PB-240 988
AN EVALUATION OF THE IMPACT OF DISCRIMINATORY
TAXATION ON THE USE OF PRIMARY AND SECONDARY
RAW MATERIALS
BOOZ-ALLEN AND HAMILTON, INCORPORATED
PREPARED FOR
ENVIRONMENTAL PROTECTION AGENCY
1975
DISTRIBUTED BY:
KFOl
National Technical Information Service
U. S. DEPARTMENT OF COMMERCE
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1. Report No.
EPA/530/SW-lOlc
2.
PB 240 986
4. r:>> •!,(] Subtitle
Ar. -.".valuation of the Impact of Discriminatory Taxation on>
the Use of Primary and Secondary Raw Materials
5. Report Date
1975
6.
7.
Scoz-Allen and Hamilton
•8. Performing Organization Rep:
No.
9. Pprtoiining Organization Name and Address
booz-Allen & Hamilton
1021J Connecticut Avenue, N.W.
Washington, D. C. 20036
10. Project/Task/Work Unit No.
11. Contract/Grant No.
EPA-68-01-0792
MP. Sponsoring Organization Name and Address
i U.S. Environmental Protection Agency
Office of Solid Waste Management Programs
Washington, D. C. 20460
13. Type of Report & Period
Covered
Final
14.
IS. Supplementary Notes
16. Abstracts
This report attempts to describe and quantify the value of current Federal tax
policy as it relates to competition between virgin and secondary materials. Tax
incentives are quantified on a per ton basis both at the raw material and selected
final product stages. A qualitative review of the potential in.pact of removing
virgin material incentives on the use of secondary materials if provided. Seven
materials are included (bauxite, timber, sand, iron ore, coal, oil, natural gas)
with an analysis of how their taxes impact on several product categories (glass,
steel, aluminum, newsprint, paperboard, plastics and rubber). The tax benefits
examined include the depletion allowance, capital gains, exploration and development
expenditures, State and local taxes and foreign taxes..
17. Key Words and Document Analysis. 17o. Descriptors
* Tax policy
* Secondary materials
* Recycling
17b. Identifiers/Open-Ended Terms
17c. COSATI Field/Group
18. Availability Statement
19. Secuiity Class (This
Repot)
in CL
21. No. of Pages
iffi
Cla
20. Security Class (This
Page
UNCLASSIFIED
22. Price
ORM NTis-38 IREV. «o.7ai ENDORSED BY ANSI AND UNESCO.
THIS FORM MAY BE REPRODUCED
USCOMM-OC 8269-P74
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SUMMARY
This is a summary which presents findings and conclusions
developed at length in the body of this report.
1. THE PRIMARY PURPOSE OF THIS STUDY HAS BEEN TO
IDENTIFY DISCRIMININATORY TAX TREATMENT AND
ESTIMATE ITS IMPACT ON RAW MATERIALS COSTS
IN SIX INDUSTRIES
The primary purpose of this study has been to identify taxes and
tax shelters applicable on a discriminatory basis to virgin or secondary
raw materials and to estimate their impacts on raw materials costs for
the following industries:
Aluminum
Pulp and Paper
Glass
Steel
Plastics
Rubber
As a secondary study objective, an attempt has been made to
assess, on a qualitative basis, the extent to which discriminatory
taxation may influence relative virgin and secondary materials use
in the commodities of interest.
2. DISCRIMINATORY TAXES AND TAX BENEFITS WERE
IDENTIFIED
For purposes of this study, discriminatory taxes and tax benefits
were defined as those which are incident to the use of either virgin or
secondary raw materials but not to both. It should be clearly under-
stood that the term "discriminatory" in this context implies no judg-
ment as to the equitv or utility of specific taxes or tax benefits but
merely relates to their incidence.
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AN EVALUATION OF THE IMPACT OF
DISCRIMINATORY TAXATION ON THE USE
OF PRIMARY AND SECONDARY RAW MATERIALS
Final Report
This report (SW-lOlc) on work performed under
Federal solid waste management contract no. 68-01-0792
is reproduced as received from the contractor.
U.S. ENVIRONMENTAL PROTECTION AGENCY
1975
\\
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This report as submitted by the grantee or contractor has not been
technically reviewed by the U.S. Environmental Protection Agency (EPA).
Publication does not signify that the contents necessarily reflect the
views and policies of EPA, nor does mention of commercial products
constitute endorsement or recommendation for use by the U.S. Government.
An environmental protection publication (SW-lOlc) in the solid waste
management series.
t s
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The taxes and tax benefits identified as discriminatory were all
found to be applicable to virgin raw materials. No taxes or tax bene-
fits were identified as applicable to secondary materials but not to
virgin materials.
Exhibit I, following this page, summarizes the major discrimina-
tory taxes and tax benefits identified and evaluated during the study.
Each of the elements of taxation shown are governed by complex defini-
tions and limitations which are discussed in some detail in Chapter II
of this report. The applicability of the taxes and tax incentives to the
commodities of interest in the study and to the raw materials required
to produce them is indicated on Exhibit II. The relative importance of
individual tax elements as they relate to specific commodities and raw
materials is discussed in following sections of th*s Summary.
3. EQUIVALENT PRIMARY AND SECONDARY RAW MATERIALS
WERE IDENTIFIED
Virgin raw materials and substitute secondary raw materials
consumed in the manufacture of the six commodities of interest were
identified. Production processes related to both primary and secondary
raw materials use were identified for each commodity of interest and
relative raw material input and output ratios wero developed to provide
a basis for estimating the dollar impact of discriminatory tax treatment
on an equivalent product basis. Specific attention was given to the im-
pact of technology on primary and secondary material substitutability.
The equivalent primary and secondary products selected for evalua-
tion are shown on Exhibit III. As indicated in the Comments column of
the Exhibit, in most cases perfect substitutability does not exist. Both
process and product characteristics operate to limit substitutability.
In plastics, for example, substