the
tax.
3.4 REVENUE GENERATION
Effectiveness in raising revenues is essential to the most fundamental
purpose of the Superfund program: to enable the States and the Federal
Government to respond to threats to the public health, welfare, or the
environment from the release of hazardous substances when private parties fail
to respond. In evaluating a CERCLA tax option, two aspects of revenue
generation may be considered: the ability of the tax system to generate
adequate revenues and the predictability of those revenues over time. If a
tax does not generate adequate revenues to fund the Superfund program, then
States and the Federal Government may be forced to seek alternate revenue
sources or limit.their response to releases of hazardous substances. If it is
difficult to predict accurately revenues over time, then efficient program
operation may be hindered.
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3.4.1 Ability to Generate Revenue
The level of revenue raised by a CERCLA tax option depends on the quantity
of the taxable substance (i.e., the tax base), the rate at which the
substances are taxed, and the interaction between the tax base and the tax
rate over time. Once a tax base has been defined and a revenue target set,
appropriate tax rates can be calculated. Careful attention must be paid to
the interaction between the tax rate and the tax base. As taxes are imposed,
the size of the tax base may shrink somewhat as firms attempt to minimize
their tax liability. This behavioral response must be reflected in setting
the tax rates; otherwise, revenue shortfalls may occur. Similarly, if
inflation erodes the value of the revenues generated from a tax imposed on a
stable tax base, the rate would have to be increased over time to maintain the
real purchasing power of the Fund. Each CERCLA tax option is evaluated to
determine its revenue generating capability.
3.4.2 Predictability of Revenue-Generating Capability
The predictability of revenues over time is alsc a key component of a tax
system. To some degree, the use of a trust fund serves to mitigate the effect
of fluctuations in revenues. If revenues cannot be reliably predicted,
however, effective program planning may be difficult. Given a specific tax
rate structure, the predictability of revenues will depend on how well the
size of the tax base can be estimated. Changes in the size of the tax base
may be motivated by the tax itself or by conditions independent of the tax
(e.g., economic cycles, changes in the demand for certain products, and
changes in industry structure, processes, and techniques). The variability of
the tax base resulting from these factors is an important aspect of the
predictability of the tax system's revenue-generating capability. Each CERCLA
tax option is assessed in terms of the predictability of the revenues it would
generate.
3.5 ADMINISTRATIVE FEASIBILITY
3.5.1 Generic Issues
Each of the alternative CERCLA taxes evaluated in this study will require
a system of assessment and collection (i.e., recordkeeping, reporting,
payment, and auditing). If it is not possible to establish such a system, the
particular tax is not feasible. If, on the other hand, a tax is feasible to
administer, then its desirability must be considered. The administrative
desirability of a tax can be measured in terms of the time, cost, and
reporting burden — both to the taxpayers and tax collectors -- necessary to
establish and operate the system. These burdens are determined by three
generic factors: the number of potential taxpayers, the complexity of the
tax, and the amount and types of information necessary to collect and enforce
the tax. A tax system that is feasible and desirable in terms of other
objectives (revenue generation, equity, economic incentives, and economic
effects) may not be able to serve the purposes of CERCLA if it cannot be
administered efficiently or effectively. The remainder of this section
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discusses the factors that are used to evaluate the administrative feasibility
and desirability of each alternative CERCLA tax option.
3.5.2 Ability to Identify Taxable Parties
The administrative feasibility of a tax depends in part on the ability to
identify the parties subject to the tax. The Internal Revenue Service (IRS)
must first inform potential taxpayers of the tax and of their responsibility
to report and pay. Second, the IRS must be able to compare those filing tax
returns with the universe of potential taxpayers to ensure compliance with the
tax. If the tax depends on voluntary filings from taxable parties, potential
taxpayers must be able to determine whether they handle a taxable substance or
engage in a taxable activity and thus are liable. If such identifications can
be made, then the burden of doing so must be considered in assessing the
desirability of the tax. The burden of these activities depends in part on
the number of potential taxpayers and on the current availability of records.
Each CERCLA tax option is therefore evaluated in terms of:
• The ability to use existing records to identify
taxpayers;
• The ability to use existing records or develop new
records to verify taxpayer identifications; and
• The number of taxpayers requiring identification.
3.5.3 Ability to Identify Taxable Substances and Activities
The feasibility of administering a tax depends in part on whether taxable
substances and activities can be identified and defined. Taxable activities
are easier to identify if they involve transfers of either physical control or
legal rights between persons or locations because these activities usually
require the creation of records for business or other purposes that are
separate from the tax system but can be used for tax purposes. The time and
burden of implementing the tax, and therefore its desirability, can be
affected by whether precise definitions already have been developed for
regulatory or other purposes.
Each CERCLA tax option is therefore evaluated in terms of:
• The ability to rely upon existing records or develop
new records to identify taxable substances and
activities;
• The ability to use terms with established regulatory
meanings rather than developing new definitions for
purposes of the tax; and
• The number of substances and activities requiring
definition.
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3.5.4 Reporting and Recordkeeping Burden
Both taxpayers and the IRS must be able to determine when a tax liability
has been incurred and the amount of the liability. The IRS must provide
methods for calculating and reporting the taxes due and require the creation
and preservation of records to support and verify the taxes paid. The burden
of computing and reporting the tax liability and verifying the accuracy of the
tax returns will vary with the complexity of the tax itself, the number of
taxpayers, and the availability of necessary information. The reporting
burden, in turn, will depend on whether existing reporting and recordkeeping
systems can supply much of the information necessary to administer the tax,
whether necessary new reporting and recordkeeping systems can be developed
quickly, and whether the administration of the tax imposes substantial new
reporting and recordkeeping requirements.
To evaluate reporting and recordkeeping requirements, each CERCLA tax is
judged in terms of:
• The ability to rely on existing reporting and
recordkeeping systems;
• The time required to establish new reporting systems;
and
• The new reporting burden imposed by the tax.
3.5.5 Ability to Monitor and Enforce
The feasibility of a tax depends in par;: on whether means to monitor and
enforce it either exist or can be developed. If these activities can be
performed by an existing administrative structure, the tax probably can be
administered more quickly and efficiently than a system requiring a new
structure. In particular, tax collection procedures and audit techniques will
already have been developed and tested.
Monitoring and enforcing a tax are made both more difficult and more
costly if the tax includes complicated exemptions or variances, frequent
changes in taxed substances or in tax rates, or other special situations
requiring extensive verification by.the IRS. These special situations can
affect both the size and the predictability of tax revenues, and they can be
major sources of conflict and litigation.
The ability to monitor and enforce each alternative tax option is
evaluated according to:
• The ability to use existing or develop tax
administration systems; and
• The number and type of exemptions, variances, and
other special situations.
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3.6 PROGRAMMATIC EFFECTS
Alternative CERCLA tax options may affect both Federal and State
regulatory programs for the management of hazardous substances. A CERCLA tax
may enhance the performance of these regulatory programs, act independently of
them, or create obstacles to the achievement of regulatory goals. These
alternative tax systems also may affect other existing or contemplated tax
systems at both the State or Federal levels, either by preempting the legal
authority to impose such taxes or by affecting the potential for revenues from
the taxes.
The programmatic effects of alternative CERCLA funding mechanisms are
evaluated in terms of:
• The burden imposed on existing regulatory programs by
a CERCLA tax; and
• The effects of alternative taxes on State tax
authority and revenues.
3.7 SUMMARY
This chapter has identified several criteria that can be used to evaluate
alternative CERCLA tax options. Ideally, each tax option would be fully
evaluated in terms of each criterion. Because this general area of
investigation is quite new, both the data and methodology necessary for a full
evaluation do not always exist. Unfortunately, because the demands for data
and sophisticated methodologies are so great, this evaluation does not answer
all questions about every alternative tax option. Thus, this attempt at a
full evaluation will prove somewhat uneven. This unevenness is, however, a
good indication of what is not yet known and where further work is required.
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4. DESIGN OF ALTERNATIVE TAX OPTIONS
This chapter reviews five alternative tax options, each of which, for the
purposes of comparison, is designed to raise $1 billion in annual revenues for
the Hazardous Substance Response Trust Fund. Of note is that these five tax
options have been chosen only to illustrate certain issues inherent in
designing a tax. The choice of specific revenue targets, taxable substances,
tax rates, and tax exemptions was necessary to conduct the analysis presented
in Chapter 5 and does not constitute an EPA recommendation about an
appropriate CERCLA tax. Each of the options considered could be varied in
several ways. For example, Feedstock Tax II bases tax rates solely on
environmental factors; it might also be possible to consider economic concerns
in rate design. In short, this study raises several unresolved issues. Other
key issues are also raised in other 301(a)(1) studies. For example, balance
of trade issues are examined in the 301(a)(1)(F) study. Because these issues
are both complex and interdependent, they must be dealt with in the
legislative process of reauthorizing CERCLA.
Each alternative is discussed in terms of its tax base, tax rates, and tax
exemptions. Sections 4.1 and 4.2 present modified feedstock taxes that adjust
CERCLA's existing tax base and tax rates. Section 4.1 presents a feedstock
tax levied on the substances currently subject to the CERCLA tax, but at a
higher rate. Section 4.2 presents a feedstock tax with a tax base and tax
rates that are different than the current tax. Section 4.3 presents a
flat-rate waste-end tax. Section 1.4 presents a combination tax that includes
both a feedstock tax and a nonincentive waste-end tax. Finally, Section 4.5
presents a two phased approach to a combination tax that combines a feedstock
tax with an incentive waste-end tax. Exhibit 4-1 presents a brief summary of
each tax.
4.1 FEEDSTOCK TAX I: MODIFIED HATES
The Hazardous Substance Response Trust Fund is currently financed by a tax
on chemical feedstocks. Between April 1981 and September 1984, the current
tax raised $863 million at an average of $247 million per year.- Under
this modified feedstock tax, the rates of the current feedstock tax have been
adjusted to raise $1 billion annually. The adjustment was made by leaving the
tax base unchanged and increasing all tax rates by an equal proportion.
Exhibit 4-2 presents a summary of the tax. This section first discusses the
current tax base, and then presents the adjusted rates. Finally, exemptions
to the present tax are presented.
\f U.S. Department of the Treasury. Financial Management Service, Trust
Fund Branch, Financial Management Service Monthly Reports, Fiscal Years 1981
through 1984.
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4-2
EXHIBIT 4-1
FIVE ALTERNATIVE CERCLA TAX OPTIONS
(Each designed to raise'$1 biLlion annually)
Tax Option
1. Feedstock Tax I;
Modified Rates
2. Feedstock Tax II;
Modified Rates and
Substances
3. Waste-End Tax;
Non-Incentive
4. Combination Tax I;
Feedstock Tax and
Non-Incentive Waste-
End Tax
- Feedstock Tax
($500 million)
- Waste-end Tax
($500 million)
5. Combination Tax II;
Feedstock Tax and
Incentive Waste-End
Tax
- Feedstock Tax^/
($800 million)
Waste-end Tax
($200 million)
Phase I
(limited incen-
tive)
Phase II
(strong incen-
tive)
Taxable Activities
and Substances
Tax Rates
Sale or use of 43 chemical Depend on substance;
feedstocks (as specified range from 17
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4-3
EXHIBIT 4-2
FEEDSTOCK TAX I
CERCLA
Section 211
Feedstocks
Acetylene
Ammonia
Antimony
Antimony trioxide
Arsenic
Arsenic trioxide
Barium sulfide
Benzene
Bromine
Butadiene
Butane
Butylene
Cadmium
Chlorine
Chromite
Chromium
Cobalt
Crude oil
Cupric oxide
Cupric sulfate
Cuprous oxide
Ethylene
Hydrochloric acid
Hydrogen fluoride
Lead oxide
Mercury
Methane
Naphthalene
Nickel
Nitric acid
Phosphorous
Potassium dichromate
Potassium hydroxide
Propylene
Sodium dichromate
Sodium hydroxide
Stannic chloride
Stannous chloride
Sulfuric acid
Estimated
1985
Production
( thousands
of tons) 1/
176.0
2,211.0
33.0
23.0
j/
20.0
7.0
6,010.0
181.0
1,764.0
2,910.0
2,265.0
4.0
12,120.0
251.0
68.0
9.0
694,595.0
2.4
39.0
3.4
15,726.0
2,791.0
218.0
537.0
1.5
2,791.0
56.0
263.0
2,347.0
287.0
0.1
107.0
7,725.0
194.0
11,891.0
0.4
136.0
2,075.0
Current
Tax Rate
(dollars
per ton) 21
$4.87
2.64
4.45
3.75
4.45
3.41
2.30
4.87
4.45
4.87
4.87
4.87
4.45
2.70
1.52
4.45
4.45
.05
3.59
1.87
3.97
4.87
.29
4.23
4.14
4.45
3.44
4.87
4.45
.24
4.45
1.69
.22
4.87
1.87
.28
2.12
2.85
.26
Adjusted
Tax Rate
(dollars
per ton)
$16.70
9.06
15.26
12.86
15.26
11.70
7.89
16.70
15.26
16.70
16.70
16.70
15.26
9.26
5.21
15.26
15.26
0.17
12.31
6.41
13.62
16.70
0.99
14.51
14.20
15.26
11.80
16.70
15.26
0.82
15.26
5.80
0.75
16.70
6.41
0.96
7.27
9.78
0.89
Total
Revenue
(in millions
of dollars)
2.9
20.0
0.5
0.3
3/
0.2
0.1
100.4
2.8
29.5
48.6
37.2
0.1
112.2
1.3
1.0
0.1
119.1
4/
0.3
4/
262.7
2.8
3.2
7.6
4/
32.9
0.9
4.0
1.9
4.4
4/
O.T
129.0
1.2
11.4
4/
1.3
1.9
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4-4
EXHIBIT4-2 (continued)
FEEDSTOCK TAX I
CERCLA
Section 211
Feedstocks
Toluene
Xylene
Zinc chloride
Zinc sulfate
Estimated
1985 Current
Production Tax Rate
(thousands (dollars
of tons) J/ per ton) 21
736.0
2,727.0
1.0
2.5
4.87
4.87
2.22
1.90
Adjusted
Tax Rate
(dollars
per ton)
16.70
16.70
7.61
6,52
Total
Revenue
(in millions
of dollars)
12.3
45.6
y
4/
TOTAL ANNUAL REVENUE
1,000.0
\J Quantity estimates do not include fertilizer or fuel uses of taxed
feedstocks. Quantity estimates for methane, butylene and toluene have been
adjusted downward to reflect the quantity of these substances used to make
other CERCLA taxed feedstocks and thus exempted from the tax.
2/ All weight measurements are in short tons (i.e., 2000 Ibs.) unless
otherwise indicated.
3/ Production estimates were not available for arsenic. Thus, total
revenues for arsenic were not computed.
4/ Less than $50,000.
Sources: Estimated production: ICF Incorporated analysis of data
provided by Data Sources Incorporated, The Chemical Model.
Tax base and current tax rates: CERCLA Section 211.
Adjusted tax rates: Current rates multiplied by 3.36.
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4-5
Tax Base (Taxable Substances, Parties and Activities): This modified
feedstock tax is levied on the same 43 chemical substances as shown in Exhibit
4-2. These substances include eleven petrochemicals, 31 inorganic chemicals,
and crude oil and imported petroleum products. In 1980, these substances were
included in the tax base because each met at least two of the following
criteria:
• The substance is inherently hazardous or hazardous in
a number of forms (intermediates or final products);
• The substance is hazardous in some form if released;
• Hazardous substances are generated in the production
of any form of the substance;
• The substance is capable of increasing the hazard
potential of other substances; or
• The substance is produced in significant amounts.-/
The tax is levied on the sale or use of these substances. Because the tax
covers usage, feedstocks that are imported or are produced and used by the
same party are also covered by the tax. Approximately 496 companies pay the
present CERCLA tax.^' Presumably, the same number would pay under this
modified version of the CERCLA tax.
Tax Rates: To increase the annual revenue yield of the current CERCLA tax
to $1 billion, an adjustment to current tax rates was necessary. First,
annual estimated 1985 production levels for each feedstock were obtained.-
Total revenue with current rates and 1985 production levels was then
calculated to be about $292 million. The target of $1 billion is about 3.43
times higher than $292 million, so each rate was adjusted by multiplying it by
3.43. Exhibit 4-2 presents, for each taxed feedstock, the estimated 1985
production level, the current tax rates specified in section 211 of CERCLA,
and the adjusted tax rates which yield annual revenues of $1 billion. Note
that by increasing the revenue yield of the tax, the tax rates for several
feedstocks exceed the ceilings used in the design of the original CERCLA
tax.5' However, no downward adjustments were made in the tax rates
presented in Exhibit 4-2.
21 Senate Comm. on Environment and Public Works, "Report to Accompany
S.1480, Environmental Emergency Response Act, S.REP.NO. 96-848," 96th Cong.,
2d Sess., p. 20 (1980).
3/ U.S. Congress, Joint Committee on Taxation, "Background and Issues
Relating to HR 5640, the Superfund Expansion and Protection Act of 1984,"
JCS-27-84, July 23, 1984.
4/ ICF Incorporated analysis of data provided by Data Resources
Incorporated, The Chemical Model.
5/ The original CERCLA tax rates were designed not to exceed the lower of
2 percent of product price or $20 per ton for organics and $10 per ton for
inorganics.
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4-6
Exemptions: CERCLA statutorily exempts the following substances from
taxation: methane and butane when used as fuel, taxable substances when used
in the fertilizer industry, substances derived from coal, and sulfuric acid
produced as a byproduct of pollution control equipment. Changes to the CERCLA
tax base were made by the Tax Reform Act of 1984, which specifically exempts
benzene, toluene, and xylene when used as fuels. Other substances are
exempted simply by omission from the specified tax base. Some examples are
metals and non-metallic minerals whose production generates hazardous waste or
from which hazardous substances are derived, such as lead, zinc, copper,
selenium, asbestos, and manganese.
4.1 FEEDSTOCK TAX D: MODIFIED RATES AND SUBSTANCES
This modified feedstock tax was designed to reflect new data and a better
understanding of the problems addressed by CERCLA. The tax adjusts CERCLA's
existing tax base and recalculates its tax rates. This section discusses each
such adjustment in turn. Exhibit 4-3 presents a summary of the feedstock tax
with modified rates and substances.
Tax Base (Taxable Substances, Parties and Activities): A two step process
was used in designing the tax base. First, a general rule was developed for
choosing which feedstock chemicals should be included in the tax base. This
rule specifies that chemical feedstocks ought to pay a tax if they contribute
or could contribute significantly to the cost of cleaning up hazardous
substances released into the environment.
Second, the above selection rule was combined with the original criteria
used to determine taxable substances when CERCLA was enacted in 1980 suggests
the possible addition of new inorganic taxable substances and the deletion of
some currently taxable substances. While preliminary changes to the list of
taxable substances are suggested by this approach, EPA has not yet performed
sufficient analyses to recommend how the current list of taxable substances
might actually be amended. Prior to such a recommendation, the Agency will be
conducting further studies on the development and application of selection
criteria for taxing new feedstocks. Consequently, the list of substances
presented in Exhibit 4-3 may be modified at a later date.
To determine which substances to include in the tax base of this modified
feedstock tax, the substances found at sites likely to be cleaned up were
analyzed. EPA has identified about 19,000 sites that potentially could
require cleanup. Information on some of these sites is contained in the
Hazard Ranking System (HRS) data base.-' For the purposes of the analysis
6/ CERCLA requires the development of a system to set priorities among
sites requiring cleanup. The Hazard Ranking System was developed as a method
of quantifying the hazard at a particular site. About 1,732 sites have been
evaluated by State and regional personnel using the HRS and information about
these sites is currently contained in the HRS data base.
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4-7
EXHIBIT 4-3
FEEDSTOCK TAX
Feedstocks
Acetylene
Aluminum
Ammonia
Antimony
Antimony trioxide
Arsenic
Arsenic trioxide
Asbestos
Barium sulfide
Benzene
Boron trioxide
Bromine
Butadiene
Butane
Butylene
Cadmium
Calcium oxide
Chlorine
Chromite
Chromium
Coal coke
Cobalt
Copper
Crude oil
Ethylene
Hydrochloric acid
Hydrogen fluoride
Iron (pig)
Lead
Lithium carbonate
Manganese
Mercury
Methane
Naphthalene
Nickel
Nitric acid
Phosphoric acid
Phosphorus
Potassium hydroxide
Propylene
Selenium
Estimated 1985 Tax Rate
Production (dollars
(thousands of tons) per ton)
176.0 42.61
6,988.0 0.20
19,585.0 0.65
33.0 9.09
22.0 13.64
I/ I/
20.0 290.00
240.0 36.67
7.0 28.57
6,010.0 22.26
692.0 5.78
181.0 19.34
1,764.0 0.45
2,910.0 1.48
2,265.0 2.52
4.0 687.54
14,955.0 0.32
12,120.0 20.67
251.0 1.59
68.0 641.18
18,766.0 1.90
9.0 400.00
2,304.0 4.25
694,595.0 0.17
15,726.0 2.67
2,791.0 2.83
218.0 27.52
66,394.0 0.10
1,341.0 49.14
14.0 328.57
9.0 233.33
1.5 3,050.06
9,700.0 2.74
56.0 81.87
263.0 25.48
9,389.0 0.01
9,511.0 0.36
287.0 15.68
107.0 31.78
7,725.0 2.68
0.7 2,206.33
Total Revenue
(in millions
of dollars)
.7
.3
7.5
1.4
12
0
0.3
15.8
5.8
8.8
0.2
133.8
4.0
3.5
0.8
4.3
5.7
2.8
4.8
250.1
0.4
.6
.7
43
35
3.6
9.8
120.0
42.0
7.9
6.0
6.4
65.9
4.6
2.1
4.4
26.6
4.6
6.7
0.1
3.4
4.5
3.4
20.7
1.6
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4-8
EXHIBIT 4-3 (continued)
FEEDSTOCK TAX 0
Estimated 1985 Tax Rate Total Revenue
Production (dollars (in millions
Feedstocks (thousands of tons) per ton) of dollars)
Sodium hydroxide 11,891.0 0.83 9.9
Sulfuric acid 41,505.0 0.35 14.4
Toluene 961.0 46.83 45.0
Uranium oxide 15.0 620.00 9.3
Vanadium oxides 8.0 200.00 1.6
Xylene 2,727.0 7.88 21.5
Zinc 1,054.0 10.82 11.4
TOTAL ANNUAL REVENUE 1,000.0
\l Production figures were not available for arsenic; thus, it was not
possible to compute its tax rate.
Sources: Estimated production: 1CF Incorporated analysis of data
provided by Data Resources Incorporated; The Chemical Model
Tax base and tax rates: ICF Incorporated analysis of MRS data
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4-9
described below, data were obtained for 691 sites which, as of May 1983, had
been nominated for the National Priorities List (NPL).2' More than 400
substances and wastes were identified at these sites. Some of these
substances were described in terms too general to permit complete
identification of the feedstocks from which they were produced (e.g.,
hydrocarbons, not elsewhere classified). Consequently, a category named
"other" was also used.
Because these 48 feedstocks were used in the manufacture of the hazardous
substances found at sites nominated for the NPL, they seem to constitute an
appropriate tax base. While there may be other ways of determining what
should be included in the tax base, the use of HRS data ensures that only
those feedstocks that have contributed to the problem at Superfund sites
likely to evoke Fund spending are taxed. In other words, rather than using a
more theoretical method of selecting feedstocks for inclusion in the tax base
(e.g., analysis of the degree of hazard posed by each substance), an empirical
approach has been used (i.e., the substances found at Superfund sites are
assumed to cause Fund spending and thus should require taxation). Further, as
described in the next section, tax rates for these 48 feedstocks were adjusted
to reflect their relative contribution to the problem as indicated by the
number of sites at which each of the substances has been found.
Like the existing tax, this modified tax would be levied on the sale or
use of the taxed substances and would generally be paid by the producers or
users of these substances.
Tax Rates: After selecting a set of substances for taxation, the next
task was to calculate what tax rates should be imposed on the 48 feedstocks.
In general, rates were calculated to reflect the notion that the tax rate for
a particular substance ought to reflect its contribution to Superfund
spending. In other words, while all of the 48 feedstocks have contributed to
the problem, each has done so to a different degree. While there are several
ways of designing a rate structure to reflect a substance's contribution to
the problem, it has been assumed that the relative contribution of a
particular substance to Fund expenditures is indicated by the number of times
it has been found at sites that are candidates for remediation. Ideally, tax
rates should be based on the contribution of each feedstock to actual clean-up
expenses. Doing so would require information on the volumes of each substance
found at HRS sites as well as other characteristics of each substance (e.g.,
release pathways, concentration, persistence, and the costs of typical
response measures) that may also influence cleanup costs. There is
7/ The National Priorities List (NPL) is a national list of sites that are
considered serious enough, based on the HRS, to require remedial action.
Under CERCLA, Section 105, the NPL must include at least 400 top priority
sites and be updated at least annually.
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4-10
insufficient information, however, to include additional factors in the
estimates of relative contribution at this time.-'
The frequency of finding particular substances at Superfund sites is thus
used as an indicator of contribution to Fund spending. The HRS data were used
to compute frequency scores for each feedstock. This was accomplished by
examining data on each of the 691 HRS sites to determine which feedstocks were
involved in the production of the hazardous wastes and substances found at the
site. A weighted frequency for each feedstock was then calculated. This
frequency reflects the number of sites at which a feedstock was found and an
adjustment to reflect the presence of other feedstocks at particular sites.
For example, lead, when found in the presence of nine other substances, was
given a weight one-tenth the weight it was given when found alone.
The result of this process was a frequency score for each feedstock which
represented its presence at Superfund sites. The scores were then indexed so
that the scores for all feedstocks added to 100. This index provides an
apportionment of the responsibility among the feedstocks according to their
contribution (as defined here) to the problem. Column 1 of Exhibit 4-4
displays the relative contribution (on a percentage basis) of each feedstock
to the substances found at sites likely to undergo Fund-financed cleanup.
The indexed feedstock score was then used to allocate the share of revenues to
be raised from each feedstock; that is, a tax bill was computed for each
feedstock. The tax bill reflected the apportionment of tax collections among
feedstocks based on relative frequency as well as two adjustments. The first
adjustment reflected the difficulty of taxing "other11 feedstocks, while the
second adjustment was made to limit tax rates to one-third of product price.
Column 2 of Exhibit 4-4 presents the annual tax bill for each substance if an
annual revenue of $1 billion were raised. Acetylene, for example, has a .75
percent share, which translates into a tax bill of $7.5 million.
Finally, these tax bills were converted into tax rates. Tax rates were
computed by dividing the tax bill for each substance by the projected 1985
annual production of that substance. For some feedstocks, however, the tax
rate was a relatively large fraction of the projected 1985 price. As in the
design of the original tax system, a rate cap was used to limit tax rates.
Feedstocks had their bills and rates reduced if their rates exceeded one-third
of their estimated price in 1985. Such reductions in revenue-raising
§/ As part of the analysis described above, sites with ground-water
contamination were compared to those without it. The presence or absence of
ground-water contamination is one of the most significant determinants of
clean-up costs. No correlation was found between the types of feedstocks
responsible for a site and the likelihood of ground-water contamination.
Absent more detailed information about the factors contributing to cleanup
costs, each feedstock has been treated uniformly and its contribution to the
problem determined by simply counting up the number of times it appears at
sites nominated for the NPL.
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4-11
capability were offset by increasing the rates on other feedstocks. No
feedstock, however, could have its share (as indicated in Column 1 of Exhibit
4-4) increased by more than one-half of one percent with the exception of
crude oil. Crude oil was treated differently because:
• taxes on it are spread out to other feedstocks by the
market mechanism; and
• there are petroleum-related hazardous substances that
are not routinely in the HRS inventories but could be
subject to Superfund cleanup (e.g., benzene, toluene,
xylenes, ethylene dibromide and lead in gasoline, or
hazardous substances, such as PCBs and dioxin, that
have been mixed with waste oil).
Column 3 of Exhibit 4-4 presents one such adjustment of shares, bills, and
rates. This modified tax system is the subject of the remaining analysis.
Exemptions: Like the current CERCLA tax, this modified feedstock tax is
not intended to tax the fuel uses of chemical substances. Accordingly,
methane and butane, when used as a fuel, are exempted. Benzene, toluene and
xylene that are added to or resident in gasoline are also exempt.
4.3 WASTE-END TAX: NON-INCENTIVE
This section describes a non-incentive based waste-end tax structured to
raise $1 billion annually. Exhibit 4-5 briefly summarizes the tax. This
option establishes a flat-rate waste-end tax expected to provide only modest
incentives for altering waste management practices because it does not
distinguish between wastes or waste management processes. Because of its size
($1 billion in annual revenue), however, the tax may affect the overall volume
of wastes produced.
Tax Base (Taxable Substances. Parties and Activities): The tax would be
assessed on all RCRA-designated hazardous wastes and would be paid by RCRA
permitted Subtitle C treatment, storage or disposal (TSD) facilities. The tax
would be levied on RCRA-designated wastes because they are generally
recognized as hazardous and because the regulated community is already
accustomed to accounting for these wastes to comply with the RCRA
requirements. Although the intent is to tax all wastes that have been
generated, the tax would be levied on TSD facilities instead of waste
generators because there are far fewer TSD facilities, making the tax easier
to administer. A recent survey indicates that there are approximately 4,818
hazardous waste management facilities, compared to an estimated 14,098
generators of hazardous waste.- Generators who operate waste-management
9/ Westat, Inc., National Survey of Hazardous Waste Generators and
Treatment. Storage and Disposal Facilities Regulated Under RCRA in 1981
(Maryland: Westat, Inc., April 20, 1984). These estimates and all other data
from the Westat survey do not reflect the effect of the RCRA reauthorization
legislation which was enacted on November 9, 1984.
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1-12
EXHIBIT 4-4
CALCULATION OF FEEDSTOCK TAX D RATES
Tax Bill Tax Rate3/
(in millions (dollars
Feedstocks Contribution of dollars) per ton)
Acetylene 0.75* 7.5 42.61
Aluminum 0.14 1.4 0.20
Ammonia 1.27 12.7 0.65
Antimony 0.03 0.3 9.09
Antimony trioxide 0.03 0.3 13.§4
Arsenic 1.58 15.8 1'
Arsenic trioxide 1.58 5.8 290.00
Asbestos 0.88 8.8 36.67
Barium sulfide 0.20 0.2 28.57
Benzene 13.38 133.8 22.26
Boron trioxide 0.09 4.0 5.78
Bromine 0.35 3.5 19.34
Butadiene 0.08 0.8 0.45
Butane 0.43 4.3 1.48
Butylene 0.57 5.7 2.52
Cadmium 2.38 2.8 687.54
Calcium oxide 0.17 4.8 0.32
Chlorine 25.05 250.1 20.67
Chromite 0.04 0.4 1.59
Chromium 4.36 43.6 641.18
Coal coke 3.57 35.7 1.90
Cobalt 0.05 3.6 400.00
Copper 0.67 9.8 4.25
Crude oil 2.44 120.0 0.17
Ethylene 4.20 42.0 2.67
Hydrochloric acid 0.79 7.9 2.83
Hydrogen fluoride 0.29 6.0 27.52
Iron (pig) 0.33 6.4 0.10
Lead 6.59 65.9 49.14
Lithium carbonate 0.01 4.6 328.57
Manganese 0.21 2.1 233.33
Mercury 2.14 4.4 3,050.06
Methane 2.66 26.6 2.74
Naphthalene 0.76 4.6 81.87
Nickel 0.36 6.7 25.48
Nitric acid 0.01 0.1 OJ51
Other 7.29 -' -'
Phosphoric acid 0.34 3.4 0.36
Phosphorus 0.14 4.5 15.68
Potassium hydroxide 0.03 3.4 31.78
Propylene 2.07 20.7 2.68
Selenium 0.38 1.6 2,206.33
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4-13
EXHIBIT 4-4 (continued)
CALCULATION OF FEEDSTOCK TAX O RATES
Tax Bill Tax
(in millions (dollars
Feedstocks Contribution of dollars) per ton)
Sodium hydroxide 0.99 9.9 0.83
Sulfuric acid 1.44 14.4 0.35
Toluene 4.50 15.0 46.83
Uranium oxide 0.93 9.3 620.00
Vanadium oxides 0.16 1.6 200.00
Xylene 2.15 21.5 7.88
Zinc 1.14 11.4 10.82
TOTAL 100. 00* 1,000.0
I/ Production figures were not available for arsenic; thus, it was not
possible to compute its tax rate.
21 Because of the difficulty of taxing "other" substances, the tax bill
has been spread among the other feedstocks.
3/ Tax rates calculated to exceed one-third of a feedstock's 1985
projected price were adjusted downward to one-third of price. The reduction
in revenues was offset by increased taxes on other feedstocks. This
adjustment is explained in detail in the text.
Source: ICF Incorporated analysis of HRS data.
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4-14
EXHIBIT 4-5
NON-INCENTIVE WASTE-END TAX
Tax Base Tax Rate Total Revenue
Generation of RCRA-designated $4.73 per metric $1 billion
hazardous waste after adjusting ton (collected at
for 20 percent shrinkage (annual TSD facility)
volume: 211 million metric tons)
Source: Tax base: Westat, Inc., National Survey of Hazardous Waste
Generators and Treatment, Storage, and Disposal Facilities
Regulated Under RCRA in 1981 (Maryland: Westat, Inc., April 20,
1984).
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4-15
facilities onsite (i.e., generators with a RCRA Part A permit) would pay the
tax directly on the total quantity of waste that is treated, stored or
disposed of on-site. This group is believed to constitute 85 percent of all
RCRA permitted facilities.—' When wastes are managed offsite, the tax
would be paid by the TSD facility on the quantity of waste received for
treatment, storage, or disposal. A single quantity of waste would not be
taxed twice. For example, if a generator operating an on-site TSD facility
generated and treated 100 metric tons of wastes and subsequently sent the same
wastes — which have been reduced by treatment to 10 metric tons — offsite
for disposal, the tax would be paid on the quantity originally treated (i.e.,
100 metric tons). The quantity disposed would not be taxed a second time.
The administration of this system will be discussed in Chapter 5.
The wastes that would be taxed under the proposed waste-end tax are
delineated in 40 CFR Section 261. As explained in Chapter 2, RCRA designates
as hazardous approximately 450 wastes (i.e., listed wastes) and approximately
90 waste streams. Also regulated under RCRA and taxable under the waste-end
tax are all wastes that show any of four hazardous characteristics: (1)
ignitability, (2) corrosivity, (3) reactivity, and (4) extraction procedure
toxicity. Many discarded commercial chemicals, off-specification chemicals,
and residues are also subject to RCRA regulation. Exhibit 4-6 shows an
estimate of the percentage of the total quantity of hazardous waste handled in
1981 by waste management facilities that is represented by each type of waste.
The 1984 survey conducted by Westat, Inc. estimates the volume of
hazardous waste generated in the United States in 1981 to be approximately 264
million metric tons.— The estimate includes wastes covered by RCRA and
managed in processes subject to regulation under RCRA. While the estimate
represents the best available data, it is subject to a high degree of
uncertainty. Statistical analysis by Westat indicates that the volume of
hazardous waste generated may range from 156 million metric tons to 394
million metric tons.—'
H)/ Ibid. , p. 84.
\\/ The Westat survey reports quantities in gallons rather than metric
tons. The conversion factor used for this discussion is .00371952 metric tons
per gallon.
12/ The confidence interval around the Westat estimate of the volume of
waste generated is very large for a variety of reasons related to the nature
of the sample. This implies a high degree of uncertainty surrounding the
estimate and means that the actual value may lie within a broad range
surrounding the estimated value. A 95 percent confidence interval sets the
upper bound of this range at +48.8J of the estimated value (i.e., 264 -»- 48.8J
(264) = 394). The lower bound is set by summing the quantities of waste
reported by a Westat survey of generators that underestimated waste volume
because it under-sampled the large generators. Although the estimate derived
from this survey, 156 million metric tons is not a useful measure of the total
volume, it can be used to set the lower bound of the estimate because it
represents the smallest possible quantity of waste generated by the total
population in 1981. The estimate of 156 million metric tons falls within the
lower bound set by a 95 percent confidence interval, which is -48.85S, or 135
million metric tons.
-------
4-16
EXHIBIT 4-6
PERCENTAGE OF HAZARDOUS WASTE HANDLED BY
WASTE MANAGEMENT FACILITIES IN 1981
BY TYPE OF WASTE GROUP
Type of Waste Percentage of Waste Handled -
RCRA listed wastes 16
RCRA hazardous waste streams 7
Characteristic wastes:
ignitable 2
corrosive 40
reactive 4
E.P. toxic 14
Off-specification or discarded chemicals 4
Other and unspecified 14
I/ These percentages are based on an estimate of the total quantity of
waste managed. This estimate is believed to overstate the actual volume of
wastes generated. The primary reasons for the disparity are double-counting
of some wastes that fell into more than one RCRA classification and the
inclusion of wastes not eligible for taxation under the RCRA criteria.
Similar data are provided by Westat for the minimum volume of wastes
generated. The percentages of wastes generated belonging to each RCRA waste
category are roughly the same as the estimates of the volume of waste managed.
Source: Westat, Inc., National Survey of Hazardous Waste Generators and
Treatment, Storage and Disposal Facilities Regulated Under RCRA in
1981 (Maryland: Westat, Inc., April 20, 1984), p. 180.
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4-17
Tax Rate: The annual tax revenue target of $1 billion can be divided by
the tax base (i.e., 264 million metric tons) to determine the tax rate. The
uncertainty of the estimate of the volume of hazardous waste generated should
be considered along with potential changes in the size of the tax base to
ensure that rates are set high enough to generate adequate revenue. As in
almost any tax, variation in the size of the tax base may be caused by
economic factors such as changes in the level of economic activity. The tax
base could also decrease because of shifts in waste management technologies,
and reductions in reported waste volumes (reflecting both legal reductions of
previously over-reported volumes and illegal tax avoidance).
An early survey showed that three States, New York, New Hampshire, and
California, have implemented waste-end tax systems and have experienced
reductions in the estimated volume of taxed wastes reaching almost 90 percent
of the level projected when establishing the rates.-13' Preliminary findings
of a survey currently being conducted by EPA indicate that these State results
were due to inadequate initial data on actual waste volumes, economic
recession during the period of start up, failure to account for the costs of
tax exemptions, and lack of programmatic resources for enforcement of the
tax. In six States surveyed by EPA, revenues are now reportedly reaching 71
to 98 percent of adjusted projections.—' Lack of extensive experience with
waste-end tax systems makes it difficult to estimate the amount of shrinkage,
if any, that would result if a Federal waste-end tax were implemented. The
success of a Federal waste-end tax in meeting its revenue target in the early
years would largely depend on its ability to avoid the types of problems
confronted by the States in projecting volumes for setting tax rates.
Exhibit 4-7 shows the tax rates that would have to be charged in order to
raise the targeted tax revenue of $1 billion per year. Three separate volume
projections are presented, based on the range of the Westat estimate described
previously. For comparative purposes, three different tax rates have been
calculated for each estimated volume of waste to reflect differing degrees of
shrinkage in the tax base. The required tax rates range from a low of $2.54
per metric ton — representing a tax base equal to the upper bound of the
Westat estimate at a 95 percent confidence level and no shrinkage in the tax
base — to $12.82 per metric ton — representing the lower bound of the Westat
estimate of waste volume generated and 50 percent shrinkage in the tax base.
Although neither of these rates reflect the most likely estimate of the tax
base, the range highlights the difficulty in choosing the appropriate tax rate
to raise the required level of funds.
The tax rate used in our illustrative design of a waste-end tax and
incorporated in the evaluation of the tax system appearing in Section 5.2 is
U.S. General Accounting Office (GAO), State Experience with Taxes on
Generators or Disposers of Hazardous Waste (Washington, D.C.: GAO, May 4,
1984 ) , GAO/RCED-84-146 .
Jjl/ EPA, Survey of States with Waste-End Taxes.
-------
4-18
EXHIBIT 4-7
TAX RATES REQUIRED TO RAISE
$1 BILLION PER TEAR
156 million metric 264 million metric 395 million metric
tons tons tons
No shrinkage:
$/KT
20% shrinkage:
$/MT
50? shrinkage:
$/MT
* 6.41
8.01
12.82
$ 3.79
4.73
7.58
* 2.53
3.16
5.06
Conversion rate: .00371952 metric tons per gallon.
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4-19
conditional upon the projection of waste volume. A rate of $4.73/metric ton
is used.-!§' This rate corresponds to the mid-range value of Westat's
estimate of the volume of waste with 20 percent shrinkage in the tax base.
The estimate of 20 percent shrinkage is not based on any empirical evidence,
but is included because it would be prudent to allow for volume shortfalls
when calculating rates in order to ensure that adequate funds are generated.
Exemptions: The waste-end tax would exempt wastes that are currently
exempted under RCRA. These wastes are exempted because it is believed that
they do not present a threat to the environment or are adequately regulated
under other laws. Examples include solid wastes that are not hazardous wastes
(e.g., irrigation return flows, household wastes, fertilizers, oil, gas and
geothermal drilling muds and brines, mining extraction, beneficiation and
processing wastes, cement kiln dust waste and coal combustion wastes); wastes
controlled under other laws (e.g., industrial wastewater discharges regulated
under the Clean Water Act and nuclear wastes regulated under the Atomic Energy
Act); hazardous wastes that are beneficially used or reused or legitimately
recycled or reclaimed; and hazardous wastes generated by small quantity
generators.
4.4 COMBINATION TAX I: FEEDSTOCK TAX AND NON-INCENTIVE
WASTE-END TAX
This section describes a combination tax that consists of two components.
Exhibit 4-8 summarizes the tax. The first component is a modified feedstock
tax designed to raise $500 million. The second component is a flat-rate
waste-end tax also designed to raise $500 million. Each of these components
is discussed in turn.
Feedstock Tax: The feedstock tax component of this combination tax is
identical to the modified feedstock tax described in Section U.2, except that
it has been designed to raise $500 million annually. It has the following
characteristics:
• Tax Base (Taxable Substances, Parties and Activities) :
The tax base is the same as with the modified
feedstock tax. Thus, the tax is levied on the
production or use of the 48 feedstocks shown in
Exhibit 4-8.
15/ For comparative purposes, the cost of disposing of wastes in a
landfill in 1982 ranged from $33-83 per metric ton for bulk material and
$110-240 per metric ton for drummed material. The tax rate on land disposal
of hazardous wastes that is levied to fund the PCLTF is $2.13 per dry weight
ton, which equates to approximately $8.25 per metric ton.
-------
4-20
EXHIBIT 4-8
COMBINATION TAX I
Feedstock Tax Component (Total Revenue: $500 mDIJon) \/
Tax Base
Acetylene
Aluminum
Ammonia
Antimony
Antimony trioxide
Arsenic
Arsenic trioxide
Asbestos
Barium sulfide
Benzene
Boron trioxide
Bromine
Butadiene
Butane
Butylene
Cadmium
Calcium oxide
Chlorine
Chromite
Chromium
Coal coke
Cobalt
Copper
Crude oil
Ethylene
Tax Rate
($ per ton)
21.31
0.10
0.32
4.55
145.00
18.33
14.29
11.13
2.89
9.67
0.23
0.74
1.26
343.77
0.16
10.33
0.80
320.59
0.95
200.00
2.13
0.09
1.34
Tax Base
Hydrochloric acid
Hydrogen fluoride
Iron (pig)
Lead
Lithium carbonate
Manganese
Mercury
Methane
Naphthalene
Nickel
Nitric acid
Phosphoric acid
Phosphorus
Potassium hydroxide
Propylene
Selenium
Sodium hydroxide
Sulfuric acid
Toluene
Uranium oxide
Vanadium oxides
Xylene
Zinc
Tax Rate
($ per ton)
1.42
13.76
0.05
24.57
164.29
116.67
1,525.03
1.37
40.94
12.74
0.01
0.18
7.84
15.89
1.34
1,103.16
0.42
0.17
23.41
310.00
100.00
3.94
5.41
Waste-End Tax Component (Total Revenue: $500 million)
Tax Base Tax Rate
RCRA-Designated Hazardous
Waste After Adjusting for
20 Percent Shrinkage
(Annual volume: 211
million metric tons)
$2.37 per metric ton
(collected at TSD facility)
]/ The rates shown are set at one-half the rates for the $1 billion
modified feedstock tax.
2/ Production estimates were not available for arsenic; thus, its tax rate
has not been calculated.
Source: ICF Incorporated analysis of HRS data.
-------
4-21
• Tax Rates: Because the feedstock tax component of the
combination tax is intended to raise $500 million, its
rates have been set at one-half the rates of the $1
billion feedstock tax described in Section 4.2.
Exhibit 4-8 presents the rates.
Exemptions: The modified feedstock tax is not
intended to tax the fuel uses of chemical substances.
Accordingly, methane and butane, when used as a fuel,
are exempted. Ben2ene, toluene and xylene that are
added to or resident in gasoline are exempt.
Waste-End Tax: The waste-end tax portion of the combination tax is based
on the flat-rate waste end tax described in Section 4.3. It is similar to the
flat-rate tax in every respect, except that it is designed to raise only $500
million annually. It can be described as follows:
Tax Base (Taxable Substances, parties and Activities):
The tax would be assessed on the generation of
hazardous wastes and paid by RCRA designated
treatment, storage and disposal facilities. While
there is some uncertainty as to the size of the tax
base, the estimate used in Section 4.3 will be used
again. In other words, the tax base is estimated to
begin at 264 million metric tons of waste per year
with a 20 percent reduction upon imposition of the tax.
• Tax Rates: Because the tax is designed to raise $500
million annually, the tax rate is set at $2.36 per
metric ton, or half of the rate described in Section
4.3.
• Exemptions: The waste-end tax component of this
combination tax would exempt all those wastes
currently exempted under RCRA, such as solid wastes
that are not hazardous wastes that are recycled and
wastes produced by small quantity generators.
4.5 COMBINATION Us FEEDSTOCK TAX AND INCENTIVE WASTE-END TAX
This section describes a combination tax designed to maximize both the
revenue generating capacity of the tax and incentives for improved waste
management practices. The tax would have two components: a modified
feedstock tax designed to raise approximately $800 million per year (80
percent of revenues) and an incentives-based waste-end tax that would be
structured to contribute approximately $200 million (20 percent of revenues)
per year. Exhibit 4-9 summarizes the tax. The waste-end component would be
implemented in two phases. Phase I would emphasize revenue-generation in an
effort to satisfy immediate funding requirements of the Superfund program for
cleaning up existing hazardous waste sites, while sending moderate signals to
industry regarding waste management practices. Phase II would emphasize
-------
4-22
EXHIBIT 4-9
COMBINATION TAX 0
Feedstock Tax Component (Total Revenue: $800 million^
M
Taz Base
Acetylene
Aluminum
Ammonia
Antimony
Antimony triozide
Arsenic
Arsenic triozide
Asbestos
Barium sulfide
Benzene
Boron triozide
Bromine
Butadiene
Butane
Butylene
Cadmium
Calcium ozide
Chlorine
Chromite
Chromium
Coal coke
Cobalt
Copper
Crude oil
Ethylene
Taz Rate
($ per ton)
34.09
0.16
0.52
7.27
232.00
29.33
22.86
17.81
4.62
15.47
0.36
1
2
550.03
0.26
16.53
1.27
512.94
1.52
320.00
18
01
,40
14
Taz Base
Hydrochloric acid
Hydrogen fluoride
Iron (pig)
Lead
Lithium carbonate
Manganese
Mercury
Methane
Naphthalene
Nickel
Nitric acid
Phosphoric acid
Phosphorus
Potassium hydrozide
Propylene
Selenium
Sodium hydrozide
Sulfuric acid
Toluene
Uranium ozide
Vanadium oxides
Xylene
Zinc
Taz Rate
($ per ton)
2.26
22.02
0.08
39.31
262.86
186.67
2,440.05
2.19
65.50
20.38
0.01
0.29
12.54
25.42
2.14
1,765.06
0.67
0.28
37.46
496.00
160.00
6.31
8.65
2.14
(continued on following page)
-------
4-23
EXHIBIT 4-9 (continued)
COMBINATION TAX II
Waste-End Tax Component (Total Revenue: $175-$275 million)3
Estimated
Volume
55 million
metric tons!
Tax Base
Tier 1
Long-term storage in surface
impoundments or waste piles and
land disposal of all RCRA
hazardous wastes
Tier 2
Land disposal of highly toxic 250,000
and highly mobile RCRA hazardous metric tons
wastes
Tax
Rate
$5/metric
ton
Estimated
Revenue
$175-$275
million*
$15-20/ $3.7-$5 million
metric ton
1The rates shown are set at 80 percent of the rates for the $1 billion
modified feedstock tax.
Production estimates were not available for arsenic; thus, its tax rate
has not been calculated.
3Phase 2 of the waste-end tax is not presented here. It is discussed in
the text and shown in Exhibits 4-10 and 4-11.
""This range accounts for possible errors in EPA's waste volume estimates
and for the potential for shifting to alternate waste management practices.
'Estimated volume is for land disposal of hazardous wastes only.
Sources: Feedstock tax: ICF Incorporated analysis of HRS data
Waste-end tax base: Westat, Inc., National Survey of Hazardous
Waste Generators and Treatment, Storage, and Disposal Facilities
Regulated under RCRA in 1981. (Maryland: Westat, Inc., April
20, 1984)
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4-24
stronger incentives for improved waste management methods in order to limit
future environmental hazards created from current land disposal practices by
combining a degree-of-hazard tax with a ban. The two components will be
discussed in turn.
Feedstock Tax: The feedstock tax component of this combination tax is
identical to the modified feedstock tax described in Section 4.4, except for
the tax rates. Tax rates would be set at approximately 80 percent of the
level specified in Section 4.2 because the feedstock component of this
combination tax is targeted to raise approximately $800 million, compared to
$1 billion for the modified feedstock tax.
Waste-End Tax (Phase I -- Limited Incentive):
Tax Base (Taxable Substances, Parties and Activities): Phase I of the
waste-end component of the combination tax is designed to generate revenue for
cleaning up existing Superfund sites while sending a signal to waste
generators communicating EPA's and Congress1 growing concern over the use of
undesirable waste management practices. As shown in Exhibit 4-9, it is a
two-tiered flat-rate tax. Tier 1 would be levied on all RCRA wastes that are
stored in surface impoundments and waste piles for long periods of time or are
land disposed and excluded from Tier 2. Since RCRA regulations define land
treatment as land disposal, land treatment would be taxed as well. However,
treatment in surfac.e impoundments is not taxable under either Tier 1 or Tier
2. Tier 2 would apply to the storage and land disposal of wastes that are
both highly toxic and very mobile. An estimated 55 million metric tons of
hazardous wastes were placed in land disposal in 1981, of which an estimated
250,000 tons would qualify for taxation under Tier 2.1S At the present
time, there is no reliable estimate of the volume of wastes stored. The
amount which would qualify for taxation under Tier 2 may vary depending on
additional characteristics and the level of toxicity and mobility considered.
The tax would be collected from RCRA Subtitle C hazardous waste disposal
facilities, and facilities with permits to store wastes in surface
impoundments and waste piles for long time periods (e.g., 90 days to 1 year).
At the present time, this would include approximately 1,028 facilities that
are owned or operated by about 500 firms.
Tax Rate: Substances and practices taxed at Tier 1 levels would be
subject to a tax rate of $5 per ton. Tier 2 substances would be taxed at $15
to $20 per ton. These tax rates were selected as illustrative rates for the
purposes of this analysis. They are not statistically derived from the range
of rates discussed in Section 4.3 because of the uncertainties associated with
the analysis. The purpose of the rate differential is to communicate to waste
generators, EPA's and Congress' growing concerns over the safety of land
disposal of the specified high-risk wastes and to send a signal concerning the
policy goal of reducing or eliminating these practices. The $10-$15
differential is not high enough and was not intended to bridge the gap between
land disposal and more expensive and environmentally preferred waste
management practices.
lsWestat, Inc., National Survey of Hazardous Waste Generators and
Treatment, Storage, and Disposal Facilities Regulated Under RCRA in 1981
(Maryland: Westat, Inc., April 20, 1984).
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4-25
Exemptions: Under Phase I, exemptions would be provided for practices
that do not create the type of problems associated with undesirable land
disposal and practices for which it may not be practical to collect the tax.
The first category would include (1) neutralization and biological treatment
in surface impoundments and (2) waste incineration. The second category would
include (1) disposal of Superfund wastes and (2) wastes from small quantity
generators currently exempt under RCRA. Similar to the waste-end tax
described in Section 4.3, the small quantity exemption would be removed with
the promulgation of new RCRA regulations pertaining to small quantity
generators.
Waste-End Tax (Phase II — Strong Incentive):
Phase II of the waste-end tax component of the combination tax would be a
complex degree-of-hazard tax combined with restrictions on the disposal of
high risk wastes. This option is designed to create effective incentives for
substantially reducing the environmental threat created by land disposal of
hazardous wastes. This tax and policy option is currently in its initial
stages of development and therefore is discussed only in conceptual terms.
Tax rates and risk classification system are included for illustrative
purposes, but are not meant to represent recommended options determined to be
appropriate for meeting revenue targets or for creating the desired
incentive. EPA has begun work on land disposal restrictions, a program that
is required in the current bills to reauthorize the RCRA statute.— The
decision rules developed for the land disposal restrictions would also be used
to develop the degree of hazard tax.
Tax Base (Taxable Substances, Parties and Activities): In Phase II, the
tax treatment of wastes would be based on a risk classification system. The
hazard potential of substances may be classified as low, moderate, or high on
the basis of several variables that affect risk, or combinations of these
variables. The variables are (1) the inherent hazard of the wastes, (2) the
type of disposal technology used and its relevant characteristics, and (3) the
location of the facility. Each will be discussed in turn.
Wastes containing components that are very toxic, persistent, have a high
propensity to bioaccumulate, or are mobile are likely to present much greater
risk to human health and the environment than those without these
characteristics, These four characteristics constitute the inherent hazard of
the wastes. Toxicity refers to the potency of different chemicals for causing
adverse health effects at various levels of exposure. Persistence refers to
the resistence of chemicals to degrading readily in air or water. These
chemicals tend to remain available for human exposure for significant periods
of time. For example, non-radioactive metals do not degrade and other
inorganic compounds are extremely persistent. Bioaccumulation means the
_17/ More information on this effort is contained in U.S. EPA, Waste-End
Tax: Technical Background Document, Office of Policy, Planning and
Evaluation, December 1984.
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4-26
tendancy of chemicals to accumulate in body tissues and cause biological
effects. Mobility means the likelihood of a waste to escape from
containment. Water solubility and sorption are often used as surrogates for
mobility in soils, surface water, and groundwater. Chemicals that are soluble
in water are likely to be dissolved and carried along with hydrological flow
systems such as rivers or aquifers. If soluble chemicals are not retarded by
sorption to soils or sediments, they are good candidates for escape from land
disposal containment systems. Even if a compound is unlikely to be mobile in
water, it may still present potential exposure hazards through the air.
It is clear that a waste's toxicity, mobility, persistence, and propensity
to bioaccumulate are the four key determinants of a waste stream's
hazardousness. Although each of these characteristics is measurable, there is
currently no consensus on how much each variable contributes to the
hazardousness of a waste. Consequently, EPA has not assigned relative
weighting factors to each. As part of ongoing efforts to consider banning the
unrestricted land disposal of certain hazardous wastes, EPA plans to evaluate
the risk of approximately one-third of RCRA hazardous wastes by early 1988,
the second third by 1989t and the remaining third by 1990.
The proposed waste-end component of the combination tax would also
consider the type of disposal technology and its relevant characteristics and
assign a risk score based on the interaction between technology and the
inherent risk of the waste being handled (waste/technology combination). The
management practices that might be subject to taxation or banning could
include disposal in a landfill, surface impoundment or injection well, land
treatment, or storage in a surface impoundment or waste pile. Exhibit 4-10
provides an illustrative example of this interaction for three types of land
disposal practices. For example, waste "A" may receive a high risk ranking if
disposed of in an unlined landfill and a moderate risk ranking if disposed of
in an injection well. The risk assessment system could further be
differentiated by facility characteristics (e.g., single or double liner).
The location of the facility is the third variable to affect risk.
Examples of locational considerations are distance to groundwater, annual
precipitation, proximity to surface water, and proximity to densely-populated
urban areas.
Tax Rate and Policy Treatment: Each waste/technology combination would be
classified into one of the three risk tiers (e.g., high, moderate, and low)
and would receive the tax or policy treatment corresponding to its respective
tier. Exhibit 4-11 summarizes these concepts.
The high risk category would be reserved for those waste/technology
combinations that very clearly present a significant threat to human health
and the environment and which EPA would not want to allow to be land disposed,
even if a high tax were paid. All substances receiving the high risk
designation would be banned.
Medium risk waste/technology combinations would be subject to a rising tax
over time in order to create an incentive to shift these wastes away from land
disposal to alternative treatment. The rising tax would provide generators
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4-27
EXHIBIT 4-10
ILLUSTRATION OF THREE-TIERED SCHEME
Waste
Disposal Method
Risk Rating
Policy Treatment
Unlined Landfill High
Surface Impoundment High
Injection Well Moderate
Ban
Ban
Graduated tax Schedule C
Unlined Landfill Moderate
Surface Impoundment Moderate
Injection Well Low
Graduated Tax Schedule A
Graduated Tax Schedule B
Flat Rate
Unlined Landfill Low
Surface Impoundment Low
Injection Well Low
Flat Rate
Flat Rate
Flat Rate
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4-28
EXHIBIT 4-11
HAZARDOUS WASTES GOING TO LAND DISPOSAL
I I
I RISK ASSESSMENT |
I I
Tier 1
High Risk
Waste/Disposal
Technology
Combinations
I
I
I
BAN
Effective Dates Based
on Alternative Capacity
Tier 2
Moderate Risk
Waste/Disposal
Technology
Combinations
I
RISING TAX
Year 1
Year 2
Year 3
Year 4
Year 5
$10 per
$20
$30
$40
$50
ton
Tier 3
Low Risk
Waste/Disposal
Technology
Combinations
I
I
I
FLAT TAX
$5 Per Ton Every
Year
Forcefully remove
waste from most risky
situations
Flexibly shift
moderately risky waste
away from disposal;
Receive some funds for
hazardous waste problems
Fund Superfund
response: Insol-
vent Firm problems
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4-29
more flexibility than the ban and ease the transition from land disposal to
treatment. Within the moderate-risk tier, several schedules would be
developed to reflect the differing levels of hazard associated with different
waste/technology combinations within the tier and the availability of
alternatives. Exhibit 4-10 illustrates this concept. In the illustration, a
moderate risk ranking is assigned to waste "A" when deep-well injected and
waste "B" when disposed in an unlined landfill or surface impoundment.
Although each of these scenarios is considered to be of moderate risk, their
relative risks differ and they would be subject to different tax rates. As
shown in the last column of the exhibit, waste "A," when deep-well injected,
would be subject to tax schedule "C". Waste "B" would be taxed according to
Schedule "A" when disposed of in an unlined landfill and Schedule "B" when
disposed of in a surface impoundment. Exhibit 4-12 presents an example of how
these tax schedules might be structured.
For waste disposal practices in the low risk category, the $5 per ton
Phase I tax would remain in force. It would not be the goal of the tax system
to encourage significant behavioral changes because the risk associated with
these waste/technology combinations is low.
The information requirements for developing a system with the level of
complexity described here are extensive. Before a tax system of this type can
be developed and used for the purpose of taxing or regulation, a number of
data gathering and analytical efforts must be undertaken. Some of the
necessary analysis is already being developed to support EPA's program to
restrict certain hazardous wastes from land disposal and would form part of
the basis for developing a waste-end tax system. As part of that process,
current data on waste stream toxicity need to be augmented. Also, existing
data on the health effects of chemicals need to be reviewed. For some waste
streams, it might be necessary to develop primary data. The Agency is in the
process of refining its techniques for modeling hazardous waste releases and
exposure. The analysis and information gathering effort described here should
be completed in several years. At that time, it should be possible to design
a sophisticated incentive-based degree-of-hazard tax, consistent with the
program of land disposal restrictions.
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4-30
EXHIBIT 4-12
ILLUSTRATIVE TAX SCHEDULES FOR MODERATE RISK CLASSIFICATION
Taxable Year
Schedule A
Year 1
Year 2
Year
Year
Year
Year 6
Year 7
Year 8
Year 9
Year
3
4
5
10
Schedule B
1
2
3
4
Year
Year
Year
Year
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Schedule C
Year
Year
Year
Year
Year
Year
Year
Year 8
Year 9
Year 10
1
2
3
4
5
6
7
Tax Rate
$ 15.00/metric ton
$ 30.00/metric ton
$ 70.00/metric ton
$110.00/metric ton
$l60.00/metric ton
$210.00/metric ton
$280.00/metric ton
$300.00/metric ton
$450.00/metric ton
$550.00/metric ton
$ 10.00/metric ton
$ 25.00/metric ton
$ 45.00/metric ton
$ 70.00/metric ton
$100.00/metric ton
$l40.00/metric ton
$190.00/metric ton
$250.00/metric ton
$320.00/metric ton
$400.00/metric ton
$ 5.00/metric ton
$ 10.00/metric ton
$ 25.00/metric ton
$ 45.00/metric ton
$ 70.00/metric ton
$100.00/metric ton
$lMO.OO/metric ton
$190.00/metric ton
$250.00/metric ton
$320.00/metric ton
y The tax rates contained in this exhibit are not intended to be
recommended tax rates. They are for illustrative purposes only and are
intended to demonstrate one method for increasing tax rates over time.
-------
5. EVALUATION OF ALTERNATIVE TAX OPTIONS
This chapter provides an evaluation of the five alternative tax options
discussed in Chapter U. For illustrative purposes and to ensure a consistent
evaluation of all five tax options, each option is designed to raise $1
billion annually to finance the Hazardous Substances Response Trust Fund.
Each CERCLA tax option is analyzed in terms of the six criteria presented in
Chapter 3t economic impacts, equity, incentives, revenue generation,
administrative feasibility, and programmatic effects.
No single tax option was found to perform best on all six criteria.
Indeed, these criteria are intended to permit a uniform analysis of the
tradeoffs associated with the selection of a particular option, and not to
rank the options at this point in time. The ultimate choice of a tax option
requires a decision by Congress about the relative importance of these
criteria. Because such a decision has not been made, this analysis contains
no recommendation about particular tax options.
Because information in some areas is incomplete or lacking, the analysis
that follows may be somewhat uneven among the five options. Where data, time,
and cost considerations allowed, in-depth analysis was conducted. In many
cases, however, the evaluation of options remains qualitative and conceptual
rather than quantitative.
5.1 FEEDSTOCK TAX I: MODIFIED RATES
5.1.1 Economic Impacts
Microeconomic Impacts. The DRI Incorporated model of the chemical
industry was used to estimate the microeconomic effects for nineteen of the
forty-three feedstocks taxed under CERCLA in the evaluation of Feedstock Tax
I.- These nineteen feedstocks are responsible for more than 97 percent of
Fund revenues under Feedstock Tax I; thus, they provide a reasonable basis for
measuring the microeconomic impacts of the tax.
\/ The DRI Chemical Model consists of a set of integrated linear
programming models that produce estimates of equilibrium supply and demand
quantities for given prices and income levels. The method of analysis
employed was comparative statics. An initial model run using prices
consistent with the existing CERCLA tax rates and a forecast of 1985 income
levels established the base case. A subsequent run with prices consistent
with the modified rates and the same 1985 income level was made. Results
include estimates of prices and quantities sold for nineteen of the taxed
feedstocks proposed in the feedstock options presented in this report.
-------
5-2
The method used to gauge economic impacts (and estimate revenues) for both
Feedstock Tax I and Feedstock Tax II (Section 5.2) has been to hold constant
all factors that influence equilibrium prices and quantities, except the
prices of related products that are taxed by CERCLA and the feedstock's own
price. These two prices may only change because of changes in the schedule of
CERCLA taxes. Products are related either by being substitutes for or
complementary to each other.- If the price of a feedstock's substitute
increases, that sends a signal to use more of the feedstock. If the price of
a feedstock or its complement increases, that sends a signal to use less of
the feedstock. The relative strengths of these sometimes offsetting and
sometimes reinforcing effects is an empirical matter. This determination is
made by collecting data on past experiences and bringing them together in a
computer model. The results of the model analysis for Feedstock Tax I are
presented in Exhibit 5-1.
The results in the exhibit indicate that raising CERCLA taxes on
feedstocks will result in increased prices for these chemicals of
approximately the same size as the increased taxes. As Chapter 4 discusses,
the CERCLA taxes on many of the feedstocks in the exhibit (e.g., benzene,
butanes, napthalene) are raised by approximately $12 per ton under the
Feedstock Tax I. For others, such as hydrochloric acid and sodium hydroxide,
the CERCLA tax increase is less than $1 per ton. As Exhibit 5-1 shows, the
price increases for these taxed feedstocks increase by approximately $12 per
ton and $1 per ton, respectively.
The price increases due to higher CERCLA taxes on feedstocks, however,
result from a complex interaction of both supply and demand responses to the
higher taxes. In some cases, e.g., acetylene and butadiene, these
interactions result in price increases that exceed the increased taxes on
these products. In other cases, e.g., ethylene and nitric acid, these
interactions result in new prices that do not rise by the amount of the tax
increase. Indeed, in the case of benzene, the market price falls after the
new taxes are imposed. The ability to account for these complex
interrelationships is one of the great benefits of using a well-developed
model of chemical markets, such as the DRI model used to generate these
results.
The changes in the amounts of the feedstocks produced and sold after the
higher CERCLA taxes are imposed are also listed in Exhibit 5-1. For the most
part, these changes are small, and in many cases, zero. There is a good
reason to expect relatively small movements in the quantities of these
feedstocks produced and demanded. The results reported in Exhibit 5-1 reflect
raising CERCLA taxes on a large number of feedstocks simultaneously. As a
consequence, the impact of a higher tax on a given feedstock, is quite
different than the expected result if only that particular feedstock's tax
were increased. In the latter case, producers who use the taxed feedstock may
be able to substitute other feedstocks or processes that reduce their
2/ Goods are substitutes if one can be used in place of the other. Goods
are complements if they are traditionally used in conjunction with each other.
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5-3
EXHIBIT 5-1
ECONOMIC IMPACTS OF FEEDSTOCK TAX ^
Summary, 1985
Pre-Tax
Post-Tax
Chemical
Acetylene
Benzene
Butanes
Butylenes
Butadiene
Ethylene
Methane
Naphthalene
Propylene
Toluene
Xylenes
Ammonia
Chlorine
Hydrochloric Acid
Sodium Hydroxide
Sulfuric Acid
Nitric Acid
Crude Oil-7
Price 21 Quantity
628
408
316
318
602
439
225
262
330
267
481
163
180
58
51
NA
170
6,
2,
2,
1
176
,010
,910
,265
,764
15,726
9,720
56
7,725
961
2,727
19,582
11,468
2,791
11,925
41,505
9,389
1,903
Price 3/ Quantity
640
403
328
330
636
445
235
274
342
279
493
169
186
58
175
52
NA
170
5,
2,
175
919
910
2,257
1,750
15,675
9,720
56
7,707
960
2,727
19,580
11,109
2,791
11,920
41,505
9,389
1,903
Percent Change
Price Quantity
1.9
(1.2)
3.8
3.8
5.6
1.4
4.7
4.6
3.6
4.5
2.5
3.7
3.3
0.0
0.6
2.0
NA
0.0
(0.6)
(1.5)
0.0
(0.4)
(0.8)
(0.3)
0.0
0.0
(0.2)
(0.1)
0.0
0.0
(3-D
0.0
0.0
0.0
0.0
0.0
_]_/ Estimates are for chemical and fertilizer use only and do not include
fuel use. In the model run, the tax was simulated to apply only to
non-fertilizer uses of ammonia, nitric acid, and sulfuric acid. All
quantities are in thousands of short tons, where quantity is production plus
imports. All prices are in constant 1982 dollars per ton.
2/ Pre-tax price includes current CERCLA tax, if any.
3/ Post-tax price includes Feedstock Tax I.
4/ Thousand tons per day.
Source: ICF Incorporated analysis of data provided by DRI Incorporated.
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5-4
dependence on the now higher taxed chemical. This would result in a drop in
that feedstock's usage. However, in the simulation reported in Exhibit 5-1,
many other feedstock taxes are also increased. Thus, the attractiveness of
substituting one feedstock or process for another after the taxes are
increased is reduced or eliminated relative to the single increased tax
scenario. Thus, the quantity movements as a result of the tax should be
smaller in the many tax increase situations shown in the exhibit.
This prediction of relatively small quantity movements is upheld by the
model results. Indeed, many feedstock quantity changes are virtually zero.
This suggests that, as a whole, these feedstocks are demanded quite
inelastically.
Macroeconomic Impacts. The macroeconomic computer models that might be
used to evaluate these impacts generally do not produce estimates that are
precise enough to evaluate a $1 billion tax accurately. As explained in
Section 3.4, the macroeconomic impacts of a $1 billion CERCLA tax are not
likely to differ between a feedstock and waste-end tax. Consequently, the
impacts of revising or replacing the current CERCLA feedstock tax to produce
$1 billion annually have not been analyzed for any of the five tax options
considered in this chapter.
5.1.2 Equity
Retrospective Equity. As outlined in Section 3.1, the retrospective
equity of Feedstock Tax I depends on the degree to which it is able to reach
broad groups of substances and parties. While the taxpayers of the current
feedstock tax are primarily in the petroleum and chemical industries, it is
unclear where the ultimate incidence of the tax falls. In the absence of
detailed econometric modeling, it is difficult to say with precision how much
of the tax is ultimately borne by the 469 companies now paying it and how much
is passed down through the stream of production to the firms and consumers
that buy the taxed substances. Some generalizations about the retrospective
equity of Feedstock Tax I are, however, possible.
As noted in Section 3.1, the broad industrial groups responsible for the
cleanup of existing Superfund sites are the petroleum refining, chemical
manufacturing, and metal processing industries. Because these industries both
produce and use the feedstocks taxed by the current CERCLA tax, it appears
that the tax burden is primarily borne by these industries and their
customers. This is consistent with the view that equity requires a rough
correlation between the industries paying the CERCLA tax and the industries
responsible for Fund spending. As noted in Section 3.1, there is an
inevitable mismatch between current taxpayers and previously disposed wastes.
Because of this mismatch, we do not know whether the distribution of the the
tax burden among these industries and the firms within them reflects the
degree to which each has contributed to the problems addressed by CERCLA.
The current CERCLA tax falls on forty-three feedstock substances.
Analysis of HRS data on the chemical substances found at sites nominated for
the National Priorities List (NPL) suggests that only 33 (or 73 percent) of
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5-5
these feedstocks have contributed to the wastes cleaned up by Superfund.
This analysis also indicates that 15 additional feedstocks are used in the
production of the materials found at these sites. In short, the current tax
both includes and excludes feedstocks that MRS data indicate could be
appropriately taxed. Consequently, some feedstocks (and the firms involved in
their production and use) bear a tax burden that available evidence indicates
may be unwarranted. Further, still other feedstocks bear no tax, despite
their presence at Superfund sites. Both situations result in an inequity.
As for the chemical composition of the materials taxed, the current CERCLA
tax raises 66 percent of its revenues from taxes on organic chemicals, 18
percent from inorganic chemicals, and 16 percent from crude oil.-'
Presumably, the same would prove true under Feedstock Tax I. This can be
compared to the substances found at HRS sites which, on a frequency basis
(data are not available for a volumetric allocation), are 33 percent organic,
59 percent inorganic, and 3 percent crude oil, and to the substances generated
as wastes which, on a weight basis, are 31 percent organic, 69 percent
inorganic, and less than 1 percent crude oil. Feedstock Tax I thus appears to
over-tax organic chemicals, while undertaxing the inorganics. This suggests
that while the current CERCLA tax falls on the broad industrial groups
responsible for Fund spending, its distribution among individual substances is
not particularly equitable from a retrospective viewpoint.
Prospective Equity. Prospective equity requires that the burden of a
CERCLA tax fall on the parties and substances that are likely to cause Fund
spending for hazardous substances that have not yet been released into the
environment. Further, similarly situated firms ought to pay the same tax,
while firms that are different with respect to the likelihood of causing Fund
spending ought to be treated differently. Because the current feedstock tax
base is broadly defined and has few exemptions, the tax is levied during the
production process of all of the substances that are likely to give rise to
Superfund spending. It does not matter if Fund spending occurs because the
feedstock itself has been spilled into the environment, one of the feedstock's
hazardous products is released, or the wastes at the end of the production
process have been released into the environment (legally or otherwise). The
point is simply that by taxing all feedstocks very early in the production
process, EPA can be confident that firms producing any substance responsible
for CERCLA spending have paid into the Fund. In the absence of detailed
econometric modeling, however, we cannot estimate the amount of the tax burden
passed through the chain of production to these substances.
3/ The list of feedstocks used in the production of substances found at
Superfund sites provides a starting point for the selection of feedstocks to
tax. Appearance at sites, however, is simply one criterion for choosing such
feedstocks and has been used for the purposes of this report. Congress may,
of course, consider other criteria in selecting the subjects for taxation.
4/ "Analysis of Superfund Revenue," Environmental Law Institute, prepared
for the Office of Emergency and Remedial Response, U.S. EPA, 12/22/83, p 14.
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5-6
On the other hand, by extending the reach of the feedstock tax so widely,
it is possible that the tax burden will not fall equally on similarly situated
firms and that some substances and parties may bear a tax burden that is not
commensurate with their contribution to Fund spending. For example, benzene
is taxed under the current CERCLA tax. To the extent that the price of
benzene has risen in response to the tax, products made with benzene also bear
some part of the tax, even though they may not pose an equal threat to the
environment. The particular product produced and the method by which it and
any attendant wastes are handled also affect the threat to the environment.
Moreover, two firms that handle identical volumes of a taxed feedstock might,
because of their management practices, create significantly different risks to
the environment, yet their liability under the feedstock tax would be the same.
In short, the current feedstock tax offers broad coverage of all the
substances and situations likely to evoke Fund spending. The result of doing
so is that this tax does not produce a high correlation between a firm's tax
burden and the chance that its behavior will lead to Fund spending. This is
because the tax does not discriminate among firms according to their use of
the taxed feedstocks, including the hazardousness of the materials made from
the feedstocks and the management of the wastes produced in the production
process. While the problem of overinclusiveness might be expected with any
form of a feedstock tax, the problem is somewhat worse with regard to
Feedstock Tax I. Because the tax base of the current tax includes some
feedstocks that are not responsible for hazardous substances and omits others
that are responsible, Feedstock Tax I is weaker in terms of prospective equity
than the Feedstock Tax II, which taxes a different set of feedstocks at
different rates to account for this problem.
5.1.3 Incentives
Changes in the rates at which specific substances are taxed provides a
potential incentive for firms to modify their behavior in the use of those
substances. Feedstock Tax I adjusts the current feedstock tax to generate $1
billion annually in revenues. The result is an increase in the tax rates of
all substances of 244 percent. Despite the size of this increase, however,
evidence presented in Section 5.1.1 indicates that feedstock prices and
production quantities are not likely to change significantly. Because of the
indirect link between feedstock costs and hazardous waste generation, the
feedstock tax is unlikely to produce significant incentives for environmental
protection. Further, evidence from the DRI model indicates that changes in
feedstock prices and quantities are likely to be quite small, and that the
overall mix of feedstocks used will remain unaffected. This suggests that
associated production process changes (and changes in waste generation) may
not be significant. Because a firm's tax liability under Feedstock Tax I is
independent of the techniques it uses in managing its hazardous waste, the tax
is also expected to have little effect on waste management practices.
5.1.4 Revenue Generation
Ability to Generate Revenue. The current feedstock tax has, in large
measure, generated the revenue that could be expected in light of changing
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5-7
economic conditions. In part because current rates are such a small fraction
of a feedstock's price and in part because the tax was levied on a wide range
of substances, the tax base does not appear to have decreased significantly in
response to the tax. As discussed below, the revenue shortfalls (about 18.7
percent) that have occurred appear to be attributable to difficulties in
prediction methodologies rather than tax-induced changes in the production of
taxed substances. Evidence from the DRI model suggests that this would remain
the case under Feedstock Tax I. The model's results indicate that among
feedstocks for which estimates are available, a revenue shortfall attributable
to shrinkage in the tax base of less than 1 percent may be anticipated. If
the same shortfall were experienced for all taxed feedstocks, the tax would
raise about $999 million.
Predictability of Revenue Generation. The experience thus far with
revenue collection from a feedstock tax suggests that tax revenues are
reasonably predictable. Revenues collected from the current feedstock tax
have averaged 15 percent less than projected revenues (see Exhibit 5-2). In
1980, EPA projected that from June 1981 to September 1985, collections from
the feedstock tax would total about $1,3^8 million.5/ Actual collections
were about $1,139 million.2'
There appear to be two related reasons for this shortfall. First, the
1980 revenue predictions did not account for the severe recession of
1981-1983. Second, studies of the relationship between the existing CERCLA
tax base and summary measures of the performance of the economy such as GNP
tended to show a fairly stable relationship when the 1980 predictions were
made. This relationship, however, is not exact and may be changing as
indicated by the fact that the production of substances taxed by CERCLA did
not recover from the recession as quickly as expected. Consequently, EPA
overestimated the production of taxable substances and subsequently observed
shortfalls of 16 to 22 percent of the predicted revenues during this period.
5.1.S Administrative Feasibility
The administrative feasibility and reporting burdens of Feedstock Tax I
should closely resemble the feasibility and burdens of the current feedstock
tax, since the only change is an increase in the tax rates. This section,
therefore, discusses Feedstock Tax I in terms of experience with the current
CERCLA tax.
Taxable Parties. The present CERCLA tax is levied on producers, importers
and exporters, and users of 42 common feedstock chemicals and crude oil at the
5/ U.S. Department of the Treasury, Office of Tax Analysis, 1980.
6/ U.S. Department of the Treasury. Financial Management Service, Trust
Fund Branch. Fiscal years 1981 through 1984 data were obtained from Financial
Management Service Monthly Reports. Fiscal year 1985 collection projection
was made by the Office of Tax Analysis, U.S. Department of the Treasury.
-------
5-8
EXHIBIT 5-2
CERCLA FEEDSTOCK TAX REVENUES
Fiscal Year
Collections
1981 (Quarters III & IV) $127,900,000
1982 $243,994,000
1983 $230,225,000
1984
1985
TOTAL
$261,200,000
Predictions
$129,700,000
$290,000,000
$297,000,000
$304,000,000
$276.000.000 V $327.000.000
$1,139,319,000 $1,347,700,000
Percent Surplus or
Shortfall from
Predictions
-1*
-16*
-22*
-14*
-16*
-15*
1/ Estimated.
Source: Collections: U.S. Department of the Treasury. Financial Management
Service, Trust Fund Branch. Fiscal years 1981 through 1984 data were
obtained from Financial Management Service Monthly Reports. Fiscal
year 1985 collection projection was made by the Office of Tax
Analysis, U.S. Department of the Treasury.
Predictions: U.S. Department of the Treasury. Office of Tax
Analysis. These predictions represent the Treasury Department's
original 1980 estimates for feedstock tax revenues. The fiscal year
1985 prediction of $327,000,000 includes an estimated $16,000,000
expected to be collected in fiscal year 1986 after the close of the
1985 fiscal year.
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5-9
point of first sale or use (Feedstock Tax I would tax these same parties). In
practice, this means that when the tax is levied on domestically produced
crude oil, it is paid by operators of U.S. refineries when the oil is received
at the refinery. When levied on imports of petroleum products (including
crude oil), the tax is paid by the importer. When levied on international
exports of domestically-produced crude oil, it is paid by the exporter. When
levied on chemicals, it is paid by the manufacturer, importer, or exporter
when the chemicals are sold, or by the manufacturer when they are used on site
to make other intermediate or final products. A total of 848 taxpayers have
filed returns since the tax was instituted in 1981,2' although the tax is
currently paid by approximately 467 companies.- The number of taxpayers
may vary by as many as 100 from quarter to quarter. Furthermore, according to
at least one estimate, a small number of companies (about 12) with very large
production volumes pay almost 70 percent of the feedstock tax.2'
Firms required to pay the current feedstock tax have encountered little
difficulty in recognizing their tax liability. The relatively small number of
substances subject to a feedstock tax, the large volume of these substances
commonly produced, imported, or exported at individual facilities, and the
relatively clear-cut points at which the tax is assessed have assisted this
process.—' Furthermore, much of the information required for producers and
operators to determine their tax liability is available from sources such as
sales records, purchase invoices, and production records.
The IRS also has encountered no major difficulties in identifying taxable
parties for the current CERCLA feedstock tax. The IRS initially used mailing
lists developed by EPA and the Department of Energy (for refineries) to
identify parties with a potential CERCLA tax liability. It then notified
these parties of the new tax provisions and provided Federal excise tax forms
for their use.
For many of the taxable substances, potential taxpayers can be identified
using existing commercial and technical sources of information, such as the
NIH/EPA Chemical Information System (CIS), the DRI Chemical Data Bank, the SRI
7/ Internal Revenue Service, Statistics of Income Division, Special
Projects Branch, "Superfund Revenue Data," August 21, 1984.
8/ U.S. Congress, Joint Committee on Taxation, "Background and Issues
Relating to HR 5640, the Superfund Expansion and Protection Act of 1984,"
JCS-27-84, July 23, 1984, p. 17.
9/ Ibid.
10/ Specialized publications directed to particular industries sometimes
have helped to inform firms of the new taxes. See, for example, the
description and analysis of the CERCLA tax in C.E. Reese, "Environmental
Excise Taxes on Production or Importing of Crude Oil and Petrochemical
Feedstocks," 30 Oil and Gas Tax Q., 222-240 (December 1981).
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5-10
Directory of Chemical Producers, and the SRI Chemical Economics Handbook.
Because the tax is levied at the point of first sale, buyers provide a
potential additional source of verification of the identity of taxable parties.
Taxable Substances. The burden on government and industry of a feedstock
tax depends in part on the number of chemicals taxed and the point in the
production process where the tax is levied. Generally, the smaller the number
of taxable substances and the earlier in the production cycle the tax is
levied, the smaller the costs and complexity of administration. The present
feedstock tax is based on a relatively small number of taxable substances,
principally primary petrochemicals, inorganic chemicals, and petroleum, from
which hazardous substances are generated. These same substances would be
taxed under Feedstock Tax I. Imposing the tax on these primary chemicals
early in the chemical production process may simplify administration of the
tax by requiring the IRS to collect the tax from a relatively small number of
taxpayers.
Defining the taxable substances for the purposes of administering
Feedstock Tax I would not impose a heavy burden on the IRS because Congress
specified in CERCLA what substances are taxed. The CERCLA tax was passed by
Congress on December 11, 1980, and temporary IRS regulations providing for its
administration as an excise tax pursuant to Sections 4611 and 4662 of the
Internal Revenue Code were promulgated on July 22, 1981 % establishing
requirements that were effective as of April lt 1981. — ' Thus, the first
tax receipts were received within six months of the passage of the Act.
Formal definitions of such terms as "Crude Oil," "Petroleum Product," and
"Refining" were supplied in regulations proposed on October 21, 1983. Those
regulations also provide clarifying definitions of the taxed chemicals and
other terms relevant to the chemical tax.—' Enforcement of the tax has not
been delayed until the definitions are enacted.
Relatively few questions of interpretation with respect to whether certain
chemicals are subject to taxation have been encountered. The two most
important interpretive questions to arise — whether taxes should be levied on
light hydrocarbons added to gasoline, diesel fuel, and aviation fuel during
the refining process and on certain chemicals with a transitory presence
during smelting, refining, and metal extraction processes — were recently
resolved by legislation in the Tax Reform Act of 1984.13/
Taxable Activities. The taxable activities specified by the present
feedstock tax (the same activities that would be specified under Feedstock Tax
JJ/ 26 CFR Part 57, Temporary Regulations in Connection with Environmental
Taxes, 46 FR 37631 (July 22, 1981).
\2I 26 CFR Part 52, Environmental Taxes on Petroleum and Certain Chemicals
and Hazardous Waste, 48 FR 48839 (October 21, 1983).
jj/ Section 1019, Tax Reform Act of 1984.
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5-11
I) are generally quite simple to define and interpret for the purpose of
administering the tax. Form 6627 (shown in Exhibit 5-3), for example,
requires the following actions to be reported under the tax on petroleum:
receipt of crude oil at a U.S. refinery, entry of petroleum products into the
U.S., and use in the U.S. or export from the U.S. of crude oil. However,
because the tax is imposed only once with respect to crude oil and petroleum,
the IRS has been required to specify in regulations what methods will be
sufficient to show that certain taxable activities do not lead to tax
liability because the tax has already been paid. Furthermore, for the tax on
feedstocks, the IRS has been able to use definitions of "sale or use" found in
regulations already promulgated for other taxes. Taxpayers selling or using
taxable chemicals are required to pay the tax, but they may receive refunds if
they can show that the taxed transaction should not have been taxed because
the tax had already been paid by another taxpayer.
Recordkeeping and Reporting. The current feedstock tax relies on existing
industry recordkeeping systems to provide adequate information to determine
feedstock tax liability, as would Feedstock Tax I. The taxpayers are
companies with the resources and experience to maintain adequate records as a
normal business practice. Sales records, purchase invoices, and production
records all provide information about the types of taxable substances sold or
received from which tax liability can be computed and compliance assessed.
The IRS therefore has not had to develop extensive recordkeeping requirements
for the existing feedstock tax. The proposed regulations are most precise
concerning the records necessary to verify that the tax has already been paid
on a particular amount of crude oil or petroleum (a statement on a bill of
lading or invoice, Customs documents, a written statement by the person
entering the crude oil into the country, "or any other form of documentation"
establishing the facts to the satisfaction of the IRS). No particular form of
records is prescribed for supporting claims to credits and refunds. Taxpayers
are required only to keep whatever records are necessary to verify their tax
return. — '
Taxpayers who cannot use measured quantities of chemicals to compute their
tax are required to choose instead one of three methods: (1) average
quarterly quantities derived from engineering data, (2) normal periodic
testing programs, or (3) consumption formulas based on the ratio of the number
of pounds of taxable chemical required to produce a substance to the measured
number of pounds of the substance produced. Once the taxpayer has elected to
use one of these methods, a change of method requires IRS approval.
The current feedstock tax does not impose a heavy reporting burden.
Taxable parties must complete a simple one page reporting worksheet (Form
6627) that lists the substances subject to taxation and their respective tax
rates. Tax liability can also be calculated on this form, which is attached
to the standard IRS Quarterly Federal Excise Tax Return (Form 720) required of
many firms and used for the collection of more than twenty different excise
taxes.
J4/ 26 CFR Section 52.4662-3, 48 FR 48849 (October 21, 1983)-.
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5-12
EXHIBIT 5-3
IRS TAX FORMS USED FOR COLLECTION OF FEEDSTOCK TAX
r*n
(Ml
On
fM»
.6627
y lHl>
mM *MW»M iMVrt*
Environmental Taxes
K S*« InMrucUons on back
»> Attach to form 720
oua «.. ms-«24i
(•>un MM 1. 1111
Cmppyw idxiuHubon numbof it uwwn on farm 720
DiU qvulir tndw
S.LC. Number
Tax on Petroleum
hi
T»
1 Crude oil received at» U.S. refinery .
2 Crude oil ti««d prior to receipt it refinery .
3 Taxable crude oil (Subtract lint 2 from Mm 1)
bbls.
$ .0079 bbl.
4 Petroleum products entered into the U.S. .
S .0079 bbl.
5 Crude oil used In or exported from the U.S. before the tax was imposed .
S .0079 bbl.
6 Total petroleum tax. Enter ntre and on Form 720 on the line for IRS No. 53 .
Tax on the Sale or Use of Certain Chemicals
Cn«mic«4
1 Ac«tyl«n» ._
2 Ammania
3 Antimony
4 Antimony trioxidi
3 Ancnic
t Arsenic trioxlde
7 Barium tulfldt
9 Gromm*
10 Butane _. ,
11 Butyline
13 Cadmium
14 Chlorine
15 Chromite..__ .
17 Cobalt . _,..
IB Cupric o»de __._
19 Cupric sulfate . .
20 Cupraut oxide .
21 Ethylene
<«)
TOfl*
=
0»
RIM
5487
2.64
4.45
3.75
4.45
3.41
2JO
4.87
4.45
4.87
4.87
4.87
4.4S
2.70
1.S2
4.45
4.45
3.S9
1.87
3.97
4.87
(e>
Am«unt
, . . ...-._
CXlmlol
22 Hydrochloric acid
23 Hydrogen fluoride „
24 Lead oxid* _^_
23 Mercury
2fi M«thiln«
27 Naphthalene
28 Nickel. . .. .
29 Nitric acid._ .
31 Potassium dlchromate
32 Potassium hydroxide
33 Propyline
34 Sodium dichromate
35 Sodium hydroxide
36 Stannic chloride „
37 Stannous chloride
38 Sulfurlc acid
39 Toluene
40 Xyfene
41 Zinc chloride
42 Zinc sulfate
<•>
TOM
(«)
R>»
{0.29
4.23
4.14
4.45
3.44
4.87
4.45
0.24
4.45
1.69
0.22
4.87
137
0.28
2.12
2.85
0.26
4.87
4.87
2.22
1.90
43 Total Chemical Tax. Entsr here and on form 720 on the line for IRS No. 54 ^
(c)
Amount
E
_
S
For Paperwork Reduction Act Notice see back of form.
6627
-------
5-13
EXHIBIT 5-3 (continued)
IRS TAX FORMS USED FOR COLLECTION OF FEEDSTOCK TAX
Paperwork Reduction Act Notic*
Tht Paperwork Reduction Act of 1980
says we mult till you wny w« art collect-
inf inn inlormation. how wt will u<« it. and
whether you have lo five '' to us. Wt ask
for tn« inlormation la carry out tne Inttmal
Revenue laws at tna Uniltd States. W« need
it to ensure that you are complying with
uiese laws and to allow us to rigura ana col-
lect In* right (mount ol U«. Von an re-
quired lo gwt us Wit information.
General Instructions
Purpose of thrs Form.—Us* this form to
figure the tax liability for pttroltum and
chemicals subject to the environmental
taK«.
OUMMM. tint
AlllM. ArilM*. CqlcrM I»M
Wl«4«MU. MMffll*. fttftlM.
tl*M«. Hutu 0»h«U. Ol*1M.
M OMMI. UIM.
OKU. ur urn
>IMM. C* Mill
. .
CMW'M. T«niwtw*.
»">"II4. Will V"«ifl.
II you IV1V4 no I.
..
intcrn.il rivmrnuo Sorvic*
PMIMUMU. P* I*!S1
Density of Gases at Standard Conditions
(O*C.. 1 atm) Pounds per cubic foot
Ammonia . . .0482 Chlorine . . .2011
Acetylene . . .0732 Ctnylene . . .0783
Butane . . . .1686 Metnane . . .0-148
Sntylene . . .1665 Propylene . .1194
Exceptions.—°i '.
No environmental tax shall be imposed:
1. on methane or butane if it is used as a
fuel. The person using the cnemical lor
the taxable ourpose (noivtud use) it
then considered to be the manufacturer
and is liable for filing the return anq
paying the tax.
2. on nitric acid, sulfuric acid, ammonia.
or methane which is used in the pro-
duction of ammonia, and is
(a) used in the manufacture of ferti*
liter by the manufacturer, pro-
ducer, or importer.
(b) sold for use in tne manufacture of
fertilizer by the purchaser: or
(c) sold for resale By tne purcnaser to
a second purchaser tor use in the
manufacture of fertilizer.
3. on sulfuric acid produced solely as a
byproduct of. ana on the same site as.
air pollution control equipment.
4. on any substance to the extent derived
from coal.
If the environmental tax hi paid on any
taxable chemical and that chemical Is later
used to manufacture or produce any other
substance subject to the environmental tax
an amount equal to the tax paid will be al-
lowed as a credit or refund. It an environ-
mental tax has btm paid an mtnc aeid. sul-
func acid, ammonia, or methane used to
make ammonia and any person later uses
that substance or sells it for use as a ferti-
lizer or in the manufacture of fertilizer, an
amount equal to trie excess of the tax actu-
ally paid over the amount of tax which was
due will be allowed as a credit or refund.
Credits may fie taken on line 2 of Form 720.
Form 843. Claim, should Be used to Claim
a refund. In both instances the creoit or re-
fund (without interest) is allowable as if
it were an overpayment of an environmental
tax.
Specific Instructions
Name.—Enter the name that will oe
shown on Form 720 as the taxpayer.
Employer identification number.—Enter
the employer identification number shown
on Form 720.
S.I.C. number.—Enter the four-digit code
number that best describes the activity that
results in your having to report and pay the
environmental tax. See Notice 603 for a list-
ing of these code numbers.
Part I.—Enter on:
Line 1.—The number of barrels of crude
oil received at tne refinery.
Line 2.—The number of barrels on which
the tax nas been paid. For example, crude oil
imported into the U.S. and the tax was paid
then later delivered to a refinery. Your rec-
ords must show that the tax was previously
paid. A statement from tne person who paid
the tax that the tax has been paid will fulfill
this requirement.
Line 3.—Subtract line 2 from line 1. This
will be the number of barrels that are sub-
tect to the tax. Enter this amount in column
(a) of line 3. Line 3 column (b) is the tax
rate. Multiply column (a) by column (b) and
enter the tax liability in column (c).
Une 4.—The number of barrels of petro-
leum products entered into tne U.S. Enter
this figure in column (a), multiply it by the
tax rate m column (b) and enter tne tax lia-
bility in column (c).
Una 5.—Repeat the procedure for line 4.
Lin* 6. column (c).—Add the figures on
lines 3c. 4c. and Sc. and enter the total on
line €. column (c). This figure must also be
shown on the line for IRS No. 53 on Form
720.
Pan II.—Enter on:
Lin* 1. column (a).—The number of tons
sold or used. If the cnemical is in a gaseous
form, see the conversion table above.
Lin* 1. column (c).—The amount of tax
due. Multiply the figure in column (a) by the
tax rate in column (b).
Lines 2 through 42.—Repeat the proce-
dure shown foi im* 1 on th* appropriate line
for any other chemical you have sold or
used.
Una 43. column (c).—Add the Figures on
lines 1 throurn 42 and enter tne total tax
due on chemicals. This figure must also :e
shown on the line for IRS No. 5-* on Form
720.
-------
5-14
Once a firm has filed as a taxpayer, it is required to continue to file
quarterly tax returns, even if it has not incurred liability for the tax in
that quarter, until it can show that it has ceased the operations that made it
liable for the tax. If, on the other hand, a firm's tax liability exceeds a
certain amount, it may be required to file monthly or semi-monthly tax returns.
Monitoring and Enforcement. Because the IRS collects numerous excise
taxes at both the manufacturing and retail levels, it already has
well-established collection, monitoring, and enforcement systems available for
use to enforce the feedstock tax. The current feedstock tax is subject to the
existing IRS excise tax audit procedures and audit cycles, as Feedstock Tax I
would be.
The relatively small numbers of taxable parties and the fact that many of
the taxable substances are produced and transferred in large volumes (subject
to review and detection through the use of existing company records) suggest
that detecting non-compliance should not impose a particularly heavy burden on
the IRS. The sale or receipt of a taxable substance, for example, should be
readily identifiable from production and sales records.
Potential compliance problems could arise when taxable substances are used
by their producers to make intermediate or final products. Although no sale
or transfer takes place, the substances are still subject to taxation if they
are used in the manufacturing process. An integrated producer, importer, or
exporter therefore must track the use of these substances within its own
manufacturing process and report tax liability on these substances. As noted
above, special procedures for identifying and quantifying the generation of
such substances must sometimes be used by taxpayers.
Exemptions, certifications, and other special situations can add to the
burden of monitoring and enforcement by complicating recordkeeping and
reporting and creating additional opportunities for mistakes or
misrepresentation. As initially enacted, the present CERCLA feedstock tax
provided exemptions for the following listed substances:
— Methane or butane used as fuel;
— Methane, nitric acid, sulfuric acid, and ammonia used
for fertilizer production;
— Sulfuric acid produced as a byproduct of air pollution
control; and
— Any substance derived from coal.
Regulations proposed in 1983 provided specific forms for exemption
certificates to be used to establish the right to exemption from taxation for
sales or use of methane, nitric acid, sulfuric acid, and ammonia used for
fertilizer production. No similar provisions specified how eligibility for
the other exemptions was to be proven. Section 1019 of the Tax Reform Act of
1984 eliminated this certification provision. Thus, in the case of each of
-------
5-15
the exemptions, IRS must rely upon ordinary business records in verifying
claims to the exemption.
Little information currently is available on the compliance rates for the
present CERCLA feedstock tax, although substantial compliance with the tax
appears to exist. Revenues have not exceeded initial projections, but the
difference is not extreme and probably cannot be attributed to problems of
administration or non-compliance. The IRS has not yet undertaken large-scale
audit activities.
Separate records of the cost of administering the CERCLA feedstock tax are
not maintained by IRS. Costs of administration, however, are not large. The
tax has required only two relatively limited rulemaking procedures.
Collection and audit costs have not required increases in the annual budget
requests for the departments administering the tax. To date, therefore, it
appears that the administrative burden of the tax has not been heavy.
5.1.6 Programmatic Effects
The current feedstock tax has not had any apparent effects on existing
Federal or State hazardous waste regulatory programs (e.g., RCRA). It has not
required changes in RCRA recordkeeping or reporting requirements, affected
regulatory compliance, or led to changes in hazardous waste regulatory
enforcement. In addition, no effects on State tax programs have been
identified, although significant increases in the Federal tax rates could
impair revenues of States that tax the same industries. In the Federal
system, action by Congress may preempt State or local action on the same
subject, and Congress attempted in CERCLA to structure the relationship of the
present feedstock tax to other State or local taxes through Section llU(c),
which states:
Except as provided in this Act, no person may be required to
contribute to any fund, the purpose of which is to pay
compensation for claims for any costs of response or damages
which may be compensated under this title. Mothing in this
section shall preclude any State from using general revenues
for such a fund, or from imposing a tax or fee upon any
person or upon any substance in order to finance the
purchase or prepositioning of hazardous substance response
equipment or other preparations for the response to a
release of hazardous substances which affects such State.
The meaning of this clause has not yet been fully clarified. A challenge
to the transfer tax on hazardous chemicals and petroleum levied under the New
Jersey Spill Compensation and Control Act, on the grounds that section llH(c)
of CERCLA preempted the State tax, was dismissed by Federal courts.—' The
J5/ Exxon Corp. v. Hunt. 17 ERC 1969 (3rd Cir., 1982), cert, denied 103 S.
Ct. 727 (1983).
-------
5-16
Mew Jersey Tax Court found that the New Jersey Spill Tax was not preempted by
CCRCLA, but apparently suggested that Congress could have precluded the States
from using such a tax if it had chosen to do so.—' Other more definitive
interpretations of section Il4(c) may, of course, be made by other courts in
the future. Feedstock Tax I does not modify section 1l4(c), or its effects,
in any way.
5.2 FEEDSTOCK TAX It MODIFIED RATES AND SUBSTANCES
5.2.1 Economic Impacts
Microeconomic Impacts. Like Feedstock Tax I, Feedstock Tax II has been
evaluated using the DRI chemical model. Exhibit 5-4 displays the changes in
the prices and quantities that are estimated to occur with modifications to
CERCLA's tax rates and taxable substances. Under Feedstock Tax II, for the
butylenes, propylene, and butadiene, tax rate decreases led to real price
declines but were also accompanied by quantity decreases. For these
substances, tax decreases were not accompanied by quantity increases because
equilibrium quantities depend not only on a feedstock's own price but also on
the prices and quantities of substitute and complementary feedstocks. For
these three feedstocks, the effect of the price changes on the complementary
and substitute feedstocks outweighed the effects generated by the change in
the substances' own price.
To illustrate, cumene is a product that is made from benzene and
propylene. Under Feedstock Tax II, the tax on benzene is increased and the
tax on propylene is decreased. Benzene's share of the cost of producing
cumene is larger than propylene's share. In turn, the price of cumene may be
expected to increase, and its quantity demanded may be expected to decrease.
The result is a decrease in the demand for propylene, in spite of a decrease
in its tax and price. In other words, the price of a feedstock used in
conjunction with propylene was increased, thus signaling a reduction not only
in benzene but also in its complementary products.
DRI's model results indicate that the production of some substances would
be relatively unresponsive to price changes brought about by Feedstock Tax
II. Naphthalene, for example, experienced a'29 percent increase in price with
no quantity change. The production of other feedstocks, however, was affected
significantly. Toluene production, for example, fell 27 percent in response
to a 16 percent increase in price.
Changes in the prices and quantities of these chemical substances may lead
to changes in employment, investment, net income, and profitability within the
affected industries. The estimation of such effects is complex and is not
possible given available information. However, some generalizations can be
made on this issue. The effect of microeconomic price changes on industry
Exxon Corp. v. Hunt. 190 N.J. Super. Ct. 131 (1983).
-------
5-1T
EXHIBIT 5-4
ECONOMIC IMPACTS OF FEEDSTOCK TAX
rl/
Sunmary, 1985
Pre-Tax
Post-Tax
Chemical
Acetylene
Benzene
Butanes
Butylenes
Butadiene
Ethylene
Methane
Naphthalene
Propylene
Toluene
Xylenes
Ammonia
Chlorine
Hydrochloric
Acid
Sodium
Hydroxide
Sulfuric Acid
Nitric Acid
Phosphoric
Acid
Crude Oil-
Price 2/ Quantity
628
408
316
318
602
439
225
262
330
267
481
163
180
58
176
6,010
2,910
2,265
1,764
15,726
9,700
56
7,725
961
2,727
19,582
11,468
2,791
174 11,925
51
NA
500
170
41,505
9,389
9,511
1,903
Price 3/ Quantity
668
430
312
316
594
436
228
339
328
312
485
162
198
60
170
5,872
2,946
2,257
1,762
15,748
9,700
56
7,707
696
3,125
19,580
11,099
2,791
175 11,920
51
NA
500
170
41,505
9,389
9,511
1,903
Percent Change
Price Quantity
6.4
5.4
-1.3
-0.6
-1.3
-0.7
1.2
29.3
-0.6
16.9
0.8
-0.6
10.0
3.4
0.6
0.0
NA
0.0
0.0
-3.4
-2.3
1.2
-0.4
-0.1
0.1
0.0
0.0
-0.2
-27.6
14.6
0.0
-3.2
0.0
-0.04
0.0
0.0
0.0
0.0
V Chemical use only. All quantities in thousands of short tons, where
quantity is production plus imports. All prices in constant 1982 dollars per
ton.
2/ Pre-tax price includes current CERCLA tax, if any.
3/ Post-tax price includes modified feedstock tax.
4/ Thousand tons per day.
Source: DRI Incorporated.
-------
5-18
must be interpreted in light of the accompanying changes in equilibrium
quantities. In general, given a tax increase, any price change accompanied by
a decrease in equilibrium quantity reduces producers' profitability and tends
to reduce employment and capital investment associated with the substance. On
the other hand, tax increases that result in higher prices and increased
quantity increase producers' profitability and tend to increase the employment
and investment associated with production of the substance.
5.2.2 Equity
Retrospective Equity. Like the current feedstock tax, Feedstock Tax II
would be paid primarily by the petroleum refining and chemical industries.
The fact that both the producers and users of taxed feedstocks are a part of
the industries believed responsible for existing Superfund sites indicates
that Feedstock Tax II meets the broad test of retrospective equity set out by
Congress.
With regard to the distribution of the tax burden among different types of
chemical substances, Feedstock Tax II raises 35 percent of its revenue from
organic feedstocks, 53 percent from inorganics, and 12 percent from crude
oil. The feedstocks responsible for wastes and substances found at Superfund
sites are, on a frequency basis, 38 percent organic, 59 percent inorganic, and
3 percent crude oil, while currently generated wastes are, on a weight basis,
31 percent organic, 69 percent inorganic, and less than 1 percent crude oil.
Feedstock Tax II, therefore, appears to undertax inorganic chemicals somewhat,
and place a higher tax burden on crude oil than might be justified by either
substances generated as wastes or substances found at sites. However, because
crude oil may be underrepresented in the data on both wastes generated and
substances found at sites, the mismatch may not have significant equity
consequences.
Because Feedstock Tax II was designed in light of the substances found at
HRS sites, there is a high correlation between the tax burden on particular
feedstocks and the frequency with which each is found at Superfund sites. In
other words, each feedstock used in the production of these hazardous
substances is taxed and each is generally taxed at a rate that reflects the
frequency of finding it at such sites.— Only because of the adjustment of
rates to reflect the 33 percent of product price limit, is there is a mismatch
between the tax bills of particular substances and the frequency of finding
those substances at Superfund sites. In short, while Feedstock Tax II falls
on the industries believed to be responsible for Superfund spending, there is
V7/ As noted in Section 4.2, the frequency of finding a byproduct of a
particular feedstock at HRS sites is used only as a rough proxy for the
feedstock's contribution to cleanup costs. Many other factors that affect
cleanup costs are likely to be determined by the types of substances found at
sites, but detailed information about those factors sufficient to evaluate a
tax system is not available.
-------
5-19
somewhat of a mismatch between the distribution of the tax burden across
different types of chemical substances and the distribution indicated by the
data.
Prospective Equity. The key strength of Feedstock Tax II in this regard
is that it offers full coverage of all potentially hazardous substances. In
short, if a substance is likely to give rise to Superfund spending, a CERCLA
tax will have been paid at some point in its production, even in cases of
illegal dumping, product spills, or the cleanup of non-RCRA regulated wastes.
The extent to which the tax will have been passed on to the party responsible
for releasing a hazardous substance, however, depends on market conditions •
controlling the economic incidence of the task.
Like Feedstock Tax I, Feedstock Tax II may spread the tax burden more
widely than is appropriate. To the extent that derivatives of the same taxed
feedstock are used in ways posing different levels of threat to the
environment, an inequity may result because the tax burden on both substances
is the same, despite the fact that their likelihood of causing Fund spending
is different. Further, because Feedstock Tax II does not discriminate among
substances based on the methods by which they are managed, an inequity may
result among firms. For example, the tax on chlorine may be partially passed
on to firms manufacturing chlorofluorocarbons (CFCs), which in turn pass on
some of the tax to the purchasers of CFCs, such as computer manufacturers that
use CFCs as a solvent to clean newly manufactured computer circuits. Once
used, these solvents become a hazardous waste. Two companies may purchase the
same amount of CFCs and produce the same amount of hazardous waste, yet one
may be extremely careful to prevent a release of the wastes while the other
acts less responsibly and lets some wastes enter the environment. Both will
bear an equal amount of the tax burden while contributing to likely Fund
spending in different degrees.
In short, by taxing every feedstock that may directly or indirectly
produce a threat to the environment, Feedstock Tax II offers a guarantee that
the tax will have been paid at some point in the production of any substance
likely to provoke Fund spending. Conversely, because several substances of
varying hazard can be produced from a single taxed feedstock and because such
substances may be managed in different ways, Feedstock Tax II may impose a tax
burden on substances and parties that is not commensurate with the threat they
pose to the environment.
5.2.3 Incentives
Feedstock Tax II eliminates the taxation of ten feedstocks currently taxed
and adds fifteen previously untaxed feedstocks to the tax base. This tax also
changes tax rates substantially for several feedstocks, increasing some and
decreasing others. In general, because of the limited connection between the
costs of feedstocks and production of hazardous wastes, the feedstock tax is
not expected to cause strong incentives for environmental protection.
As a result of changes in the tax base and the tax rates, the cost of
using particular feedstocks changes relative to the cost of using other
-------
5-20
feedstocks. As shown in Section 5.2.1, changes in relative costs provide
incentives for producers to change the mix of feedstocks used in production
and to change their production processes. Because many of the taxed
feedstocks are substitutes for or complements to each other, not all tax
increases lead to production decreases (e.g., naphthalene) and not all tax
reductions lead to production increases (e.g., ammonia). This change in the
mix of feedstocks used in the chemical industry may lead to a change in the
mix of chemical products, and hence a change in the mix of wastes.
As with Feedstock Tax I, Feedstock Tax II does not provide direct
incentives for changes in waste management practices. However, higher tax
rates on some feedstocks provide incentives for increased recycling and
reclamation, and lower tax rates on other feedstocks decrease the value of
recycling and reclaiming wastes which include these feedstocks. Also, as
indicated above, there will be a change in the mix of wastes generated to the
extent that Feedstock Tax II is effective. This mix may be more or less
hazardous than under the current feedstock tax and, as a result, there may be
a change in the mix of waste management practices followed.
5.2.4 Revenue Generation
Ability to Generate Revenues. Feedstock Tax II appears capable of
generating almost all of the revenue it is designed to raise. The DRI
chemical model was used to estimate the changes in price and quantities of 19
of the taxed feedstocks that would be induced by this tax. The results
indicate that while it will reduce the quantities of some of the taxed
substances, Feedstock Tax II may also lead to production increases for other
feedstocks. The overall result is a very small decrease in revenues due to a
decrease in the tax base. The DRI model does not include all of the taxed
feedstocks, but it does model feedstocks that produce roughly 70 percent of
Fund revenues. For the feedstocks included in the model, results indicate
that the decrease in the tax base would reduce tax revenues by about 3
percent. If the production of the feedstocks not included in the model
changes in a manner similar to feedstocks that are included, the tax would
raise roughly $997 million. If the production of feedstocks not included in
the model declines proportionally more than the modeled feedstocks, the
revenue shortfall may be greater. However, the potential size of this
shortfall is limited by the fact that only 30 percent of the revenue comes
from feedstocks not included in the.model.
Predictability of Revenue Generation. The predictability of Feedstock Tax
II is likely to be quite similar to that of the current CERCLA tax. While it
is true that economic cycles, changes in the demand for final products, and
changes in industry structure, processes, and techniques will affect the
predictability of the tax, historical experience shows that the feedstock tax
is reasonably predictable. There is a chance that the much higher rates of
Feedstock Tax II may affect predictability, but as experience increases over
time, the predictability of revenues may be expected to improve, particularly
as predictions are made on the basis of previous tax receipts rather than
other factors in the economy.
-------
5-21
5.2.5 Administrative Feasibility
The administrative and reporting burdens for Feedstock Tax II would not
differ significantly from those imposed by the present feedstock tax or
Feedstock Tax I. The identification of the additional taxable parties could
be conducted in much the same way as for the current feedstock tax. It is
also possible that current taxpayers would be producers or users of the
additional chemicals. The same activities—sale or use of a taxable
substance—are used to specify when the tax is assessed as are used for the
present feedstock tax. Therefore, no additional regulations would need to be
developed to define taxable acts. An increase in the number of taxable
substances from 43 to 48 is not likely to increase the burden of reporting or
recordkeeping significantly. Removing the exemptions for coal-derived
substances, secondary recovery, and substances used for fertilizers would
simplify the administration of the tax and would lessen the amount of
recordkeeping and reporting, and potentially also lessen the burden of audit
and verification that the tax would require.
5.2.6 Programmatic Effects
The relationship between Feedstock Tax II and State or local taxes is
likely to be identical to that of Feedstock Tax I. The type of tax and method
of collection would remain the same; only the group of feedstocks taxed and
the tax rates would be adjusted. Therefore, no new programmatic effects are
anticipated unless the new tax rates affect the ability of States to raise
additional revenues from firms subject to Feedstock Tax II or Congressional
action implementing Feedstock Tax II alters the current statutory language on
preemption of State or local authority.
5.3 WASTE-END TAX: NON-INCENTIVE
5.3.1 Economic Impacts
The flat rate waste-end tax would increase the cost of products produced
in processes that generate large amounts of taxed wastes and cause changes in
the supply of and the demand for these products. Unlike the model developed
by DRI to predict changes in the prices and level of feedstocks resulting from
a tax, no comprehensive model exists to precisely estimate waste generators'
potential responses (i.e., waste reduction through process or input changes)
to a tax on the generation of hazardous waste. Thus, it was not possible at
this time to do a detailed economic analysis at a disaggregate level for the
purposes of this study. EPA's Hazardous Waste Management Model, which
examines generators' choice of waste management options (e.g., landfill versus
incineration) once the waste has been generated, estimates economic impacts at
a broad industry level. This model has been used to estimate the economic
impacts of a waste-end tax on the land disposal of hazardous waste (i.e.,
Combination Tax II). Over the next few months, EPA will attempt to use this
model and other available data to develop better information on the possible
economic effects of a tax on waste generation.
-------
5-22
To predict these impacts, more information is needed about the production
and decision-making processes that affect the supply of and demand for various
products. To model the supply component, additional insight is needed about
(1) the link between wastes, production processes, and products, (2) the
sensitivity of production costs to the waste-end tax, (3) the availability and
cost of substitute production processes that would produce less waste, (t) the
decision-making processes of firms with regard to capital investment and
research and development expenditures, and (5) the expectations of firms
regarding the private costs of future waste management regulations. To model
the demand component, more information is needed about the sensitivity of
demand for final products to changes in cost conditioned by the waste-end tax
and the elasticity of demand for the final products. These factors would, in
turn, affect equilibrium prices and quantities. While progress is being made
in some of these areas, data are not consistently available in enough detail
to integrate them into a meaningful representation of the actual economic
processes.
Qualitative analysis suggests that such a tax would affect producers
differently, depending on their ability to switch to processes that generate
fewer wastes. If a producer were able to shift completely away from processes
that generate hazardous wastes without increasing costs, there most likely
would be little or no change in the quantities of products produced. To the
extent that a producer could not shift production processes or could do so
only by increasing costs, there would likely be a decline in output. The
responses of firms would be determined not only by the level of tax rates but
also the relative costs of substitute production processes and the price
elasticities of the demand for final products.
5.3.2 Equity
Retrospective Equity. The retrospective equity of the waste-end tax
depends on the degree to which it falls on the broad industrial groups and the
types of substances believed responsible for causing Superfund spending. Each
is discussed in turn.
The waste-end tax is levied on all RCRA-designated hazardous wastes; thus,
it will be paid primarily by the petroleum refining, chemical, and metal
processing industries. Because these industries are believed to be
responsible for the vast majority of existing hazardous waste sites, this tax
satisfies the first test of retrospective equity.
A second measure of retrospective equity depends on the distribution of
the tax burden across chemical substances. Two standards can be used to make
such an assessment. The first reflects data about the types of substances
found at Superfund sites. The second is based on the types of substances
generated as hazardous wastes. As indicated in Exhibit 5-5, there is a
relatively good match between the types of substances taxed by a waste-end tax
and the substances responsible for Fund spending. There is, of course, a
perfect match between the types of RCRA-regulated wastes generated and the
types of wastes taxed. Further, the proportion of organics, inorganics, and
crude oil found at Superfund sites is similar to the distribution of
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EXHIBIT 5-5
RETROSPECTIVE EQUITY OF WASTE-END TAX
Type of
Substance
Distribution Distribution Distribution
of of Substances of Substances
Tax Burden J[/ Found at Sites 2/ Generated as Wastes 3/
Organic
Inorganic
Crude Oil
31*
69
38*
59
3
31*
69
V Types of taxed substances assumed to be identical to the types of
wastes generated.
2/ Based on the analysis described in Section U.2. The substances found
at sites were traced back to constituent feedstocks. The information
displayed here is based on a frequency count of these feedstocks.
3/ ICF analysis of data provided by Westat, Incorporated, 1984. Results
calculated on the weight, rather than volume, of hazardous waste streams.
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substances bearing the tax burden. While the burden of the waste-end tax on
organics is slightly less than indicated by the analysis of actual sites
(i.e., 38 percent of substances found at such Superfund sites are organics
while 31 percent of the waste-end tax revenues were from organics), it should
be remembered that site data are computed on a frequency basis, while the tax
distribution is calculated on a weight basis. If the site data were computed
on a weight basis, it is likely that the match would improve because inorganic
chemicals tend to be heavier than organics.
In short, the waste-end tax meets both the criteria of retrospective
equity. The tax falls on the broad industrial groups responsible for Fund
spending and the tax burden is distributed across chemical types in a manner
that is identical to the types of RCRA-regulated wastes generated and is
similar to the types of wastes found at Superfund sites.
Prospective Equity. To be judged prospectively equitable, a tax must
provide a close connection between a party's tax burden and the likelihood
that its actions will cause Fund spending. This connection may break down if
the tax does not reach substances or situations that cause Fund spending or if
the tax burden in such instances is not commensurate with the risk of
provoking such spending. While the waste-end tax suffers in both regards,
there is a moderate connection between the tax burden and the likelihood of
causing Fund spending.
There are a number of instances, however, where the tax under
consideration does not reach substances and situations likely to give rise to
Fund spending. First, the problem arises primarily because the tax is levied
only on RCRA-regulated wastes, even though other hazardous wastes and
substances may lead to Fund spending. Second, while the tax is levied on the
generation of wastes, it is not collected until the point where the wastes are
treated or disposed. Consequently, the possibility of tax evasion exists. If
the problem of evasion proves significant, the equity of the tax may be
undermined because the release of some wastes may lead to a Superfund
response, even though the tax has not been paid. A September 1983 analysis of
the substances found at 454 sites that were either on, or proposed for, the
National Priorities List, determined that the presence of illegally dumped
wastes meant that a waste-end tax would not have been paid at about 11 percent
of the sites.—' There have, however, been significant changes in legal and
regulatory requirements since the time these sites were created. It is not
clear that the level of illegal dumping will remain the same.
Finally, there are other situations that can arise where a waste-end tax
would not have been paid, even though Fund spending may be involved. Such
situations include recycling, transportation, and storage of hazardous
substances. The analysis of the 454 sites described above indicates that in
addition to illegal dumping, a waste-end tax would not have been paid at:
j8/ ICF Incorporated, Analysis of EPA site description data, September
1983.
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• 7 percent of the sites where contamination resulted
from recycling,
• 7 percent of the sites where contamination resulted
from product spills, and
• 2 percent of the sites where contamination resulted
from a mining operation.
The sum of these percentages does not equal the total percentage of sites
where a waste-end tax would not have been paid because the tax would not have
been paid at some sites for more than one reason. While in some cases, it
might be possible to collect the tax upon discovery of the site, the data
suggest the potential magnitude of the discrepancy between a waste-end tax
base and the sites eligible for CERCLA spending.
While the waste-end tax is, in some respects, too narrow, it may also
overtax or undertax specific wastes. The problem arises because the tax rate
is a uniform $4.73 per metric ton, despite the fact that not all wastes are
equally likely to cause Fund spending. Some wastes may be released with
greater frequency, pose a greater risk to the environment, be particularly
persistent and mobile, or have some other characteristic that increases the
chance of creating a situation requiring a CERCLA-financed response. By
taxing all wastes at the same rate, some wastes are being undertaxed while
others bear a disproportionately high tax.
In short, if a flat-rate waste-end tax is used to finance CERCLA
activities, the tax burden will not match responsibility for Fund spending in
a way that equity considerations call for. First, the tax does not reach
hazardous substances (wastes or otherwise) that are not RCRA-designated
wastes, despite the fact that Fund spending may be involved if they are
released. Further, tax evasion may mean that some of the wastes cleaned up by
Superfund have escaped the tax. Finally, because a flat rate is used, all
wastes are treated in the same manner, despite a varying likelihood of causing
Fund spending. The omission of these hazardous substances or events from the
tax reduces the correlation between those bearing the tax burden and the
problems addressed under CERCLA.
5.3.3 Incentives
While the waste-end tax was not designed to provide incentives for
improving waste management practices, it does produce a modest level of
incentives. In this section, the tax is evaluated in terms of its success in
creating the four environmentally preferred incentives established in Section
3.3: (1) an incentive to shift to better waste management practices, (2) an
incentive to reduce the volume of wastes produced, (3) an incentive to reduce
the hazardousness of the waste produced, and (U) a disincentive to circumvent
or illegally handle or dispose of hazardous materials. Each of these will be
discussed in turn.
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EXHIBIT 5-6
COMPARISON OF OFF-SITE HAZARDOUS WASTE
MANAGEMENT QUOTED PRICES FOR
NINE MAJOR FIRMS IN 1982 AND CALCULATION OF TAX RATE
AS A PERCENTAGE OF WASTE MANAGEMENT COST
Tax Rate as a
1982 Price Percentage of
Type of Waste Management ($/metric ton) Management Cost
Landfill Drum $110-240 2.0-4.3
Bulk 33-83 5.7-14.3
Land Treatment $ 5-24 19.7-94.6
Incineration Liquids $ 53-237 2.0-8.9
Solids & highly toxic liquids $395-791 0.6-1.2
Chemical Treatment $ 13-92 5.1-36.4
$ 66-791 0.6-7.2
Resource Recovery $ 66-264 0.6-1.8
Deep Well Injection Oily Haste Waters $ 13-32 14.8-36.4
Toxic Rinse Waters $132-264 1.8-3.6
Transportation $.08-.16 MT mile
Source: Booz-Allen and Hamilton, Inc., Review of Activities of Major Firms
In the Commercial Hazardous Waste Management Industry; 1982 Update
(Bethesda, Maryland: prepared for U.S. Environmental Protection
Agency, August 1983), p. 17.
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A flat rate waste-end tax may signal industry to plan to shift to better
waste management practices for the future, but is unlikely to provide
incentives for measureable changes in these practices in the near term. The
proposed tax rate, $4.73 per metric ton, is not differentiated by waste
management practice and therefore would not change the ranking of the costs of
different management practices. Exhibit 5-6 shows the costs of various
off-site waste management practices, indicating that even with the tax,
landfill would remain the least expensive option. Furthermore, it is possible
that a tax rate of $4.73 may be too low to produce any strong incentive to
change waste management practices. In a recent survey conducted by EPA,
various State officials indicated that the tax rates charged for their
waste-end taxes « most of which were higher than $4.73 per ton — were too
low to create such an incentive. In their opinions, the increase in costs
imposed by the tax has been small relative to price fluctuations in the cost
of waste management and the total management cost.™'
On the other hand, the percentage impact of the tax on the cost of waste
management would differ by management practice. This may send signals to
decision-makers in affected industries to consider alternative (although
currently more expensive) waste management methods for the future. The last
column on Exhibit 5-6 shows the percentage of total cost represented by the
tax. For example, the tax would increase the cost of land disposal of solid
wastes by 5.7 to 14.3 percent, compared to an increase in the cost of
incineration of only 0.6 to 1.2 percent.
It is difficult to determine at this time if a flat-rate waste-end tax
would provide an incentive to reduce the overall volume of wastes generated by
increasing the costs of production processes that generate a large amount of
waste relative to production processes that generate less waste. Quantifying
the effectiveness of a tax rate of $4.73 per metric ton in producing this
incentive would require a better understanding of the economic effects and the
development of the analytic tools and data described in Section 5.3.1. The
tax is unlikely to create an incentive to reduce the hazardousness of the
wastes because it does not discriminate this feature in the rate structure or
in the definition of the tax base.
Like any other tax, a waste-end tax provides an incentive for
circumvention. Tax avoidance may take the form of non-reporting or
underreporting the amount of wastes managed or the use of untaxed practices or
illegal treatment, storage, or disposal (TSD) practices. The flat rate
waste-end tax provides no disincentive for circumvention, and its ability to
discourage tax-avoidance would depend on the success of enforcement efforts.
The recent EPA survey of States' experience with waste-end taxes indicates
that many States attribute the incidence of tax avoidance to a lack of
enforcement staff and resources with which to identify these activities.
J9/ Office of Policy, Planning and Evaluation, U.S. Environmental
Protection Agency, Draft Report, Survey of States with Waste-End Taxes (August
1984).
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5.3.4 Revenue Generation
Unlike the feedstock tax, no model has been developed to predict the
ability of a waste-end tax to achieve its revenue target by estimating the
effect of the tax on the volume of taxable wastes that constitute the tax
base. Without a better understanding of the degree to which the tax would
create an incentive to reduce the overall volume of wastes generated, it is
difficult to predict the ability of the tax to generate revenue. As explained
in Section H.3, various States' experiences with similar taxes have been
inconclusive because the proportion of revenue shortfalls that can be
attributed to the incentive effects of the tax systems has not been
determined. The stability of the revenue stream generated by the tax would
vary indirectly with the strength of the incentive created for reducing the
volume of waste. A stronger incentive would result in less stable revenues
while a weaker incentive would provide a more certain revenue source.
It would seem that the ability of a Federal waste-end tax to meet revenue
projections in the first year would improve if it were able to avoid the types
of problems encountered by the States. For example, before implementing a
waste-end tax, further research would be necessary to determine the
availability of good data on waste volumes to be used in developing the rate
structure. Similarly, the assurance of adequate resources to meet the
enforcement requirements of a nationwide waste-end tax would improve the
revenue generating capability of the tax.
5.3.5 Administrative Feasibility
Taxable Parties. A flat rate waste-end tax collected from RCRA-permitted
Subtitle C treatment, storage or disposal (TSD) facilities would require the
identification of approximately M,8l8 facilities, according to a recent
survey.—' These facilities would include both hazardous waste generators
that manage waste on site, and off-site treatment, storage or disposal
facilities.
Existing records are available with which to identify potentially taxable
parties. RCRA Section 3005 requires all TSD facilities to obtain permits in
order to operate. All existing management facilities were required to file a
Part A permit application on or before November 19, 1980, and the information
from those applications has been entered into the Hazardous Waste Data
Management System (HWDMS) maintained by EPA. Facilities coming into existence
after Movember 1980 are required to obtain a permit before they may begin
operations. The identities of all TSD facilities, therefore, probably could
be determined by reviewing the file of completed permits and permit
applications in the HWDMS. However, because the HWDMS data base contains
permit applications from inactive sites, so-called "protective filers," and
facilities that filed by mistake, the creation of an accurate list of
20/ Westat, Inc., National Survey of Hazardous Waste Generators and
Treatment. Storage, and Disposal Facilities Regulated under RCRA in 1981
(Maryland, Westat, Inc., April 20, 1984), p. 85.
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potential taxpayers would require action by EPA or IRS to purge the list of
these facilities. Such a process is currently underway.
Verifying the identity of potential taxpayers also might be accomplished
through the use of other RCRA reporting and recordkeeping requirements, such
as the Part B permit application and the biennial report. EPA has established
the goal of calling in all Part B land disposal permit applications by the
close of fiscal year 1985. Information derived from these sources could be
compared to the list of potential taxpayers developed from HWDMS. Finally,
because some potential taxpayers would be in the business of commercial
hazardous waste management, the IRS could obtain independent verification of
their activities from their customers--hazardous waste generators--who might
otherwise be liable for the tax themselves.
The administrative burden of identifying the taxpayers for a flat rate
waste-end tax could be increased when the existing RCRA exemption for small
quantity generators is revised. A reduction in the threshold amount of waste
that can be generated per month in order to qualify as a small quantity
generator (for example, from 1000 kg to 100 kg) might significantly increase
the number of generators subject to Subtitle C regulation and therefore also
potential taxpayers. Many of these generators probably would not treat,
store, or dispose of hazardous wastes on site, and thus would not be subject
to the waste-end tax. The IRS, however, probably could not completely ignore
this group of potential taxpayers. Efforts to identify them, notify them of
the tax and its recordkeeping and reporting requirements, and to verify their
compliance would be required.
Previous experience with identifying taxpayers for waste-end taxes has
been ambiguous. Some states with such taxes have experienced difficulty in
identifying taxpayers, although the most difficult problems have probably been
associated with identifying hazardous waste generators for taxes assessed
against generators, and not with identifying hazardous waste management
facilities. States have used registers of State permits and licenses for
either generators or landfill operators; other State registers that may
correlate with hazardous waste activities (e.g., industrial waste permits,
sewer permits, SIC information, and Chamber of Commerce rosters) or Federal
registers (e.g., RCRA Part A facility permit applications or EPA
identification numbers) can be used. In some instances, States have relied
upon notices sent to licensed or permitted generators and/or disposers
notifying them of tax obligations and then relied upon voluntary activity
reports, or have sent requests to off-site facility operators to identify
taxable acts and make the appropriate tax assessments.
As more States obtain authorization to operate hazardous waste regulatory
programs that include permitting authority, the decentralization of
information concerning permitted TSD facilities could add to the
administrative burden of a waste-end tax and require EPA to modify some of its
current reporting requirements to ensure that adequate tax collection
information is on hand. Th^ IRS or EPA might be required, in addition to
using the HWDMS, to contact numerous State hazardous waste regulatory
authorities to obtain a complete and up-to-date inventory of potential
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taxpayers, particularly if State summary reports continue to be submitted
biennially. Alternatively, States might be asked to submit detailed data on
an annual basis.
Taxable Substances. The flat rate waste-end ta-: would be assessed against
all wastes defined by 40 CFR Section 261 as hazardous wastes subject to
regulation under RCRA. Because the taxable substances are defined by the RCRA
regulatory program, the problem of defining them for purposes of the waste-end
tax is significantly reduced. The regulatory program has already identified
the relatively large number of substances (about 450} included in the category
of listed wastes which must be identified specifically, and procedures have
been specified for determining ignitability, corrosivity, reactivity, and
extraction procedure toxicity in order to identify characteristic wastes.
Thus, a time-consuming development of lists and definitions of taxable
substances is not necessary for implementing this option.
Defining a unit of measure of the taxable substances could require some
time and effort before the tax could be instituted. Experience with the use
of "dry-weight" ton as a unit of measure for the PCLTF tax might be compared
to other potential measures before a unit of measure is chosen.—'
An administrative burden could result from the need to keep the tax and
the hazardous waste regulatory program proceeding in parallel. The inclusion
of additional wastes or changes in the definitions of characteristic wastes in
the regulatory system, for example, could affect the timing of tax-related
activities such as expanding the list of taxed substances. If additional
wastes were added to the regulatory program before legislation was enacted to
add them to the list of taxable substances, tax reports and records could not
require taxpayers to report simply the amount of hazardous waste that they had
treated, stored, or disposed of during the tax reporting period, because such
a report would include non-taxed hazardous wastes. Administering the tax
would be complicated by the need to develop and enforce methods for
distinguishing non-taxed hazardous wastes from taxed hazardous wastes.
Delisting a particular waste at a particular facility also could pose a
difficult administrative problem. Delisting, under 40 CFR Section 260.22,
excludes a substance at a particular generating facility from the lists of
hazardous waste in Subpart D of 40 CFR Part 261 by amending Subpart D with
respect to that waste at that facility. The waste, however, may still be a
characteristic hazardous waste as defined by Subpart C of 40 CFR Part 261. If
Congress enacts a tax law that lists each waste in Subpart D, then the
regulatory delisting may not remove the substance from taxation because of the
priority of the statute over the regulation. Administering the tax would be
made more difficult, however, because if the substance had been delisted for a
2V Section 231 of CBRCLA establishes a tax of $2.13 per dry weight ton on
hazardous waste received at a hazardous waste disposal facility. The tax
receipts fund the Post-Closure Liability Trust Fund (PCLTF) established by
section 232 of CERCLA.
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facility under Subpart D and did not qualify as a hazardous waste under
Subpart C, the facility would no longer be required to include the waste in
its RCRA reporting and recordkeeping.
Taxable Activities. A flat rate waste-end tax assessed against all
hazardous waste management facilities that treat, store, or dispose of
hazardous waste without making any distinctions among waste-management
practices would not impose significant burdens with respect to defining
taxable activities. Definitions adopted by the regulatory program could be
adopted without changes for the purposes of this tax.
Recordkeeping and Reporting. The burden of administering the flat rate
waste-end tax, as well as the time necessary to implement it, could be reduced
significantly through the use of existing reporting and recordkeeping
systems. Regulations under RCRA— require generators of hazardous waste
and the owners or operators of treatment, storage, or disposal facilities
(TSDs) to submit or maintain the following reports and records:
• Part A Permit Applications;
• Part B Permit Applications;
• Biennial Report;
• State Summary Biennial Reports;
• Operating Record; and
• Uniform Hazardous Waste Manifest System.
Each of these systems is discussed in detail in Appendix B.
These reporting and recordkeeping systems, however, would require certain
changes before they would be fully adequate for tax purposes. In particular,
using the facility reports and the State summary reports to verify the
identity of potential taxpayers or the amounts of waste potentially subject to
taxation would be difficult unless the frequency of the reports was changed
from biennial to annual. In addition, a change in the content of the State
summary report so that it included information on a facility-specific basis
would be necessary. Finally, changes in the format of the facility's
operating records would be desirable so that they could be used effectively
for tax purposes.
Monitoring and Enforcement. A flat rate waste-end tax levied against all
RCRA Subtitle C TSD facilities managing any waste identified by 40 CFR Part
261 as hazardous would require IRS to rely heavily on the compliance of
taxpayers with regulatory reporting requirements in order to monitor and
enforce the tax. Compliance or evasion of RCRA regulatory requirements and
the tax could be closely associated with each other.
22/ 40 CFR Parts 262, 264, 265, and 270.
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At a minimum, effective enforcement of the tax would require regulatory
changes in the existing RCRA reporting requirements. Although facility
operating records could be used to verify information concerning the amounts
of waste managed, such records are likely to be voluminous and will be kept at
the facility itself. Thus, the existing biennial reports probably should be
changed to annual reports to ensure that an initial verification of tax
returns can be made in an efficient and centralized manner. A regulatory
rulemaking procedure to make this change probably would require one to two
years to complete.
5.3.6 Programmatic Effects
As noted above, administration of this tax would probably require changes
to Federal and State hazardous waste reporting and recordkeeping requirements
and enforcement procedures. It might also affect States that have already
enacted waste-end taxes to finance different parts of their hazardous waste
regulatory and/or response programs. The level of staffing necessary to
obtain satisfactory compliance with a State waste-end tax could be reduced,
for example, if Federal enforcement of a similar Federal waste-end tax
produced data that could be shared with the States (such as currently is done
with certain income tax information). Alternatively, double taxation could
lead to revenue effects that could reduce the sums available to finance State
programs and require staffing reductions.
There are several different ways of dealing with the problem of the
interaction of the Federal and State taxes:
(1) Rely on Section Il4(c) of CERCLA, as it currently exists
and as past and prospective decisions by courts
interpret it further;
(2) Specify that no preemption of state taxing power is
intended;
(3) Explicitly preempt State taxing power for the same
purpose;
(4) Explicitly preempt State taxing of the same revenue
source; and/or
(5) Explicitly preempt State taxing of the same revenue
source but establish a State revenue sharing program.
The broad preemption options might be challenged on the grounds that
unless a State tax presents a direct obstacle to the accomplishment of a
Federal legislative goal (such as the encouragement of interstate commerce),
the State may impose the tax as an exercise of its concurrent taxing powers.
Thus, an analysis of the effects of State and Federal taxation of the same
revenue source in terms of altered revenue, changed incentives, and altered
economic impacts from those planned, and the subsequent effects of those
changes on State hazardous waste regulatory programs, would be necessary to
survey the full programmatic effects of the waste-end tax option.
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5.4 COMBINATION TAX b FEEDSTOCK TAX AND NON-INCENTIVE
WASTE-END TAX
5.4.1 Economic Impacts
The economic impacts of Combination Tax I described in Section 4.4 reflect
the combined effects of the feedstock and waste-end tax systems. These
combined effects would not exactly equal the sum of the individual effects
because of the complex interaction of economic variables that link the changes
in costs resulting from the imposition of a tax to changes in output. This
section will discuss each component of the tax — Feedstock Tax II modified to
raise $500 million and a flat rate waste-end tax targeted to raise $500
million — and describe the possible economic impacts of the combination.
Section 5.2 estimated the changes in prices and quantities of feedstocks
that would result from a feedstock tax designed to raise $1 billion annually.
Without a similar analysis of a tax designed to raise $500 million in revenues
each year, it is difficult to predict the exact effects of the tax. The
overall impact of the lower tax would be smaller than the impact of the higher
tax. In some cases, however, the elasticities observed at the $1 billion tax
level may hold for the lower tax. For example, in the case of acetylene, a
6.4 percent increase in price caused a 3.4 percent decrease in the quantity
produced. It is possible that this relationship may be a good predictor of
the effects of a lower tax on the price and quantity of acetylene. The exact
effect is difficult to predict because it is the relationship between the
effect of the tax on the cost of a feedstock and the prices of substitute and
complementary products that affect the direction and magnitude of the changes
in quantities of feedstocks produced. Therefore, although it is tempting to
conclude that the effects would be one-half of those observed under a $1
billion tax, all of the effects will not be proportional. Thus, we can only
conclude that the impact would be smaller, but how much smaller is unclear.
Section 5.3.1 suggested that a waste-end tax of $4.73 per metric ton would
cause relative increases in the cost of products produced in processes that
generate large amounts of wastes. The lower tax rate associated with the
waste-end component of Combination Tax I (i.e., $2.3? per metric ton) would
produce smaller price increases and a lower magnitude of economic effects.
Because the effects of each component (feedstock and waste-end) of Combination
Tax I are likely to be less intense than when considered independently with
higher rates, the cumulative effect of the two taxes may depend on the extent
to which they ultimately affect the same products or firms. To clarify, the
feedstock tax directly affects the price of feedstocks that are production
inputs. The waste-end tax affects the cost of waste management and,
consequently, the price of products that involve the generation of wastes
during manufacture. To the extent that the two taxes affect the costs of
different products, the rates on each tax may be too low to have any
significant economic impacts. If the cost impact of the two taxes is
concentrated on the same products, the combined effects may be as great or
greater than when the taxes are imposed independently at higher rates.
Another possibility is that the economic effects of the two taxes may offset
each other as they independently affect the costs of production inputs and
final products as well as their substitutes and complements.
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Without a better understanding of the magnitude and direction of the
economic effects of a combination tax, it is difficult to predict accurately
and to evaluate the equity considerations, the combined incentive effects, and
the ability of the combination tax to generate revenues that are discussed in
subsequent sections.
5.4.2 Equity
Retrospective Equity. Combination Tax I generally appears to meet the two
criteria used to evaluate retrospective equity: The tax would be levied on
the broad industrial groups believed to be responsible for Fund spending and
its distribution across different types of chemicals would be similar to the
desired distribution. Each of these issues is discussed in turn.
The feedstock component of Combination Tax I would be paid almost
exclusively by the petroleum refining and chemical industries because these
two industries produce virtually all of the taxed feedstocks. Depending on
several economic considerations, a portion of the tax burden may be shifted
out of these two industries in the form of higher product prices. If the tax
were passed on in this fashion, the industries facing the higher prices (i.e.,
those using the feedstocks) would likely be industries paying the waste-end
tax component of this tax. The waste-end tax, as indicated in Section 4.3.2,
would be paid by precisely those industries believed responsible for Superfund
spending. In short, Combination Tax I meets the first test of retrospective
equity.
The second test depends on the types of substances on which the tax is
levied. Because Combination Tax I has two distinct tax bases (i.e., taxed
feedstocks and RCRA-designated hazardous wastes), the overall tax burden on
substances would depend on the burden under each tax. For Combination Tax I,
the tax burden would be distributed in the following fashion: 33 percent
organics, 61 percent inorganics, and 6 percent crude oil. Exhibit 5-7
presents a comparison of the distribution of the tax burden to both the
substances found at sites and the substances generated as wastes. The
distribution of the tax burden would be similar to the distribution of
substances found at sites. The only exception is that crude oil bears 6
percent of the tax burden while only being found at 3 percent of the sites.
Because crude oil is usually refined into organic chemicals (as opposed to
being released in its unrefined state), market mechanisms may distribute some
portion of crude oil's tax burden to other organic chemicals, although some
crude oil purchasers (e.g., gasoline users) may pay a part of the tax burden
that is not commensurate with the risk to the environment. Further, to the
extent that the tax burden is not passed on to consumers, crude oil producers
would pay more than appears justified based on the occurrence of crude oil at
sites. There would be a more significant mismatch between the distribution of
the tax burden and the distribution of substances produced as wastes. In
particular, inorganics would pay a smaller share of the tax than might be
appropriate based on the types of wastes generated.
In short, Combination Tax I would meet the general requirement that it
fall on certain broad industrial groups. The distribution of the tax burden
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EXHIBIT 5-7
RETROSPECTIVE EQUITY OF COMBINATION TAX I
Distribution Distribution Distribution
Type of of of Substances of Substances
Substance Tax Burden 1/ Found at Sites 2/ Generated as Wastes 3/
Organic 33? 38% 31*
Inorganic 61 59 69
Crude Oil 6 3 <1
V Distribution of tax burden calculated as the weighted average of the
burden for Feedstock Tax II (described in Section 5.2.2) and the Waste-End Tax
(described in Section 5.3.2).
2/ Based on analysis described in Section M.2. The substances found at
sites were traced back to constituent feedstocks. The information displayed
here is based on a frequency count of these feedstocks.
3/ ICF analysis of data provided by Westat, Incorporated, 1984. Results
calculated on the weight, rather than volume, of hazardous waste streams.
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across chemical substances produced within those industries would be somewhat
different from the desired distribution.
Prospective Equity. As described in Section 5.2, Feedstock Tax II would
offer broad coverage of all the substances and situations likely to give rise
to Fund spending. Regardless of how a hazardous substance enters the
environment, it is certain that at some point in the production process, the
tax would have been paid. This tax, however, may also be overly inclusive
because two final products made from the same feedstock would pay the same
share of the tax burden, despite the fact that both may not be equally
hazardous. Further, Feedstock Tax II would not discriminate among firms based
on behavior. One firm may use a taxed feedstock in a safe fashion while
another allows it to be released into the environment. Each firm would face
the same tax burden, despite their different probabilities of causing Fund
spending. The waste-end tax component, on the other hand, would offer a close
connection between the threat of causing Fund spending and the tax burden, at
least for those wastes subject to the tax. Some substances and situations
likely to cause Fund spending, however, may escape taxation. As described in
Section 5.3.2, all non-RCRA-designated wastes (e.g., hazardous substances or
small generator wastes) would not be taxed, despite the chance that their
release may necessitate a Fund response. Furthermore, all wastes would be
taxed at a uniform rate of $2.37 per metric ton, despite varied levels of risk.
Taken together, the components of Combination Tax I may be more
prospectively equitable than either tax by itself. Through the feedstock tax,
all substances likely to cause Fund spending would be taxed, thus reaching the
substances and situations missed by the waste-end tax. The use of the
waste-end tax would result in a closer match between a firm's behavior and its
tax burden. The combination tax would not, however, avoid the over-inclusive-
ness of the feedstock tax nor, because of the flat-rate nature of the
waste-end tax, would it distinguish among wastes according to their chance of
causing Fund spending. In short, Combination Tax I would be more
prospectively equitable than either tax standing alone, though it would
contain some significant shortcomings.
5.4.3 Incentives
It is difficult to make measureable predictions of the incentives created
by Combination Tax I without knowing its precise economic effects. Thus, this
section will describe the likely incentive effects of each component of
Combination Tax I, and compare them to the feedstock and waste-end taxes when
imposed independently at higher rates. The analysis focuses on (1) the
incentive to shift to better waste management practices, (2) the incentive to
reduce the volume of wastes produced, (3) the incentive to reduce the
hazardousness of the wastes produced, and (U) the disincentive to
circumvention or illegal handling or disposal of hazardous materials.
Previous sections described the incentives created by the feedstock tax
for increased recycling of wastes that include feedstocks, and the signal sent
to industry by the waste-end tax to .begin to explore alternative waste
management practices. Changes in the volume of waste production that could be
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expected from changes in the volume of feedstocks and changes in production
processes were also described. The signals sent to industry by a lower
feedstock and waste-end tax under Combination Tax I would be weaker than under
a $1 billion dollar per year tax. The combined effects would depend on the
overlap in the incidence of the two taxes on industries and products. If the
feedstock and waste-end taxes fell on different industries and products, their
effects would be diluted and the rates could be too low to achieve significant
incentives. The greater the overlapping impact of the two taxes, the stronger
the incentive for changing waste management practices and changing the volume
of wastes produced.
Section 5.2.3 described the possible change in the hazardousness of wastes
that may result from the change in the mix of wastes caused by the feedstock
tax. The change in the hazardousness of wastes produced by Combination Tax I
is likely to be less than the potential change conditioned by the feedstock
tax alone. The weakened impact of a feedstock tax targeted to raise $500
million would not be offset by the waste-end tax component because the latter
was not designed to generate any incentive for reducing the hazardousness of
wastes. Finally, neither tax would provide disincentives for circumvention.
Combination Tax I rates are lower for each component; therefore, this tax may
produce a smaller incentive for circumvention if the tax burden were borne by
different industries and products. The strength of the incentive to
circumvent the tax would be likely to increase with the level of overlap in
the tax bases.
5.4.4 Revenue Generation
In gross terms, the tax base is likely to be more stable under Combination
Tax I than under either the feedstock or the waste-end tax alone because the
tax incidence is divided between two tax bases and each bears only half the
burden. As a result, the ability to predict revenues may improve because
there is likely to be a reduction in the types of incentive effects that would
result in a reduction of the tax base.
5.4.5 Administrative Feasibility
The administrative and reporting burdens of Combination Tax I are likely
to be higher than the burdens imposed by either the feedstock or waste-end
taxes alone, because in general, the burdens will be the sum of the burdens
imposed by each tax.
Taxable Parties. A reduction in the burden required to identify taxable
parties for Combination Tax I from the burden required to identify them for
each tax individually would occur only if a significant number of the
taxpayers of the feedstock tax are also TSD facilities for purposes of the
waste-end tax. However, the estimates of the numbers of taxpayers for the two
taxes suggest that, at best, this reduction could not be larger than the
estimated number of feedstock taxpayers — about 500 — and they would make up
no more than about 10 percent of the total number of taxpayers for Combination
Tax I.
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Taxable Substances. Because of the different nature of the substances
taxed under the two components of Combination Tax I, there is likely to be no
reduction in the burden of defining taxable substances due to the
combination. The burden will be the sum of the burdens of the two taxes
individually.
Taxable Activities. These activities may be slightly easier to identify
with Combination Tax 1 because certain activities can be expected to be found
together. Thus, for example, the use of a particular feedstock identified for
the feedstock tax may provide an indication that the manufacturer also
generates a waste commonly associated with that feedstock. Even so, however,
the generator might dispose of the waste off site, and could not be presumed
to be subject to the waste-end portion of Combination Tax I without further
investigation. In addition, because of the limited overlap described above
between potential taxpayers for the feedstock and waste-end portions of this
tax, the reduction in administrative burden from the sum of the burdens of the
two taxes might not be particularly large.
Recordkeeping and Reporting. Under Combination Tax I, these activities
might be slightly less burdensome than the sum of the reporting and
recordkeeping burdens of the two taxes considered individually if combined
reports could be used. However, because of the difference between the
activities addressed by the two taxes, the tax return form itself appears to
be the only report that could be combined.
Monitoring and Enforcement. Enforcement and audit staff might be able to
investigate both components of Combination Tax I simultaneously with respect
to taxpayers subject to both. Once again, however, potential savings would
depend on the overlap between the taxpayers of the two taxes, and that overlap
would probably not be large.
5.4.6 Programmatic Effects
The programmatic effects of Combination Tax I are not likely to be
different from those of each tax considered separately. Both the feedstock
and waste-end portions could raise problems of preemption of State taxing
authorities or affect the revenues derived.from similar State taxes. The
waste-end portion could affect the operation of Federal and State hazardous
waste regulatory programs by requiring changes in recordkeeping and reporting
requirements or enforcement programs. These preemption, revenue, and
regulatory effects, however, could also be possible from either a feedstock or
waste-end tax alone. Thus, the combination of the two taxes does not appear
to create any unique problems.
5.5 COMBINATION TAX Ifc FEEDSTOCK TAX AND INCENTIVE WASTE-END TAX
5.5.1 Economic Impacts
Like the other taxes, the Combination Tax II will generate $1 billion.
Approximately four-fifths of that will be collected from the feedstock tax,
and the other fifth from the waste-end tax.
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Rather than examine the economic effects of both components of the
Combination Tax II, this section will only concentrate on the effects of the
waste-end tax. This is because the effects of an annual $800 million
feedstock tax would, of course, be somewhat less than the effects of an annual
$1 billion tax on the same substances. However, this section will consider
the combination of the feedstock and waste-end taxes insofar as it will expand
the current base of feedstock taxpayers and thus generally reduce their burden.
To help estimate the microeconomic effects of a waste-end tax, EPA has
developed a computer model. =2.' It compares the cost of land disposal and a
tax with the cost of waste treatment. Before presenting the model's results,
this section will first explain the model's assumptions and limitations.
Assumptions and Limitations of Waste Management Model. The model's
operation is straightforward. It computes both the cost of disposal with the
tax and the cost of each treatment alternative available to the generator of
hazardous wastes. It then selects the least-cost option and allocates the
waste to that option.
The model calculates the incremental cost of complying with the waste-end
tax in either of two ways:
• if the generator continues to dispose of wastes on
land, the incremental cost is the amount of tax paid
on those wastes;
• if the generator adopts a treatment alternative, the
incremental cost is the difference between the cost of
that treatment alternative and the cost of land
disposal (plus any tax paid on the residual wastes
generated by the treatment alternative).
Information from EPA's survey of hazardous waste management practices was
used to determine the types of quantities of hazardous waste generated and
disposed of on land by firms regulated under RCRA.—' The initial cost
analysis of treatment and disposal options has been limited to the ten
highest-volume waste streams handled in each of three land disposal
technologies as reported in the survey. The technologies were deep-well
23/ U.S. Environmental Protection Agency, Office of Policy Analysis,
Hazardous Haste Management Model, prepared by Putnam, Hayes and Bartlett, and
Pope Reid Associates, Inc., April 1984. A complete description of the model,
its assumptions, and limitations and a discussion of the cost estimates
developed for each treatment option considered in the analysis are presented
in a supplemental document entitled: Waste-End Tax — Technical Background
Document.
2|4/ U.S. Environmental Protection Agency, Office of Solid Waste, National
Survey of Hazardous Waste Generators and Treatment, Storage, and Disposal
Facilities Regulated Under RCRA in 1981, prepared by Westat, Inc.-, April 1984.
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injection, landfills, and. surface Impoundments. As a result, the current
version of the model analyzes 28 waste streams that comprise about 83.3
million metric tons (MMTs) of waste classified as hazardous under RCRA. This
constitutes about 78 percent of surface Impoundments or waste piles in 1981.
ApproKimately 24.4 MMTs of hazardous waste that were disposed of or stored on
land in 1981 have been excluded from the model.=5'
Because the model does not comprise the total universe of potentially
taxable land disposed wasts, simplifying assumptions about the effect of the
tax on wastes excluded from the model were made in order to present a more
complete picture of the total effects from the tax. Throughout the analysis,
we will attempt to clearly indicate when results are based only on model
analysis and where simplifying assumptions have been introduced for purposes
of analyzing the effects on excluded wastes.
Thus, since the model does not include the entire universe of RCRA wastes,
the analysis of the effects of a tax will be understated. Alternatively, if
the survey did not accurately characterize an industry's waste management
practices in 1981 (e.g., estimates of volume of waste disposed of), the
resultant cost estimates presented here may be under- or overestimated. In
general, the significance of these limitations will depend on the magnitude of
the economic impacts that can be estimated. If these effects are
insignificant, then it may be reasonable to assume that the incremental impact
of the tax on waste streams that are excluded from the model would also be
insignificant.
To estimate the impacts from the Phase I tax of $5 a ton, a baseline had
to be established. The baseline represents the amount of waste that should be
disposed of without a waste-end tax. By setting a baseline, we were able to
focus our analysis on the economic effects that would be caused by the tax and
not by other environmental control costs. To estimate the baseline, the model
was run with the tax set at zero to determine whether it was cheaper to treat
rather than to use land disposal for certain waste streams under Part 264 land
disposal regulations.— Failing to estimate a baseline that accounts for
25/ Because some of the respondents to EPA's survey claimed confidential
business information, our access to their responses was limited. Also, to
develop estimates of the total waste managed in a process, EPA's survey
imputed estimates of the volume of waste managed in a process when there was a
missing value in a questionnaire. The model, however, included only volumes
of hazardous waste that were actually reported as treated, stored, or disposed
of on land in 1981. Finally, because we only looked at the top 28 wastes by
volume, we excluded many smaller volume wastes.
26/ Estimating the baseline was particularly important to this analysis
because the model currently uses data on 1981 waste management activities (the
model includes about 83.3 MMTs in either land disposal, or storage in a
surface impoundment or a waste pile). However, it was not until 1982 that
RCRA1s final land disposal regulations were promulgated. These regulations
had the effect of increasing the cost of land disposal, making treatment less
expensive in some cases.
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the effects of the Part 264 land disposal regulations would mean that the
economic impacts estimated in this analysis would overstate the incremental
effects of the tax.
The baseline analysis indicated that a fully implemented and enforced RCRA
program under Part 264 land disposal regulations would have a significant
effect on land disposal, assuming the availability of adequate treatment
capacity and that generators perceive the long-term liability associated with
land disposal alternatives as being low. For approximately 35.5 million
metric tons (MMTs) of the 83.3 MHTs in storage or disposal (in EPA's model),
Part 264 land disposal regulations would have the effect of making treatment
alternatives cheaper than land disposal. Of the remaining 47.8 MMTs of
hazardous waste, 27.3 MMTs would be disposed of on land, and 20.5 MMTs would
be stored in surface impoundments.—
Microeconomic Impacts. Ideally, a microeconomic analysis would be done at
a plant-, firm-, or industry-segment level. However, data on the costs of
products sold, operating margins, and waste management practices are not
universally available at such a disaggregate level. Because of these
limitations, as well as the large amount of resources required to do a
disaggregate analysis, we conducted our analysis at the aggregate industry
level (2-digit SIC). Thus, our analysis at a higher level of aggregation may
mask some potentially adverse effects a waste-end tax may have on industry
segments, firms, or plants.
To determine whether the waste-end tax could have significant
microeconomic impacts, we compared the cost imposed by both phases of the tax
with both the costs of production and the pretax margins in thirteen
manufacturing industries. In general, the ratio of incremental cost to pretax
profits provides a measure of the severity of an impact when it is suspected
that a firm will be unable to raise prices and thus recover its increased
costs. The ratio of incremental cost to the cost of production indicates the
magnitude of the price increase necessary to recover cost increases.
We also attempted to qualitatively assess the microeconomic effects of a
waste-end tax at the firm level. However, we were unable to do a detailed
assessment of these effects because of data and resource limitations.
Although the waste-end tax would be collected from RCRA Subtitle C
facilities, the additional cost of the tax would be passed back to industries
and firms regulated as generators (14,000 facilities) under RCRA. This is
because the demand for commercial land disposal services appears relatively
inelastic, and commercial land disposal firms would be able to pass the tax
27 / EPA's survey did not ask how long a waste was held in storage. Here,
the model assumes that if the waste does not shift in response to the Part 264
requirements, then the generator would either leave the waste in storage or
send it to land disposal. This is consistent with EPA's current belief that
many unlined storage surface impoundments will close as disposal facilities.
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back to the generators through price increases.2-?/ Therefore, the tax will
represent an increase in production costs for industries and firms using land
disposal, and may affect the prices of their products as well as their
profitability.
Effects on Industries. Only nine of the thirteen manufacturing industries
included in this analysis used disposal or storage practices in 1981 that
would be taxable under the Phase I scheme. As Exhibit 5-8 shows, incremental
cost as a percent of cost of production would be one-tenth of one percent of
the chemicals and allied products industry, and less than one-tenth of one
percent in all others. This implies the chemical and allied products industry
would have to increase prices one-tenth of one percent to recover increased
costs from the tax. In none of the nine industries did the ratio of
incremental costs to pretax margin exceed four-tenths of one percent. Thus,
at the industry level, the effects of the Phase I tax on prices or profits
would be negligible.
In addition, because the Phase I tax should expand the current base of
taxpayers, the pressure to increase prices in industries that pay the existing
feedstock tax may be reduced. This should be particularly helpful to the
chemicals industry, which appears to be the largest taxpayer in the current
feedstock system and which may be particularly vulnerable to foreign
competition. =9-* However, other industries generating hazardous wastes but
not paying much feedstock tax would pay the waste-end tax. These industries
include the steel, textile, and primary metal industries.
In contrast, the Phase II tax could affect industries significantly. Some
firms would incur higher costs as a result of either the rising tax or a
decision to ban a waste from land disposal. If waste treatment is
substantially more expensive than land disposal, some firms may be unable to
continue operating unless they raise prices. Manufacturers of products that
have a high elasticity of demand and low growth in demand would most likely be
unable to pass through their increased production costs. As a result, they
would have to reduce their profit margins and could become unprofitable.
Alternatively, manufacturers of products for which demand is relatively
inelastic would not be significantly affected.
28/ Based on discussions with commercial disposal operations, which are
responsible for collecting the Post-Closure Liability Trust Fund tax, it
appears that the disposal facilities are adding the tax to the price for
disposal services. If this policy is practiced over the entire hazardous
waste management industry, it would seem reasonable to assume that the Phase I
tax would be passed back to thousands of waste-generating firms.
29/ Analysis of the revenue-generating capability of the Phase I tax of $5
per ton indicates the chemicals and allied products industry would pay
approximately 47 percent of estimated waste-end tax revenues. In addition,
the industry may be paying as much as 95 percent of the current feedstock tax,
according to industry estimates.
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EXHIBIT 5-8
ECONOMIC EFFECTS OF THE PHASE I WASTE-END TAX
AT $5/METRIC TON
SIC Industry
Incremental Cost Incremental Cost
as a Percent of as a Percent of
Production Cost 1/,2/ Pretax Margin 1/,2/
20 Food Processing 3/ -.-
23 Textile Manufacturing 0.0
26 Paper and Allied Products 3/ -.-
28 Chemicals and Allied Products 0.1
29 Petroleum and Coal Products 0.0
30 Rubber and Misc. Plastics 3/ -.-
32 Stone, Clay, and Glass Products 0.0
33 Primary Metal Industries 0.0
34 Fabricated Metal Products 0.0
35 Machinery, Except Electrical 0.0
36 Electric and Electronic Equipment 0.0
37 Transportation Equipment 0.0
39 Instruments and Related Products 0.0
0.0
™ • ^
0.2
0.4
™ • ^
0.0
0.0
0.0
0.0
0.0
0.0
0.0
\l Information on cost of production and pretax margin of manufacturing
SIC categories represented in our sample were developed from Census of
Manufacturers.
2/ The ratios have been expressed as percentages in the table. All
estimates are rounded to tenths of a percent, and estimates of less than one-
tenth of one percent have been rounded to zero.
3/ Based on EPA's survey data, these manufacturing industries did not
dispose of or store hazardous waste in ways that are taxable under the Phase I
or II tax.
Source: EPA, Office of Policy Analysis, Hazardous Waste Disposal Model.
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As Exhibit 5-9 shows, the incremental cost of a tax of $1707ton would be
five-tenths of one percent of the cost of production in the chemical and
allied products industry, one percent in the petroleum and coal industry, and
less than one-tenth of one percent in the other seven industries. In the
petroleum and coal industry, incremental cost as a percent of pretax margin
would be 9.8. Although this figure is much higher than in other industries,
it still appears insignificant as an indicator of economic effects. If pretax
margin in the industry were $100, a 9.8 percent decrease would reduce the
margin to $91.20, and thus have little effect on profitability.
Effects on Firms. Although data are inadequate for comprehensively
estimating the effects of a Phase I tax at the firm level, we generally
believe that small firms that generate and dispose of large volumes of waste
on site could be adversely affected by the tax if alternative treatment is not
available at a reasonable cost. Estimates of the cost of waste treatment for
the 28 waste streams analyzed generally indicate significant economies of
scale in waste treatment.35' Thus, the cost of treatment may be lower than
the tax, and the impact on these firms may be insignificant. Because the tax
is a small percent of the price of commercial land disposal for firms sending
their wastes off site, the incremental effect of the tax appears insignificant
here as well. (EPA will attempt to analyze these effects in greater detail in
the next few months.)
The Phase II tax could also significantly affect firms. At the industry
level, impacts appeared insignificant at $170 a ton because most firms can
treat their waste at a fairly low cost and avoid paying the tax. Because of
the large economies of scale in waste treatment, large waste generators should
find treatment less expensive than land disposal and paying the tax. However,
small generators could still find on-site treatment costs prohibitive (e.g.,
the initial cost of investing in a treatment unit may be significant). As a
result, these firms would have to either pay the rising tax or send their
waste to a commercial treatment facility. Both of these options may place a
large financial burden on small firms in an industry, possibly putting them at
a competitive disadvantage with larger firms. For example, a firm with large
volumes of waste may pay only $2 per ton to treat its waste, and a smaller
firm with less waste may pay a tax of $20 per ton. If the smaller firm tries
to recover all of the additional costs through a price increase, it may be put
at a competitive disadvantage with the larger firm. The differential impact
of the tax may cause the smaller, higher-cost firm to reduce profit margins
and, in the extreme case, to close. Electroplaters, small refiners, and wood
preservers are examples of firms that may face high treatment costs and may be
adversely affected by the tax.
30/ Economies of scale in waste treatment are exhibited when the
additional costs of treating another unit of waste (e.g., ton) decreases as
the volume of the waste increases.
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EXHIBIT 5-9
ECONOMIC EFFECTS OF THE PHASE D WASTE-END TAX
AT $170/TON
SIC Industry
Incremental Cost Incremental Cost
as a Percent of as a Percent of
Production Cost _1/,2/ Pretax Margin _1/,2/
20 Food Processing 3/ -.-
23 Textile Manufacturing 0.0
26 Paper and Allied Products 3/ -.-
28 Chemicals and Allied Products 0.5
29 Petroleum and Coal Products 1.0
30 Rubber and Misc. Plastics 3/ -.-
32 Stone, Clay, and Glass Products 0.0
33 Primary Metal Industries 0.0
34 Fabricated Metal Products 0.0
35 Machinery, Except Electrical 0.0
36 Electric and Electronic Equipment 0.0
37 Transportation Equipment 0.0
39 Instruments and Related Products 0.0
0.0
—* • ™
1.2
9.8
"* • ™
0.0
0.3
0.0
0.0
0.0
0.0
0.0
I/ Information on cost of production and pretax margin of manufacturing
SIC categories represented in our sample were developed from Census of
Manufacturers.
2/ The ratios have been expressed as percentages in the table. All
estimates are rounded to tenths of a percent, and estimates of less than one-
tenth of one percent have been rounded to zero.
3/ Based on EPA's survey data, these manufacturing industries did not
dispose of or store hazardous waste in ways that are taxable under the Phase I
or II tax.
Source: EPA, Office of Policy Analysis.
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5,5.2 Equity
Retrospective Equity. Because Combination Tax II is paid both by waste
generators and feedstock producers, it seems likely that the tax burden will
fall within the broad industrial groups believed responsible for Superfund
spending. The feedstock tax would be collected primarily from the petroleum
refining and chemical manufacturing industries, while the waste-end tax would
be collected from these two industries as well as the metal processing
industry ll»e., those industries responsible for 93 percent of generated waste
volumes).21' Combination Tax II, therefore, would meet the first test of
retrospective equity as defined earlier.
The second measure of retrospective equity depends on the types of
chemical substances that are taxed. In order to determine which types of
chemicals are taxed, both components of the combination tax must be analyzed.
As indicated in Section 5.2, Feedstock Tax II would raise 35 percent of its
total revenues from organic chemicals, 53 percent from inorganic chemicals,
and 12 percent from crude oil. Under Phase I, the waste-end tax would be
collected on land disposed wastes as well as on wastes stored in surface
impoundments or waste piles. Some wastes, therefore, would not be taxed. For
the purposes of this analysis, it has been assumed that the subset of taxed
wastes would be similar in terms of chemical constituents to the total
quantity of wastes generated. The assumption may be somewhat incorrect
because different wastes have characteristics making them more or less
suitable for certain waste management choices. For example, petroleum based
wastes with a high BTU content are often incinerated and would thus not be
subject to the tax. In the absence of any data, however, it has been assumed
that because the distribution of taxed wastes among organic chemicals,
inorganic chemicals, and crude oil is similar to the distribution for all
wastes. Accordingly, it is estimated that the waste-end tax component will
raise 31 percent of its revenue from organic chemicals, 69 percent from
inorganic chemicals, and less than 1 percent from crude oil. The tax burden
of the combined tax is next estimated as a weighted average of the burden
under the component parts. Doing so indicates that Combination Tax II would
raise 34 percent of its revenue from organic chemicals, 56 percent from
inorganic chemicals, and 10 percent from crude oil.
As shown in Exhibit 5-10, the tax burden on organic chemicals (34 percent)
is similar to the fraction of sites at which organics are found (38 percent)
and to the proportion of generated wastes that are organic (31 percent). The
tax burden on inorganic chemicals appears to be somewhat lower than that
suggested by the data, while the tax share for crude oil is higher. As noted
in Section 3.2, however, crude oil may be underrepresented in the data
available for both MRS sites and generated waste quantities. Thus, from an
equity perspective, the distribution of the tax burden for Combination Tax II
may be satisfactory.
3_1/ Westat, Inc., National Survey of Hazardous Waste Generators and
Treatment. Storage, and Disposal Facilities Regulated under RCRA in 1981
(Maryland, Westat, Inc., April 20, 1984), p. 141.
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EXHIBIT 5-10
RETROSPECTIVE EQUITY OF THE COMBINATION FEEDSTOCK
TAX AND INCENTIVE WASTE-END TAX
Distribution Distribution Distribution
Type of of of Substances of Substances
Substance Tax Burden U Found at Sites 2/ Generated as Wastes 3/
Organic 3l\$ 38%
Inorganic 56 59 69
Crude Oil 10 3 <1
_!/ Distribution of tax burden calculated as the weighted average of the
burden for the modified feedstock tax (described in Section 5.2.2) and the
waste-end tax (described in Section 5.3.2).
2/ Based on analysis described in Section 4.2. The substances found at
sites were traced back to constituent feedstocks. Information displayed here
is based on a frequency count of these feedstocks.
3/ ICF analysis of data provided by Westat, Incorporated, 1984. Results
calculated on the weight, rather than volume or frequency, of hazardous waste
streams.
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Prospective Equity. Because the tax under consideration would combine two
distinct types of tax, its prospective equity would depend on the
characteristics of its constituent parts. As noted in Sections 5.1.2 and
5.2.2, the prospective equity of a feedstock tax would be affected most
directly by its broad reach. Because the tax would be levied early in the
production process, virtually any substance that is likely to lead to Fund
spending would have had the tax paid at some point during its manufacture.
This broad reach also implies, however, that the tax burden for some
substances or situations may be higher than is equitable. For example, the
tax would be borne equally by two products of the same taxed feedstock even if
both did not pose the same environmental risk because the feedstock would be
taxed without regard to how it was to be used. Further, the feedstock tax
would not distinguish between firms based on the methods by which each manages
hazardous substances. Two firms may handle the same substance and pay an
equal tax, even though the waste management practices of one constitute a more
significant environmental threat.
To a large degree, these equity shortcomings would be offset by the
waste-end tax component. Given that the waste-end tax is designed primarily
to create incentives for firms to act in an environmentally safe fashion, it
also would tend to adjust a firm's tax burden to reflect the likelihood that
its activities may cause Fund spending. For example, in Phase I, tax rates
would be $10 to $15 per ton higher for highly toxic and mobile wastes.
Because such wastes would probably be more likely to cause Fund spending
(i.e., if released, such wastes may pose a significant threat), equity would
be served by taxing them more heavily. Similarly, incineration and recycling
would not be taxed under Phase I because wastes managed in such processes
would not be likely to lead to Fund spending. Phase II of the waste-end tax
may be even more equitable because the tax burden for particular substances
and situations would be adjusted to reflect the associated risk in a complex
and sophisticated fashion. To the extent that the tax burden may not reflect
accurately the probability of a particular substance or situation leading to
Fund spending, some inequity may remain. However, this waste-end tax would
have the potential to provide a much more direct link between the likelihood
of provoking Fund-financed responses and the tax burden than would any of the
other taxes considered. It is important to note that the double taxation, to
the extent it exists, may also create inequities.
In short, this combination tax would offer a high level of prospective
equity. Because of the feedstock tax component, it is reasonably certain that
the tax would have been paid at some point in the production of all substances
likely to cause Fund spending. As a consequence of the incentive-based
waste-end tax, it is also likely that a firm's total tax bill would reflect,
at least partially, the riskiness of its activities. Some inequity would
still exist, however, because of the excess burden imposed on some substances
by the feedstock tax and the chance that the waste-end tax would miss some
substances that would be appropriately taxed; however, the combination of the
two types of tax minimizes this inequity.
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5,5.3 Incentives
In analyzing incentive effects, It is useful to assess the feedstock and
waste-end components of Combination Tax II separately. Again, as the result
of limited information, this approach may overlook potentially significant
interactions between the two taxes.
The incentive effeccs of the 1800 million feedstock component of
Combination Tax JI would probably fall somewhere between those of the i1
billion Feedstock Tax II evaluated in Section 5.2 and those of the $500
million feedstock component of the Combination Tax I assessed in Section 5.4.
In general, higher prices for feedstocks can be expected to reduce demand and
to encourage recycling and process innovations that reduce feedstock use.
These effects are not detailed in this section.
A waste-end tax creates an incentive to change current hazardous waste
management practices by increasing the cost of land disposal relative to other
waste treatment and disposal notions. In general, the strength of the
incentive depends on the size of the tax. However, the wasce-end "ax
component of Combination Tax II system will actually augment existing
incentives for improved management of hazardous waste (e.g., existing federal
and state regulations, state taxes,and liability under Superfund and other
federal and state laws). Yet, while the existing incentives for better waste
management have increased the generator's awareness of the long-term cost of
land disposal, EPA's survey of hazardous waste generators and treatment,
storage, and disposal facilities indicates that in 1981 about 20 percent of
all hazardous wastes generated (55 million metric tons) was disposed of on
land, and about 52 million metric tons were stored in surface impoundments or
waste piles.
The waste-end tax component of a Combination Tax II system could create
some primary and secondary incentives for hazardous waste management:. Primary
incentives include increased use of better treatment and disposal practices, a
lower volume of hazardous substances produced, and a reduction in the
hazardousness of substances produced. Although the secondary incentives
created by the tax are often difficult to readily identify and measure, they
can also be very important. They include expanded research and development
activities, development of better data on hazardous waste management practices
(e.g., improved reporting systems), and increased construction of waste
management facilities. The tax can also adversely affect the environment if
it contributes to an increase in the incidence of illegal disposal. Depending
on the strength of the incentive created by the tax, some or all of these
incentives could be created. This section will examine each one as it applied
to the Phase I and Phase II waste-end tax systems.
Increased Use of Better Treatment and Disposal Practices. The Phase I tax
of $5 a ton is designed primarily to raise revenue, rather than create strong
incentives for better waste management practices. It is generally thought
that only a significant increase in the price of disposal (e.g., through
higher tax rates) or a land disposal prohibition could substantially reduce
land disposal. This notion has been supported by analyses of states'
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experiences with waste-end taxes and limited EPA analysis of prices in the
commercial waste management industry.
The EPA analysis showed that the price of disposal in a landfill or deep
well can be as low as S10-S30 a ton. In contrast, resource recovery,
treatment, and incineration can be as much as S260-S790 a ton (although the
range can frequently be less than this;. Price differences still persist,
even after EPA has promulgated several rules that increase the cost of land
disposal. However, as this section shows, new analysis suggests that
substantial amounts of certain types of wastes would no longer be disposed of
on land, even at low.waste-end tax rates.
Phase I. The model described earlier contains information on the
relative cost of land disposal and alternative treatment and disposal
practices for the 28 largest volume waste streams that are disposed of on land
under RCRA. The current version of the model defines alternative treatment
practices as only those practices that do not occur in or on the land. Thus,
any shift to non-taxed treatment in a surface impoundment would not be
reflected in the model's results.
The preliminary results of such an analysis using the Phase I tax of $5
per ton are shown in the top portion of Exhibit 5-11. They indicate that
about 16.8 million metric tons (MMTs), or 35 percent of the hazardous waste
disposed of or stored on land,32 would shift to. treatment under the $5 a ton
tax. Most of these -- 11.-7 MMTs -- are corrosive wastes from underground
injection wells and storage surface impouridraents. They would be sent to
neutralization tanks and then discharged to a- publicly .owned wastewater
treatment facility. Three other waste streams comprise the remaining 5.1
MMTs: about 4.5 MMTs of chrome containing waste (which fail the extraction
procedure toxicity test), about .16 MMTs of cyanide-bearing waste would be
chemically treated and reduced through vacuum filtration, and about .32 MMTs
of organic distillation tars would be biologically treated.*3
Exhibit 5-11 generally shows that the $5 per ton tax would reduce the
amount of waste that would be disposed of in injection wells by 24.0 percent
and the amount stored in surface impoundments by 67.3 percent. However, che
tax would have a much smaller effect on landfilling and disposal in surface
impoundments. The largely unanticipated incentives created by the Phase I tax
could significantly affect its ability to generate reveues as the base of
taxable wastes decreases in size over time. This issue is closely examined in
the section on revenue generation.
In addition to the modeling analysis, we assumed that the waste streams
excluded from the model would shift to treatment at roughly the same rate as
the wastes that were modeled. By applying the estimates of the percentage
32This figure assumes a baseline of compliance with Part 264 land
disposal regulations.
33We also simulated the effects of imposing a high tax ($22/ton) on
wastes that might qualify as extremely toxic and mobile. Treatment of these
wastes was not increased by the $22/ton tax.
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EXHIBIT 5-11
TOTAL HAZARDOUS WASTE DISPOSED OF BY
TECHNOLOGY AND TAX RATE
(millions of metric tons)
Haste
Management Options
?/
Wastes in model:-'
Landfill
Underground Injection
Surface Disposal Impoundment
Surface Storage Impoundment
Total Land Disposal
Wastes not in model:-
Underground Injection
Surface Impoundment Disposal
Surface Impoundment
Total Land Disposal
TOTAL LAND DISPOSAL
MODELED/NOT MODELED
Current"
3.09
9.76
14.46
20.54
47.85
6.6
2.4
5.0
$5/MT
Percent
Reduction
14.0
61.85
31.00
5.0
2.3
1.7
9.0
40.0
35.2 %
Assumed same
$ reduction
as modeled
waste stream
J/ Current figures reflect a baseline of compliance with RCRA Part 264
land disposal regulations.
21 The model assumes no capacity constraints on the availability of
treatment alternatives, as well as no lag time (e.g., for obtaining a RCRA
permit) between switching from land disposal to waste treatment.
3/ These results should be considered preliminary because of the
simplifying assumptions used in the analysis. (During the next few months,
EPA will attempt to refine its understanding of the waste streams that are
currently excluded from the model and develop more reliable projections of
potential revenues that could be generated from these wastes.)
Source: EPA, Office of Policy Analysis, Hazardous Waste Disposal Model.
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reduction in each land disposal technology predicted by the model to the 24.4
MKTs not in the model, an estimate of the effect of the tax on the total
quantity of waste stored or disposed of on land in 1981 was developed. The
bottom portion of Exhibit 5-11 presents the results of this analysis. For
approximately 10.4 MMTs of the 24.4 MMTs, RCRA would have the effect of making
treatment cheaper than land disposal. At $5 per ton, the tax would then shift
an additional 5 MMTs to treatment. Thus, the $5 per ton tax could have a
total effect of shifting a total of 21.9 MMTs of hazardous waste to treatment.
The analysis assumed that corrosive wastes are hazardous only because of
having a high or low pH. It is not clear whether pH alone accurately
describes the true nature of waste streams that generators now report to EPA
as corrosive.—' Additional hazardous constituents, if present in the
waste, could increase the cost of treatment precipitously.
To analyze the sensitivity of the results to the assumption that corrosive
wastes are hazardous solely because of their pH, we substituted another waste
stream with similar pH, but that also contained lead and chrome.^2' Adding
these constituents should have increased the cost of treatment. However, the
results showed no difference. One possible explanation of the results is that
there are substantial economies of scale for certain treatment technologies,
such as neutralization, oxidation, chemical reduction, and biological
treatment. Thus, treatment costs for large volumes of a waste stream often
were equal to or Just slightly higher than the cost of land disposal.
The low unit cost of treatment for certain waste streams appears to
disagree with both the conventional wisdom about the effects of a low
waste-end tax and States' experiences with their taxes' producing relatively
insignificant changes in waste management practices. Our analysis shows that
wastes would shift primarily from underground injection and storage surface
impoundments under a $5 a ton tax. But most State taxes are levied on
commercial land disposal, which occurs primarily in landfills, and waste
34/ RCRA's waste-listing regulations require generators to first determine
whether a substance is listed as hazardous in Subpart D of 40 CFR Part 261.
(Listed wastes are substances that either contain specific hazardous
constituents or are generated by a specific process.) If a substance is not
listed in Subpart D, the generator must determine whether it is hazardous by
its characteristics (ignitable, corrosive, reactive, or failing the extraction
procedure test). Many generators may not be fully aware of this requirement
and, rather than incur additional testing costs to determine whether the
substance contains listed constituents, may simply report that the stream
meets one of the four aforementioned characteristics. This could explain the
tremendous quantities of characteristic wastes now reported to EPA and the
lack of information on waste composition.
35/ Chrome and lead were added to corrosive waste in the model because
corrosive or caustic substances are often used to treat metals (e.g., pickling
liquor). Therefore, we assumed they would be typical waste products in a
metal-treating process that used corrosive substances.
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storage is usually exempt from a tax.22' Therefore, in a number of States,
the tax is not applied to land disposal practices that are most likely to
change in response to a tax.
On the other hand, the amount of waste disposed of in a landfill that
would shift to treatment under the $5 per ton tax is relatively small (6
percent). This result is much more consistent with conventional wisdom and
States' experiences.
Phase II. In Phase II, the tax would rise over time to create strong
incentives for waste treatment. The results of simulations of the tax at
rates of $5, $22, $50, and $170 a ton are shown in Exhibit 5-12.
At $22 a ton, landfilling is reduced by 59 percent, underground injection
by 38 percent, and surface impoundment storage by 6 percent. This trend
continues at $50 a ton, with the exception of disposal in surface
impoundments, which still receives about 13-3 MMTs of waste. Dissolved air
floatation float, generated in the process of petroleum refining, appears to
constitute the majority of this waste, with the least-cost alternative being
incineration, at approximately $151 a ton. At $170 a ton, virtually all land
disposal of hazardous waste was eliminated, with the exception of landfills,
which can receive residuals from waste treatment as well as some untreated
wastes.
Exhibit 5-12 demonstrates the effectiveness of a rising tax in reducing
the amount of hazardous waste land disposal. The rates here are illustrative,
but a rising tax could be calibrated to shift hazardous wastes away from land
disposal to treatment alternatives as additional treatment capacity becomes
available. This could also reduce the pressure on firms to consider illicit
disposal practices as an alternative to paying the tax. The table also shows
a relatively steady reduction in the amount of waste disposed of on land up to
approximately $50/ton. Thus, it is possible that the Phase II tax could
provide a stream of revenue that would be both relatively significant and
generally predictable over time, if rates are allowed to rise to compensate
for shrinkage in the base. (The issue of the tax's revenue-generating
capability is examined in the section on revenue generation.)
Reduction in Generation of Hazardous Waste. A waste-end tax may induce
firms to reduce the volume of hazardous waste they generate, either by
changing their manufacturing processes or by using raw materials that do not
generate hazardous waste. A comprehensive analysis of these two effects is
difficult, because they depend on factors specific to a firm or product (e.g.,
corporate investment cycle or product quality). However, the plausibility of
a firm's adopting process changes (most likely minor changes) in response to a
low waste-end tax was tested by undertaking detailed case studies in the
organic chemicals industry and by inquiring whether states' waste-end taxes
had brought about process changes. The results of these analyses are only
useful in a general sense and cannot be generalized to the universe of
waste-generating firms.
36/ U.S. Environmental Protection Agency, Office of Policy Analysis,
Survey of States' Experience with Waste-End Taxes, draft report.
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EXHIBIT 5-12
HAZARDOUS WASTE DISPOSED OF BY
TECHNOLOGY AND TAX RATEl'
(millions of metric tons)
Waste
Management Options Current 21 $5.00/MT $22/MT $50/MT $170/MT
Landfill 3.09 2.90 1.19 1.16 1.14
Underground Injection 9.76 7.41 4.83 0.00 0.00
Surface Impoundment Disposal 14.46 13.97 13.83 13.29 .11
Surface Impoundment Storage 20.54 6.71 2.49 1.74 .04
TOTAL 47.85 30.99 22.34 16.19 1.29
\J Model assumes no capacity constraints on the availability of treatment
alternatives, as well as no lag time (e.g., for obtaining a RCRA permit}
between switching from land disposal to waste treatment.
2/ Current figures reflect a baseline of compliance with Part 264
regulations.
Source: EPA, Office of Policy Analysis, Hazardous Waste Management Model.
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A case study of the chloroethane and chloromethane sector of the organic
chemicals industry indicated that a $10 a ton tax on hazardous wastes would
induce firms to distill additional residues during the production of carbon
tetrachloride. This change would reduce the total waste those firms generate
by an estimated 2.5 percent.2-L'
EPA conducted a survey of waste-end tax programs in eight states during
the summer of 1984. Respondents, which included State program officials,
environmentalists, and business persons, were asked whether their state's tax
had caused changes in waste management practices. In general, because these
programs are young and still evolving, states have typically put little effort
into investigating whether, and to what extent, these changes have occurred.
However, respondents in California indicated that virtually all solvents are
currently being recycled and reused in response to increasingly stringent
regulations, the waste-end tax, and a strong concern about the long-term
liabilities associated with land disposal. In New Hampshire, as of fiscal
year 1982, between one-quarter and one-third of the state's total hazardous
waste was recycled (largely methylene chloride, trichloroethylene, and
perchloroethylene) .—
Reduction in the Waste's Degree of Hazard. The Phase I waste-end tax
could encourage a reduction in the hazardousness of the waste generated or
disposed of. The results of the Phase I analysis indicated that corrosive
wastes would be neutralized, and cyanide-bearing waste would be chemically
reduced under the simple $5 per ton tax. However, because that tax uses only
a very limited degree-of-hazard system, the greatest tax savings should come
from reducing the volume of the waste, not its hazardousnes.^2' This would
not be true if the tax were based on dry-weight because, unlike a wet-weight
basis, a dry-weight tax creates no incentive for volume reduction.
Because the Phase II waste-end tax could adopt multiple hazard classes and
use rising rates, it should create a much stronger incentive to reduce the
hazardousness of a waste. Generators would be encouraged to use chemical or
physical treatment or to use other production methods to reduce their tax
liability.
Increases in Research and Development. Many of the available waste
treatment technologies merely reduce the waste volume and do little to make
the waste less hazardous. A tax system, such as the Phase II approach, that
is based on the quantity and characteristics of wastes that are disposed of
37/ U.S. Environmental Protection Agency, Office of Policy Analysis, Case
Study of Three-Tiered Tax versus Ban on Land Disposal — Chloroethanes/
Methanes, prepared by Industrial Economics, Inc., March 1984.
38/ U.S. EPA, Office of Policy Analysis, Draft Report of Survey of States'
Experience with Waste-End Taxes, August 1984.
39/ It uses only two tiers, and only a small number of wastes would
potentially be subjected to the higher tax.
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5-56
or treated and on the hazardousness of treatment or disposal techniques may
encourage taxpaying generators to search for new processes to reduce their tax
liability.
Generation of Better Hazardous Waste Management Information. EPA has
recently completed its most comprehensive survey to date of hazardous waste
generators and treatment, storage, and disposal facilities. The information
it has generated, along with other existing data sources, has provided an
adequate basis for establishing the Phase I tax. However, additional data are
required to support enforcement activities and to support the development and
implementation of the sophisticated degree-of-hazard tax. As taxpayers report
the type and quantity of waste handled during Phase I, a more refined profile
of the taxable universe of wastes and facilities could be developed. This
information could be used to provide a basis for designing and implementing
Phase II of this tax.
Acquisition of Information Useful in Setting Priorities for Permitting and
Enforcement Programs. The risk classification analyses used to establish
Phase H taxes may also identify the wastes for which treatment capacity may
eventually be necessary. This information should help EPA to determine the
types and quantities of facility permits that may be demanded by generators in
the future. Further, because treatment processes can be very expensive for
some waste streams, these wastes may also be strong candidates for illegal
disposal. This information could help EPA and IRS to target subsequent
enforcement and permitting activities. Already EPA's waste-end tax cost model
is providing useful information on which wastes may shift to treatment at low
tax rates.
Increased Incidence of Illegal Disposal. Many of the concerns about a
waste-end tax rest on the presumption that it may cause an increase in illegal
disposal. In general, any policy, regulation, or standard that increases
waste management costs creates some incentive for some generators and
disposers to consider bypassing the regulatory system.
The strength of the incentive created by the tax will be influenced by the
size of the tax and tempered by whether the firm has made a significant
investment in resources to comply with existing hazardous waste regulations,
the enforcement capability of the government, and the feared consequences of
being caught. Firms that have invested heavily and worked hard to comply with
existing regulations should be less likely to risk being caught if the tax is
low relative to other costs. At $5 and $10 a ton, the Phase I tax is a
relatively small percentage of the cost of commercial disposal. Exhibit 5-6
shows that the $4.73 a ton waste-end tax is usually a small percentage of the
commercial disposal price.
Since almost all waste-end taxes have been in place for only a few years,
it is difficult to accurately assess either positive or negative effects. In
recent interviews with states that have waste-end taxes, most States were
concerned about the lack of resources to pursue an aggressive enforcement
program. However, no States had evidence to confirm or deny the existence of
illegal disposal, or increases in illegal disposal, as a consequence of the
taxes. Earlier studies raised concerns about the incidence of illegal
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5-57
disposal because of unexplained shortfalls in revenues and because some State
officials suggested that illegal disposal was a factor.™' However, States
now indicate that these shortfalls were mainly due to inadequate data bases,
the recession, and ambiguous legislative language creating numerous exemptions.
EPA has also conducted a limited study to compare the incidence of illegal
disposal in states with and without waste-end taxes. The results of that
study show no difference between illegal disposal activities in States with
waste-end taxes and in States with other revenue mechanisms. However, this
analysis is more suggestive than conclusive.—'
In some States, thorough enforcement programs are in place. For example,
New York's manifest system includes both on-site and off-site waste
management. State hazardous waste personnel thoroughly check all generators'
manifests for accuracy and possible abuse of a recycling exemption. Also,
voluntary business compliance, which credible tax and regulatory programs
have long enjoyed, should be quite high. However, the Phase II system should
increase the incentive for some generators to use illegal disposal as the tax
rises and wastes are banned from land disposal. By increasing tax rates
gradually over time (e.g., five to ten years), the Phase II approach would
reduce the price shock that generators might experience if they are required
to use expensive technologies to treat their waste in the very near future.
In doing so, the Phase II tax also attempts to reduce the pressures toward
illegal disposal.
5.5.4 Revenue Generation
In analyzing the ability of the Combination Tax II to generate revenues,
we must consider the two components of the tax separately. The DRI results
for Feedstock Tax II discussed in Section 5.2.4 suggest that a tax designed to
raise $1 billion per year would be unlikely to cause a decline in output
sufficient to reduce feedstock tax revenues substantially. The waste-end
component, however, may reduce the amount of waste disposed of on land by
encouraging a shift to waste treatment. This section of the analysis examines
the ability of the Phase I tax and Phase II waste-end tax to generate
revenues, and how limitations in data and predictive techniques make very
precise revenue projection difficult.
Ability to Generate Revenue. The ability of the Phase I and Phase II
taxes to generate revenue depends on the incentives they create. Both Federal
407 U.S. General Accounting Office, State Experience with Taxes on
Generators or Disposers of Hazardous Waste. May 1984. Office of Emergency and
Remedial Response, U.S. EPA (Draft Working Papers), Experience of States with
Waste-End Taxes, prepared by ICF, September 1983.
4J/ U.S. Environmental Protection Agency, Office of Policy Analysis,
Special Analysis of the Implications of a Waste-End Tax and Limited Land
Disposal Bans for Illegal Disposal, prepared by Response Analysis, Inc.,
January 19, 1984.
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and State land disposal regulations are increasing the cost of disposal and
encouraging generators to use environmentally preferable treatment options.
The clearest example is Congress1 decision to have EPA ban certain wastes
from land disposal.— In general, these restrictions could shift over time
significant quantities of hazardous waste from land disposal to treatment,
assuming adequate treatment capacity is available. Thus, they could limit the
long-term revenue-generating capability of the waste-end tax. Beyond the next
five to eight years, the tax's most appropriate use could be to create strong
incentives for better waste management and to complement the existing
regulatory program.
In the meantime, the amount of time that elapses between the points when
treatment becomes the low-cost option and when generators begin to treat their
wastes (lag time) will have significant implications for waste-end tax
revenues during the next five to seven years. This section will examine how
various lag times affect revenues. Since the federal government has had
relatively little experience with levying and collecting a waste-end tax,
the revenue analysis will focus mainly on modeling results and States'
experiences with waste-end taxes.
In 1981, 55.0 MMTs of hazardous waste were disposed of on land, and about
52.0 MMTs were placed in storage.—' Assuming a continuation of these
practices, EPA arrived at an initial annual estimate of $175-$275 million in
revenues from the Phase I tax. However, this estimate did not account for
revenues from the stored waste because EPA's survey did not ask how long a
waste was stored.
ty2/ In deciding which wastes should be banned, EPA plans to evaluate the
risks of a significant amount of waste under a provision of the new RCRA
legislation (California list) by 1987, and approximately one-third of the
remaining RCRA hazardous wastes by early 1988, the second third by 1989, and
the remaining third by 1990. Individual ban decisions will affect plants
immediately in some cases and in up to four years in others.
43/ The IRS collects the Post-Closure Liability Trust Fund (PCLTF) tax on
hazardous waste disposal. The experience with this tax does not appear to be
a good basis for comparison because of its relative obscurity. (In a limited
phone survey of firms that were likely to dispose of hazardous waste and would
be required to pay the PCLTF tax, approximately half the respondents were not
aware the tax existed. According to the IRS, only about 50 firms out of about
1130 facilities that were likely to dispose of hazardous waste actually paid
the tax in the first quarter the IRS collected it.) Also, the tax is based on
dry weight, and IRS has yet to issue interpretative regulations defining the
procedures for calculating the tax.
In 1981, 55.0 MMTs of hazardous waste was land disposed as the economy
was approaching the peak of a recession. As a result, because of the direct
relationship between producing and generating hazardous waste, 55.0 MMTs may
be significantly lower than the amount of waste currently disposed of on land.
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5-59
To develop revenue estimates that comprised the entire quantity of
hazardous waste that could potentially be managed in taxable practices, an
assumption was made as to how generators use storage impoundments. Generators
were assumed to store their wastes for a long period of time or to dispose of
their wastes on land, if the imposition of Part 264 land disposal regulations
did not cause a shift toward treatment. This assumption is generally
consistent with EPA's current belief that many unlined storage surface
impoundments will eventually close as disposal facilities.
Earlier analysis suggests that the approximate tax base, assuming
compliance with the Part 264 land disposal regulations, would be about 61.9
MMTs annually (which includes 47.8 MMTs disposed of on land in the model's
base case plus 14.1 MMTs not in the model but assumed to be disposed of on
land, as well). Also, at the $5 per ton tax rate, an additional 21.9 MMTs
would shift to treatment. Therefore, the relevant range of taxable wastes
appears to be 40.0-61.9 MMTs. This translates into a revenue range of
$200-$310 million annually where $200 million annually assumes all 21.9 MMTs
can immediately shift to waste treatment, and $310 million annually implies
none of the 21.9 MMTs can shift to treatment.
Exhibit 5-13 lists the industries that would pay the tax, and their
contribution, based on the modeling analysis. However, the table reflects
only wastes included in the model and assumes generators can immediately shift
their wastes to treatment, if cheaper than disposal. Thus, the annual revenue
estimate is only $155 million based on the land disposal of 31.0 MMTs as
compared with the previously stated quantity range of 40.0-61.9 MMTs and
revenues of $200-$310 million annually. The exhibit indicates the approximate
distribution of the tax burden among taxpaying industries. Individual
contribution, however, will vary depending on the availability of adequate
treatment capacity.
Because of limited treatment capacity and the time needed to construct and
permit such capacity, it is unlikely that all 21.9 MMTs could shift to
treatment immediately. To examine the revenue implications of various rates
of transition from land disposal to treatment, we had to make assumptions
about the rate at which this shift, and concurrent shrinkage in the tax base,
would occur.
We assumed that an additional 10, 15, 25, and 50 percent of the 21.9 MMTs
would shift to treatment in each of the five years of the tax. The term
"annual shrinkage" is used here to mean the amount of waste that can be
diverted from land disposal to treatment each year. Since in each year of the
tax, a generator can add new capacity, the cumulative amount of shrinkage over
the five years should appropriately reflect the amount of waste that could go
to treatment.-^'
45/ In general, using an annual shrinkage rate appears to be a reasonable
method of accounting for the variability in the rate at which firms can switch
from disposal to treatment.
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5-13
MODEL PROJECTIONS OF ANNUAL TAX REVENUE BT
INDUSTRY TYPE FOR PHASE I TAX ASSUMING
AN IMMEDIATE SHIFT TO TREATMENT-!7
SIC Industry Tax Revenues
(Thousands of $)
13 Oil and Gas Extraction 21 $0
20 Food Processing 3/ 0
23 Textile Manufacturing 2/ 0
26 Paper and Allied Products 3/ 0
28 Chemicals and Allied Products 72,600
29 Petroleum and Coal Products 71,730
30 Rubber and Plastic Products 3/ 0
32 Stone, Clay, and Glass Products 21 0
33 Primary Metals Industry 2,026
34 Fabricated Metal Products 597
35 Machinery, Except Electrical 132
36 Electric and Electronic Equipment 471
37 Transportation Equipment 170
38 Instruments and Related Products 21 0
39 Miscellaneous Manufacturing 2
42 Trucking and Warehousing 21
49 Sanitary Services 4/ 4,490
99 Nonclassifiable Establishments 253
Annual Revenues: $155,500
_1/ The annual revenue estimate generated by EPA's model is based on the
land disposal of 31.0 MMTs of waste annually. This assumes that of the 47.8
MMTs modeled in the base case, a $5 per ton would shift 16.8 MMTs to treatment
immediately. By including the waste streams we were not able to model, and
using simplifying assumptions about the effect of the tax on these wastes, the
analysis suggests a quantity of taxable waste of about 40.0-61.9 MMTs and a
relevant revenue range of about $200-$310 million annually.
2/ Based on EPA data, these industries used taxable practices in 1981 but
would shift to treatment under the Phase I waste-end tax.
3/ EPA data show these SIC's used nontaxable handling practices.
4/ Sanitary services should include firms in the commercial hazardous
waste management industry.
Source: EPA, Office of Policy Analysis, Waste Management Model.
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For example, as Exhibit 5-14 shows, at a 10 percent annual shrinkage rate,
50 percent of 21.9 MMTs would be diverted to treatment by year five.
Alternatively, at 50 percent shrinkage a year, generators would have sent all
of their waste to treatment in the second year of the tax. A 50 percent rate
represents the most conservative of the four scenarios. In general, it may
take a generator two or three years to plan, construct, and obtain a permit to
operate a treatment facility.
Exhibit 5-15 shows total revenue estimates for the five years of the tax
using 10, 15, 25, and 50 percent shrinkage rates. These projections are
compared with a five-year revenue goal of $1 billion. The analysis assumes
that for the UO.O MMTs for which it would still be cheaper to land dispose and
pay the tax than treat the waste, generators would continue to land dispose
these wastes in a year, generating $1 billion over the five year period. At
annual shrinkage rates of 10, 15, 25, and 50 percent, revenue projections are
over the $1 billion target by 38, 30, 16, and 5 percent, respectively.
Together with earlier revenue projections of $200 million and $310 million
annually, these estimates generally indicate an ability of the Phase I tax to
generate $1 billion over five years, with a possible surplus of five to
thirty-eight percent annually.
Effects of Rate Increases on Revenues. To assess whether a waste-end tax
could generate more revenues without huge increases in tax rates, we examined
the effects of doubling and tripling the tax to $10 and $15 per ton. This
analysis was restricted to wastes included in the model because it was not
clear that the simplifying assumptions about the effects of the tax on wastes
not modeled would hold as the rates were increased. As a result, the rate
increases examined here apply only to a tax base of 31-0 MMTs (and changes
from annual revenues of $155 million) — the amount of waste remaining in land
disposal at a $5 per ton tax. Increasing the tax to $10 a ton nearly doubled
revenues, generating at least $302 million annually, and the potential for
more if adequate treatment capacity is not available to those wastes for which
treatment is now cheaper than land disposal. The same is true for a tax of
$15 per ton, which shifted only an additional 6 MMTs to treatment, and would
still generate at least $362 million in annual revenues. These results
suggest that the wastes remaining in land disposal under the $5 per ton tax
are not extremely sensitive to small increases in the tax. This further
suggests that the Phase I tax can generate substantial revenues at modest
rates and also create a relatively strong incentive for some wastes to shift
to treatment.
Phase II. The waste management model was also used to examine how a
rising waste-end tax could affect revenues. To estimate annual revenues under
Phase II, we assumed the si2e of the tax that would apply to residuals from
waste treatment.—' Unless a waste stream was solidified, it was assumed to
The Phase II tax rate for treated and untreated wastes would be set on
a degree-of-hazard basis. This analysis does not attempt to use any of the
available ranking systems to establish tax rates because EPA has not fully
developed an appropriate method for estimating risks. As a result, it uses a
simplified assumption of $10/ton for unsolidified wastes. This assumption
appears fairly conservative when the tax is high, and less so when it is low.
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EXHIBIT 5-14
ALTERNATIVE TAX BASE SHRINKAGE SCENARIOS
Rate of
Year of Tax Cumulative Shrinkage (%)
Year 1
Year 2
Year 3
Year 4
Year 5
10
20
30
40
50
15
30
45
60
75
25
50
75
100
_
50
100
-
-
_
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EXHIBITS-IS
REVENUE PROJECTIONS UNDER ALTERNATIVE TAX
BASE SHRINKAGE SCENARIOS
Revenue Rate of Estimated Percent of
Projection Annual Shrinkage Revenues Shortfalls
$1,000 million 10* $1,382 million 38.2
$1,000 million 15* $1,300 million 30.0
$1,000 million 25* $1,163 million 16.3
$1,000 million 50* $1,054 million 5.1
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be taxed at $10 per ton, if disposed of on land. This rate was selected not
to reflect the risk a waste may pose to human health and the environment, but
only to indicate that a tax would be applied to wastes that remained after
treatment. Therefore, annual revenues under Phase II would come from a rising
tax on the land disposal of untreated wastes and a constant $107ton tax on
disposal of treatment residuals on land.
Although the results of the Phase II analysis are preliminary and subject
to limitations, they suggest a waste-end tax can achieve revenue and incentive
goals simultaneously. Exhibit 5-16 shows, because of the relatively large
spread in treatment costs for the waste streams examined in the analysis, some
generators would switch to treatment at a low tax, while others would continue
to use land disposal until the rising tax made treatment the cheaper option.
Because the tax rose at a faster rate than the tax base declined, annual
revenues increased as the tax approached $75/ton. At a tax of about $113/ton,
almost all generators would prefer to treat rather than to dispose of their
untreated waste on land. At $170 per ton, land disposal of untreated
hazardous wastes would be virtually eliminated, and annual revenues would be
only $MO million, as taxpayers would solidify the bulk of the hazardous wastes
generated in each year.
Several factors may induce a generator to switch to treatment, even at a
tax rate lower than that projected by the model. For example, some states
already levy a tax on land disposal of hazardous wastes; the combined effect
of a Federal and State tax could create a strong enough incentive for a firm
to shift to treatment. (During the next few months, EPA plans to examine the
incentive and revenue effects of this combination, although an analysis of
higher tax rates already suggests that revenues may not be adversely affected
between $15 and $75/ton — which represents the relevant range of tax rates if
State and Federal taxes are added together.) Similarly, generators who
perceive the long-term liabilities associated with land disposal as
significant will most likely choose treatment rather than land disposal at a
lower tax. Other firms could change production processes or begin to use
nonhazardous waste-generating inputs. Finally, the tax base would be reduced
by a decision to restrict a waste from land disposal. Each of these responses
appears reasonable. However, firms' abilities to carry them out will be
strongly influenced by available capacity, construction and permitting
requirements (which are likely to be relatively fixed in the short term), and
the availability of investment capital.
Data Reliability. A number of States levy and collect waste-end taxes to
finance their site cleanup and waste management programs. Upon examining
States' experiences with waste-end taxes in 1983 and early 1981, the General
Accounting Office found that some States were experiencing problems in
correctly projecting revenues from the tax.
A major reason cited for erroneous projections was a thoroughly inaccurate
and inadequate data base. For example, New Hampshire initially estimated
annual revenues of $700,000 in 1981; it received $76,000. The State's
estimates of the amount of taxable hazardous waste had been extrapolated from
an analysis of a New England regional survey. Because the regional survey had
been done by a very reputable firm, and because the state was just "gearing
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EXHIBIT 5-16
PROJECTED ANNUAL REVENUES AND QUANTITIES OF HAZARDOUS
WASTE DISPOSED OF ON LAND UNDER A PHASE D TAX
Tax Rates
Revenues 1/
(millions of $)
$22 /ton
$495
$50/ton
$804
$75/ton
$1,075
$113/ton
$154
$170/ton
$40
Quantities of Waste
Disposed of on Land
(millions of tons)
Solidified Wastes .08 .27 2.62 7.10 9.44
Treated Wastes 21 .45 .77 3.12 7.61 .51
Untreated Hastes 22.34 15.98 14.27 1.33 .21
_!/ Total revenues equal the quantity of untreated waste multiplied by the
designated tax rate, plus the quantity of waste that remained after treatment
that would be disposed of on land, multiplied by $10.
2/ Treated waste category does not include solidification.
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up" its program, with no capability for checking the contract work, the State
accepted the estimates at face value. Since then, the State has derived more
accurate waste volumes from manifests and has increased its tax rates.
Current revenue projections are more stable, and income has surpassed
them.-il'
In New York, the Assembly publicly announced that it wanted $10 million
for the State's waste-end tax program. It passed a bill with numerous waste
exemptions that were difficult to analyze adequately, partly because of time
constraints, and mainly because of major data limitations. The State
Department of Environmental Conservation was making projections for different
drafts of the bill as it evolved. This was quite difficult, because
legislative definitions for exemptions did not match up well with how the
State's data base was structured. Also, the State was using the best
available data at the time, which were later discovered to be significantly
inadequate. Ultimately, the Department projected that the legislation would
produce "$7 to $8 million," recognizing the potential for error because of the
inability to accurately analyze exemptions.
Actual revenues in New York were half of this projection. The Department
gives the following reasons for the shortfall in order of importance:
(1) Inadequate data for this type of revenue projection, a
limited data base and limited time to develop accurate
projections;
(2) The recession;
(3) The economic competitiveness of out-of-state facilities;
and
(4) Industry's evasion of, or confusion about, tax
responsibility.
Present projections are based on surveys of industry, permit data, State
manifest information (New York's manifest system records both on-site and
off-site management), and the previous year's revenue reporting. Further,
estimates are being revised regularly on the basis of revenue reporting. The
State believes its revenue collection experience is a good basis for making
revenue projections because it thoroughly checks all generators' manifests.
Industry confusion or evasion has been ascribed to such factors as ambiguous
language in the law.—'
U7/ U.S. Environmental Protection Agency, Office of Policy, Planning and
Evaluation, draft report, Survey of States' Experiences with Haste-End Taxes,
August
Ibid.
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A more recent EPA survey of eight States in the sunnier of 1984 reflects
substantial improvement over their revenue projections. In fact, a number of
States now believe the tax is responsible for generating much of the
information necessary to better define the regulated community and to develop
more realistic projections. As data bases improve and programs settle into
operation, problems reported in the past have, in many cases, been shown to be
merely start-up problems. In six States, waste-end taxes had recently
generated revenues between 71 percent and 98 percent of projections; in three
states, revenues were ahead of projections.Hi' Exhibit 5-17 shows the
revenues projected and collected in each State.
Thus, while our current data cannot be called conclusive, they suggest
that waste-end taxes in the States surveyed have approximately the same
revenue-generating reliability as feedstock taxes at the Federal level.—'
Continued analysis of the experience of States and their future program needs
will be useful in designing Federal tax policy.
EPA's recently completed survey and other Agency efforts have provided
data that we used to prepare this study. Reports on hazardous waste
generation and management activities in calendar year 1983 were due to EPA on
March 1, 1984. By late 1984 or early 1985, this information could be
computerized. EPA's survey estimates of the quantity of hazardous waste
disposed of or stored on land could then be verified and refined using more
current, nonrecession-year data that comprise the total universe of waste
generators and treatment, storage, and disposal facilities, rather than
comprising just a sample.
EPA could also assess in detail both the activities of generators of large
quantities of hazardous waste and their plans for handling such waste in the
future. Approximately 90 percent of all hazardous wastes regulated under RCRA
in 1981 were generated by about 140 facilities, or 1 percent of all
generators.—' The biennial report and existing Part A permit data could be
used to reduce the scope of the assessment.—' EPA could also coordinate
this effort with states that currently require generators and treatment,
storage, and disposal facilities to report their activities annually.
49/ Ibid.
50X The existing feedstock tax has generated 78-84 percent of revenue
projections over its initial three years.
5V Surveying of these large-volume generators before implementing a
Federal tax would enable EPA and IRS to eliminate large volumes of waste that
may no longer be taxable because of a possible change in waste management
practices.
527 RCRA requires firms to file with EPA or the state agency (if the state
has program authorization) a record of any changes they have made in their
facilities, such as expansions of capacity, management of additional wastes,
or facility modifications.
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EXHIBITS-IT
REVENUES PROJECTED AND COLLECTED FROM WASTE-END
TAXES IN STATES IN MOST RECENT FISCAL YEARS
(thousands of $)
State
California
Connecticut
Illinois
Ohio
Minnesota
New Hampshire
New York
South Carolina
Most Recent
State Fiscal
Year Projection 1/
$6,114
1,000
400
1,227
900
232
3,500
750
Actual
Income
$5,468
712
330
1,205
921
247
3,546
720
Income as a
Percent of
Projection
89*
71
83
98
102 2/
107
101
96 3/
Next SPY
Projection
$6,513
None
1,600
1,400
900
230
4,000
None
I/ Survey conducted in summer 1984.
2/ Minnesota's actual income figure is based on six months or two quarters
of collections put on an annual basis.
3/ South Carolina's figure reflects five months of collection, also put on
an annual basis.
Source: U.S. Environmental Protection Agency, Office of Policy, Planning
and Evaluation, draft report, Survey of States' Experiences with
Waste-End Taxes, August 1984.
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Earlier revenue analysis indicated a waste-end tax could generate
approximately $1 billion annually, with an approximate surplus of between five
and thirty-eight percent annually. Additional data analysis before
implementing the tax would help to refine and further reduce possible error in
the revenue projections. Since the availability of alternative treatment
capacity is the primary determinant of the amount of hazardous waste that will
remain in the tax base and generate revenues, better information in this area
should have the most significant impact on our ability to refine predictions
on revenues.
Predictive Techniques. One impediment to more accurate revenue
projections has been States' failure to accurately ascribe dollar amounts to
exemptions before projecting the tax. This can cause unexpected but
explainable revenue shortfalls. For example, in Connecticut, legislation
passed in 1982 called for a fund of $1 million annually for three years.
Actual collections were just under 60 percent of projections: $886,809 for
six quarters, or $591,126 per year. Asking for an explanation of the
shortfall, the state legislature learned that it had failed to account for the
cost of exemptions in the bill that was passed. In the original legislation,
all manifested hazardous waste was used to estimate the tax base. But the
final bill included exemptions for small generators and waste oil. (Further,
out-of-state generators were part of the original estimate, but did not start
paying until the first quarter of 1983, which was not reflected before the
third reporting quarter of 1983.)—
In general, another significant limit in EPA's predictive techniques is
less than complete understanding of the decision-making process for managing
hazardous waste. It is unlikely that EPA will ever be able to precisely
predict generators' behavior on a case-by-case basis, since there are
considerations such as long-term liability, public perception, and reliability
of waste management services that are difficult, if not impossible, to
quantify and factor into models for predictive behavior. However, by assuming
both that all generators are generally concerned about their public image and
about the long-term liabilities associated with land disposal, and that all
have equal access to alternative treatment technologies, the current version
of the waste management model takes the logical first step in developing the
framework for analyzing the decision-making process. That step is comparing
the cost of alternative technologies.
5.5.5 Administrative Feasibility
The administrative and reporting requirements of Phase I of Combination
Tax II (feedstock tax and incentive waste-end tax) would probably exceed those
of Combination Tax I (feedstock tax and non-incentive waste-end tax) due to
additional features of the waste-end tax. However, the type of information
necessary to calculate the tax is available from the existing RCRA information
53 / U.S. EPA, Office of Policy, Planning and Evaluation, draft report,
Survey of States' Experience with Waste-End Taxes, August 1984.
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system. The requirements of Phase I of Combination Tax II are the sum of the
administrative and reporting requirements of the feedstock tax and the
waste-end tax considered separately. No economies of scale or synergistic
effects appear to result from combining the two taxes. In general, this is
because the two taxes are levied on significantly different activities and
substances and affect different groups of taxpayers. Because the
administrative and reporting requirements of the feedstock portion of
Combination Tax II have already been described, this section will concentrate
on assessing the requirements of the limited incentives waste-end tax
component (Phase 1 of Combination Tax II).
Taxable Parties. The Phase I waste-end tax component of Combination Tax
II is applied to the disposal on land of all RCRA regulated hazardous wastes,
as defined under 40 CFR Part 261, and their management in a landfill, surface
impoundment, land treatment facility, waste pile or underground injection
well, as.described in 40 CFR Parts 264 and 265. In addition to taxable
parties classified as disposal facilities (currently defined by RCRA as
landfills, injection wells, disposal surface impoundments, and land treatment
facilities), the Phase I tax would also require identification of waste
management facilities that store wastes for long periods of time in a surface
impoundment or a waste pile. This results in a total taxable universe of
about 1,028 facilities. This estimate includes all facilities using storage
impoundments, but may decrease when long-term storage is defined as a
specified length of time. Currently, facilities that store wastes for longer
than 90 days must have a RCRA permit. It is not anticipated that the current
number of storage facilities will drastically increase or decrease in the near
future; however, some storage impoundments may be closed as disposal
facilities, which is allowable if certain RCRA provisions are met. EPA is
currently calling in RCRA Part B land disposal permit applications, with the
goal of calling in all in FY 1985. As this is done, the total number of
potential taxpayers should decrease as some facilities are denied their final
RCRA permits or choose to close rather than upgrade to permitting standards.
These 1,028 RCRA facilities are owned by approximately 500 firms. About
430 of these facilities are engaged in land disposal activities and have the
following disposal units: 199 landfills, 116 disposal surface impoundments,
87 injection wells, and 70 land treatment facilities.5" These taxable
parties should be identifiable through the HWDMS and other information sources
in the regulatory system.
Taxable Activities. The Phase I waste-end tax is levied on two
activities: the land disposal of hazardous wastes, and the long-term storage
of hazardous wastes, when storage takes place in a storage impoundment or a
waste pila. A typical storage lagoon is used on a fairly constant basis.
51lThe number of disposal facilities does not equal the sum of the
processes because of multiple processes at some facilities. Regulations under
RCRA in 40 CFR Section 260.10 provide definitions for landfills, surface
impoundments and land treatment facilities.
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Wastes are often piped into the lagoon and later shipped off site or allowed
to flow into another lagoon to evaporate. There is likely to be a wide
variation in storage practices, which may make it difficult to characterize
precisely what is "long-term."
To administer a tax effectively on both disposal and long-term storage, it
may be necessary to make the period on which the tax is assessed identical for
both activities. Otherwise taxpayers have an incentive to shift their waste
from disposal activities to storage each time the tax is due and temporarily
defer payment of the tax. Eventually, the tax should catch up with these
wastes; however, the result could be some unpredictability in revenues in each
collection period. A possible means of avoiding this problem is to assess the
tax on both disposal and long-term storage by levying it on the total amount
of waste held at a permitted facility in either a surface storage impoundment
or a waste pile on the last day of a reporting period and on the total tonnage
of waste that was land disposed in the same reporting period. Another option
is to require taxpayers to account for the wastes held in long-term storage by
last in, first out methods. This would tax a portion of the stored waste when
waste is flowing in and out of the facility on a continuous basis. However,
because some storage impoundments are used to settle out the solids in liquid
wastes, and may be dredged infrequently, the wastes in these facilities could
be taxed more than once if the tax is assessed on a quarterly basis.
Quarterly dredging would be impractial because the firm could be left without
storage capacity for weeks, and frequent dredging could damage the integrity
of liner systems. Thus, additional reporting and estimating procedures may be
required to enforce this option.
Taxable Substances. The Phase I tax would place a higher rate on wastes
that are highly toxic and very mobile. Administrative problems of defining
and identifying taxable substances could arise with respect to (a) defining
highly toxic and mobile wastes, (b) applying the tax to waste mixtures, (c)
taxing hazardous treatment residuals, and (d) defining the unit of taxation.
Each of these administrative requirements is discussed in this section.
• Defining highly toxic and mobile wastes: The Phase I tax places a
higher rate on wastes that are highly toxic and very mobile. EPA or IRS would
not necessarily be required to develop regulations dividing RCRA wastes into
high and low hazard categories if legislation lists wastes that have been
determined to be highly toxic and very mobile, in the same way that the
current list of taxable feedstocks appears in CERCLA. The wastes to be taxed
at a higher rate could be identified by using the EPA four-digit waste code
identification; all other RCRA wastes could then be defined as taxable at a
lower rate by a simple comprehensive rule of taxation.
Because EPA is in the process of delegating the RCRA program to the
States, a tax on wastes listed under RCRA could allow States to add substances
to the list of taxable wastes. This could create a number of administrative
problems that could hinder implementation, collection, and enforcement of the
tax. It would also create an incentive for generators to send their wastes to
States that do not tax certain substances. If the tax initially were limited
to only hazardous wastes listed by EPA, the time necessary to implement the
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tax could be reduced significantly and the collection and enforcement process
would be simplified.
• Applying the tax to waste mixtures: The Phase I limited incentive
waste-end tax sets differential rates on substances. It may, therefore,
create an incentive for taxpayers to mix high tax wastes with low tax wastes,
classify the entire waste stream as a low hazard stream, and pay the lower
rate. One means of eliminating the incentive to mix wastes created by a
differential tax is to define the entire stream as taxable at the rate
applicable to the most hazardous waste in the mixture. However, this would
not eliminate the incentive to misclassify taxable wastes. Thus, regular site
audits, waste analysis, and other methods to detect noncompliance will be
necessary to reduce the misclassification of wastes and tax avoidance. The
potential for misclassification may not be significant under the Phase I tax,
however, because the wastes subject to the high tax are relatively small in
number and quantity.
• Taxing hazardous treatment residuals: Hazardous waste treatment
technologies usually reduce the volume of the waste, render the waste
nonhazardous, or alter the chemical or physical state of the waste, thereby
reducing the degree of hazard of the stream. Almost all forms of waste
treatment generate a hazardous residue that must be properly disposed. For
example, incineration can generate toxic ash.
The Phase I limited incentives waste-end tax applies to treatment
residuals that are disposed of using taxable practices. Taxing all residuals
at the same rate and on the same unit of taxation as the original waste stream
greatly simplifies the task of administering the tax. Neither the IRS nor EPA
is required to make a technical distinction between the degree of hazard of
the original waste compared to that of its treatment residuals for the
purposes of assigning a different tax rate.
This approach may appear inequitable to taxpayers who choose to treat
their wastes prior to disposal, but the inequity is not as significant as it
first appears. Because the tax uses a very simple two-tiered incentive scheme
and the high tax applies to only a limited group of wastes, a taxpayer's
actual tax liability will be affected more by the quantity of waste disposed
than by the hazardousness of the waste. In other words, under the Phase I
limited incentives tax, a taxpayer should receive greater tax savings by
reducing the quantity of taxable waste than by rendering the waste less
hazardous. This is not necessarily true for the Phase II tax in which one
rate is much higher (e.g., 5 to 10 times) than another rate, or where the
system has multiple hazard tiers. For wastes that are truly rendered
nonhazardous, EPA's delisting process is available as a means of rewarding
desirable behavior and reducing inappropriate taxation.
If residuals are exempted rather than taxed, an incentive would be created
to claim falsely that waste treatment was performed in order to avoid all tax
liability or taxpayers might seek low-cost, ineffective treatments to qualify
for the exemption. A tax with a residuals exemption would be very difficult
to administer. Standards defining adequate treatment would have to be
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developed for all wastes and treatment technologies. EPA is now working on an
approach to classifying hazardous treatment residuals; however, this analysis
may require two or three years to complete. Based on that analysis, the Phase
II tax proposal, which provides strong incentives, could apply a lower rate to
less hazardous treatment residuals or exempt them altogether.
• Waste Listings and Delistings: EPA's waste listing and delisting
process could add and delete waste streams from the list of taxable wastes.
The tax is least burdensome to administer if, as EPA lists a waste according
to its regulatory authority, the waste becomes taxable and if a decision to
delist a waste exempts the substance from the tax. Waste delisting also could
present some administrative difficulties because a delisting decision could
depend on where the waste would be disposed. Thus, a delisting could apply to
a waste regardless of its disposal location or only when it is disposed at a
particular facility. However, an individual listing or delisting decision
would not have an effect on the taxable status of other RCRA wastes. In
addition, over the past few years, EPA has only approved a few delisting
petitions and recent RCRA legislation passed by Congress makes it more
difficult to delist a waste.
• Unit of Taxation: A critical variable affecting the simplicity of
the tax is the unit of taxation. The tax could be based on the weight or
volume of wastes, or some variant of these such as dry weight. If the tax is
based on a unit of measurement that conforms with existing practice and is
simple to calculate, the tax will be more effective than if new measuring and
testing procedures must be developed and implemented. A study performed for
EPA suggests that dry weight may be more difficult than wet weight to
administer as a unit of taxation.— Examples of problems include:
• Dry-weight would have to be defined as either the
nonwater weight of the waste or its solids content. A
solids content tax basis would make many highly mobile
solvents tax exempt, whereas a nonwater definition
would require fairly sophisticated waste analyses to
determine the nonwater portion of the waste.
• Wastes could be mixed together or diluted with water
to reduce tax liability, and IRS or EPA could not
verify taxes owed. Such incentives to dilute exist
when there are high differential tax rates among
disposal methods and especially when wastes are put
into an underground injection well and cannot be
sampled.
• Mistakes in calculating dry-weight could contribute to
significant revenue losses.
55/ Pope-Reid Associates, "Effects of Changing the CERCLA Tax Basis,"
prepared for Office of Policy Analysis, EPA, December 1983.
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• The dry-weight of a waste could vary significantly
from shipment to shipment, requiring frequent waste
sampling and analyses to calculate the proper tax
liability.
• Waste-management facilities must perform tests for
either the solid content of waste or its nonwater
content in order to report under the Post-Closure
Liability Trust Fund tax, but EPA currently has no
standard procedure for testing for dry-weight.
Using a wet-weight ton basis would reduce or eliminate a number of factors
that could contribute to an error in calculating the tax. This common
standard of measurement is frequently used by waste management facilities to
maintain records and report information to EPA. Finally, a wet-weight tax
would not result in additional testing requirements for taxpayers and would
eliminate the need to develop and implement testing protocols, which would
have to be incorporated into the implementing regulations.
Reporting and Recordkeeping. The administrative feasibility of the Phase
I waste-end tax depends in large part on the ability to rely on existing
reporting systems. Taxpayers use this information to calculate tax liability,
and the government uses the reporting and information systems to perform
important tax management functions, including:
• identifying taxable parties and verifying taxpayer
status;
• levying and collecting the tax; and
• auditing taxpayers and performing other routine
enforcement functions.
IRS must have access to four basic pieces of information to implement the
Phase I waste-end tax:
• a list of potential taxpayers;
• information on waste types and quantities managed at
taxable facilities;
• information on the waste management processes
conducted (e.g., storage in impoundments) at each
facility; and
• the quantity of waste managed by process type (e.g.,
100 tons of corrosive wastes were landfilled).
If extensive and time-consuming changes are required in existing reporting
and recordkeeping systems in order to obtain the information necessary to
administer a tax, the desirability of a particular tax is lessened. If much
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of the information already exists, the burden of reporting and recordkeeping
and the time required to implement the tax can be reduced significantly.
Combination Tax II Phase I will require only moderate changes to the
existing reporting and recordkeeping system. Currently, hazardous waste
generators and treatment, storage, and disposal facility operators are
required under RCRA to notify EPA of certain activities, maintain a number of
records, and periodically report their waste management activities to EPA.
The records they must collect and/or submit include the biennial report,
operating records, Part A and B permit applications, and hazardous waste
manifests. EPA has developed data bases incorporating national surveys of
hazardous waste facilities. None of these records in their current form
satisfy the needs of a reporting system for implementing and enforcing the
Phase I waste-end tax but they can be used in combination and revised to
provide the necessary data. Appendix B describes in detail the existing
reporting and recordkeeping systems, required changes, and uses of the data.
In summary, the data required to administer the Phase I tax could be
obtained from the following sources:
• Part A and B permit applications and biennial reports
from non-authorized states could be used to identify
potential taxpayers;
• Biennial reports and facility operating records could
be used to provide data on the quantities of wastes
managed by waste and by process and could be used as
the basis of the tax returns;
• Biennial reports, operating records, and manifests
could be used for enforcement and verification.
The current limitations of these reporting and recordkeeping systems are
(1) biennial rather than annual submissions, (2) differences in data reported
by RCRA authorized and non-authorized states, (3) the format and contents of
the facility operating record may make it difficult to use for tax enforcement
purposes, and (4) the waste manifest applies only to wastes managed off site.
Although changes to the existing reporting and information systems are
necessary to provide data on an annual basis for all facilities, these changes
are not likely to impose a large incremental burden on the regulated
community, the states, or EPA. A number of states already have more
comprehensive reporting requirements (e.g., annual reports) than EPA.
However, time and resources will be required to promulgate the necessary
regulatory amendments. The two changes most likely to be necessary would
probably be requiring annual rather than biennial reporting and specific
recordkeeping requirements for identifying hazardous wastes and processes at
individual facilities. These modifications could take one or two years to
make. Another option would be to require reporting of some information that
facilities are currently required to keep in their operating record.
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Monitoring and Enforcement. The problems of levying, collecting, and
enforcing the Phase I and II waste-end taxes are technical and complex.
Traditional collection and verification procedures may not be adequate to
administer the tax effectively, and IRS and EPA probably will be required to
share the responsibility of administering the tax.
EPA may be required to provide considerable technical expertise to IRS in
a number of key areas. Regulation development, for example, will require
extensive understanding of technical hazardous waste regulations, standards,
and practices. EPA also may be required to provide IRS with information,
through a formal information exchange system, for identifying taxpayers and
waste types, quantities, processes at TSDFs, and screening for potential
non-compliance.
A strong enforcement program will be an important factor, if not the most
important factor, in effectively administering the waste-end tax. Regular
site audits by well-trained auditors and inspectors may be the only method to
verify taxpayer claims with actual facility practices. Joint IRS and EPA
auditing teams might be required for regular site inspections or surprise
inspections.
State experience with waste-end taxes suggests that monitoring and
enforcement is extremely important. EPA recently surveyed States with
waste-end taxes to determine what administrative problems they have
encountered. Because State waste-end tax programs are evolving, most State
officials indicated that they had experienced some initial administrative
problems in running the tax program, but appear to have resolved many of these
problems and are administering the tax more effectively now. Among the
problems States experienced are the following:
• Insufficient staff in enforcement, inspection, and
collection; and inadequate training for tax collection
personnel in understanding regulatory programs under
State and Federal statutes.
• Ambiguous legislative language, which created problems
for the administrative agency in defining taxable
substances and activities.
• Poorly defined exemptions, which allowed wastes that
were intended to be taxed to escape the system, also
creating an incentive for generators to shift waste to
exempt practices.
• "Honor System" self-reporting of taxable volumes and
lack of adequate on-site inspection appear to have
contributed to early losses in revenues, although they
are not quantifiable at present.
State experience suggests that EPA and IRS could require additional
resources in order to enforce the waste-end tax. Among the key elements that
would be required as part of a tax enforcement program are:
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A well-trained enforcement staff consisting of
scientists, engineers, and tax auditors to conduct
thorough site audit/inspections to verify tax returns
with waste management practices and operating records;
Adequate resources to: perform site audits, conduct
surveillance to monitor for illegal disposal (e.g.,
training and partial funding for State highway patrols
and local police in surveillance techniques), improve
existing detection methodologies (e.g., metering waste
flows), and develop new enforcement methods;
Access to comprehensive data on waste management
practices at taxpaying facilities; and
Stiff penalties for tax violations to increase the
cost to violators and increase their visibility, if
caught.
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APPENDIX A
"TRACEBACK" OF FEEDSTOCKS
DETERMINING THE RELATIVE CONTRIBUTION OF
FEEDSTOCKS TO THE MANUFACTURE OF SUBSTANCES
FOUND AT HAZARD RANKING SYSTEM (HRS) SCORED SITES
BACKGROUND
In order to determine a feedstock's contribution to the problem at a
particular hazardous waste site, one must trace back from the chemicals found
at the site to their feedstocks. The "traceback" involves determining the
relative contribution of feedstocks (and raw materials) to the production of
substances found at HRS sites. To the extent possible, the substances were
traced back to feedstocks currently taxed under CERCLA; where this would not
account for some of the feedstocks of a substance, additional feedstocks were
included.
In order to determine the relative contribution of feedstocks, data from
actual production processes should be used. Reaction yields are rarely 100
percent of theoretical yields; therefore, mass balance data (weight of
feedstocks per unit of product) are needed. Because a substance may be
produced by a variety of processes, the percent contribution of each process
to total production is needed. The relative contribution of feedstocks can be
calculated in the following manner:
(1) For each process, list the feedstocks and the tons of
feedstock required per ton of product;
(2) For each process, multiply these mass balance data by
the relative contribution of that process;
(3) For each feedstock, add the resulting values for each
process (some feedstocks may not appear in all
processes); and
(4) Calculate the percent contribution of each feedstock.
In many cases, the reactants for a process are not taxed CERCLA feedstocks
but are derived from them, and the processes that produce the reactants must
also be evaluated. The goal is to express the production of a substance in
terms of CERCLA-taxed feedstocks and other feedstocks that are not derived from
taxed feedstocks.
Because of the data collection and calculations required, the above process
is time consuming. In order to minimize the time required to evaluate the over
450 substances found at HRS sites, only the 44 most frequently found substances
(found more than 20 times) were evaluated according to the procedure outlined
above. For the remainder of the substances, the production processes were not
investigated; the feedstocks were determined from more general sources (e.g.,
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SRI Chemical Origins and Markets). In such cases, all of the feedstocks used to
manufacture a substance were assumed to be used in equal amounts. Thus, equal
relative shares were assigned to each of the feedstocks.
In some cases, this simplification may lead to significantly different
relative shares than would be obtained from a detailed analysis; the identity of
the feedstocks, however, is relatively consistent. The error is minimized,
however, by evaluating the most frequently found substances in detail;
evaluating more substances would provide smaller increases in accuracy. The 44
chemicals evaluated in detail account for 71 percent of the 4,950 observations
of chemicals at MRS sites. Evaluating another 22 chemicals would raise this to
78 percent; evaluating 44 more chemicals would raise this to 83 percent.
Even detailed evaluations are subject to uncertainties. Relative shares of
feedstocks may vary over time as economic conditions that favor one process over
another change. Data used were the most recent available from SRI's Chemical
Economics Handbook.
ASSUMPTIONS
• In many reactions involving chlorination, hydrochloric acid (HC1) is
produced as a byproduct. HC1 is also often used as a chlorine
source. If the chlorine in the HC1 byproduct is attributed to the
production of the principal product, that HC1 would be counted twice
if the HC1 was used as a chlorine source. Therefore, the quantity
of chlorine used in a reaction that forms HC1 is not counted against
the main product. However, wastes which are generally not recovered
and recycled (e.g., sodium chloride) are included when assessing the
feedstock's share. This is a judgment decision, and generally only
affects reactions producing HC1.
• Oxygen is not considered a feedstock because it is readily available
from the air.
For listings in the HRS data base that are generic (e.g., heavy
metals, not otherwise specified (N.O.S.)), the assessment of the
feedstocks is as detailed as possible. For example, heavy metals,
N.O.S. is not traced back to any specific feedstocks;
trichloroethenes, N.O.S. is traced back to ths feedstocks of
specific trichloroethenes on the HRS list.
• If no specific production or capacity data are available, one
process is chosen if the data indicate that it is clearly dominant;
equal shares are assumed if no data are available.
SOURCES
The data used to perfom these calculations are from:
• Hawley, Gessner G., ed. The Condensed Chemical Dictionary 8th ed.
New York: Van Nostrand Reinhold Company, 1971
— General information
— Process information
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Lawler, Gloria M., ed. Chemical Origins and Markets 4th ed. Menlo
Park: Chemical Information Services, Stanford Research Institute,
1977
— Process flow diagrams
Rudd, Fathi-Afshar, Trevino, and Stadtherr. Petrochemical Technology
Assessment. New York: John Wiley & Sons, 1981
— Mass balance data
— Process information
Stanford Research Institute. Chemical Economics Handbook. Menlo Park.
— Process information
— Production and capacity data
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APPENDIX B
RCRA REPORTING AND RECORDKEEPING REQUIREMENTS
AS SOURCES FOR ADMINISTRATION OF
COMBINATION TAX II, PHASES I AND II
The following RCRA reporting and recordkeeping requirements could be used
to provide data necessary to administer the Combination Tax II, Phases I and
II. The existing system, required changes, and uses of the data are described
in this Appendix.
• Biennial Report
RCRA requires generators and owners or operators of TSDFs in
non-authorized States to submit data on their hazardous waste activities of
the previous year on a biennial basis, beginning in 1984. Reports of
activities conducted in calendar year 1983 were due March 1, 1984; subsequent
reports are due March 1st of even-numbered years. The biennial report form
provides much of the data necessary to implement the waste-end tax:
• Basic information about the facility, including
current and future status;
• Type of waste handled, in general descriptive terms
arid EPA waste codes;
• iMethods used to manage the waste; this information is
entered in the form of a code for each process (e.g.,
D79 -- Injection well, S04 -- Storage surface
impoundment);
• The quantity of waste managed using a particular
process; and
• Information on the total waste in storage.
The data provided by the biennial reports could be used to verify and update
an initial list of taxpayers developed from other sources and to collect,
verify, and enforce the tax.
Authorized States must submit a State Summary Report to EPA on a biennial
basis. In the report, the State must supply a list of generators and
disposers in the State, and summary statistics on the types and amounts of
waste generated and managed by process type (e.g., landfill, surface
impoundment). Many authorized States are using the same form as nonauthorized
States are required to use, but with some minor modifications, and some are
collecting data annually. The information presented in the report must
conform to EPA's waste and process codes. States without program
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authorization are currently submitting their biennial reports directly to EPA
Regional Offices.
Because State reports provide only summary statistics, they could not be
used to verify a taxpayer's liability. In order to use the biennial report
effectively to implement a waste-end tax, States would have to be required to
present the information they currently gather from their facilities in a
different form. For example, States now report the total quantity of
hazardous waste handled by all regulated TSDFs in a reporting year. Instead,
data would be necessary on an individual facility basis. These data should
already be on hand for use in developing the summary report; therefore,
altering the presentation of the report should not place a great burden on the
States.
At present, one significant limitation of the report is that information
on hazardous waste activities is only reported every other year. As a result,
valuable tax enforcement information is not available in non-reporting years.
While the report generates all the information necessary to collect and verify
tax payments, its biennial cycle greatly limits its usefulness. An annual
report would overcome this problem and provide the information necessary for
the collection and verification processes; it would also generate information
on taxpayer status for updating a list of taxpayers.
• Facility Operating Record
RCRA regulations require all owners or operators of TSDFs to maintain a
written operating record at the facility at all times which records all waste
management activities conducted from the time waste is generated or received
from another facility until its ultimate disposal or shipment off-site. Some
of the information that is required to be maintained in the record includes:
• A description of each hazardous waste by its common
chemical name and its EPA four-digit hazardous waste
code.
• The physical form of the waste and its quantity. If
the waste is accompanied by a manifest, this is also
indicated.
• Method of handling the waste -- treatment, storage, or
disposal.
• Dates that wastes were received and managed, including
intermediate processes such as treatment.
• The amount of each waste being managed by a particular
process (e.g., placed in storage), and for wastes that
are disposed, a map designating the location of the
waste on the facility.
Because of its scope and detail, the facility operating record should
provide taxpayers with all the information necessary to calculate their tax
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liability. The operating record can also serve as a valuable source of
information for enforcing the tax. The detailed information on waste type,
quantity, and process, and the flow of the waste through the facility to its
final disposition should provide an auditor with the information necessary to
determine whether a taxpayer facility has paid the proper amount.
One limitation of the operating record is that while the regulations
clearly articulate the type of information that must be maintained, they do
not specify the format in which the information should be kept. For purposes
of th« waste-end tax, disposal facilities could be required to maintain
operating records according to one or more prespecified optional or mandatory
formats or be required to maintain uniform summary sheets of their waste
management activities.
Currently, the owner or operator is required to keep the physical record
of daily operations on-hand at the facility only until the facility closes.
Thus, if time had elapsed between the facility closing and a final audit by
IRS, the operating record might not be available. This problem could be
easily rectified by modifying the regulation to extend the time in which the
record must be kept after closure.
• Part A Permit Application
All owners or operators of facilities that treat, store, or dispose of
hazardous wastes were required to file a Part A permit application with the
EPA Regional Administrator by May 19, 1980 as a condition of operating under
interim status. This information is maintained on EPA's Hazardous Waste Data
Management System (HWDMS). A record of changes, such as expansion of
capacity, management of additional wastes, or facility modifications, must be
supplied to EPA or the State agency, if the State has program authorization.
The Part A and HVDMS is the most comprehensive source of data available
for identifying potential taxpayers. The permit application provides data on
wastes handled, waste management process used, amount of unused capacity
remaining at the facility, and even requests a scale drawing of the facility,
including designations of current, past, and future waste management operating
areas.
Because applications were filed in 1980, a number of firms filed
"protectively" in order to obtain interim status in the event they decided to
handle hazardous waste in the future. For this reason, HWDMS may contain some
facilities not currently engaged in hazardous waste management activities.
Although the existence of some nontaxpaying facilities in the data base is not
an impediment to developing a preliminary roster of taxpayers, their current
status in HWDMS should be verified. Three possible sources of information
exist for cross-checking HWDMS, including:
• the biennial report, which provides information on
current facility status;
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• EPA has recently completed an extensive mail survey of
generators and TSDFs that could provide a reliable check
on the facilities that responded tc both Part A and the
mail survey; and
• EPA has a goal of call-ins for all Part B final land
disposal permit applications in 1985.
• Uniform Hazardous Waste Manifest
Any shipment of wastes subject to RCRA regulation and shipped off-site
after September 20, 1984 must be accompanied by a Uniform Hazardous Waste
Manifest. The manifest tracks the shipment as it leaves a generator and is
transported to a TSDF. The manifest system requirements have been in
existence for a number of years; however, a uniform reporting form has not
been required until recently. The manifest form requests information that
identifies the generator, all transporters, and the TSDF receiving the
shipment. Other basic waste type and quantity information is also required.
The usefulness of the manifest as a collection tool for the waste-end tax
appears limited, mainly because it only covers wastes managed off-site. In
addition, the manifest is not returned to EPA; rather, a copy must be retained
for three years by all parties that handled the waste. Also, most of the
information reported on the manifest is already required by the biennial
report and operating record. Therefore, requiring generators that manage
waste on-site to complete a manifest would not be necessary if EPA were to
make changes to other existing reporting systems.
The manifest does provide information that could be used to detect
noncompliance. Because the manifest tracks the movement of waste shipments
and because parties handling the wastes must retain a copy for three years,
the manifest could be used to monitor the behavior of generators who ship
off-site. Enforcement agents could examine the historical record of manifest
shipments to TSDFs to determine whether a waste generator has significantly
reduced the number of shipments to a TSDF in any reporting period. If
significant changes were to be detected, enforcement agents could go back to
the generator to determine the reason for the changes (e.g., sent waste
another TSDF or constructed an on-site treatment facility, making them an
eligible taxpayer) or whether possible RCRA violations have occurred. Because
the generator is not liable for the tax, it may be necessary to pursue the
firm under RCRA. Approximately 85 percent of all generators send some wastes
off-site; therefore, the manifest can provide an accounting system that uses
the manifest forms of less than 1,274 TSDFs to monitor the behavior of
thousands of generators. To increase the efficiency of the manifest system,
it may be desirable to have TSDFs submit a copy of each manifest received to
EPA.
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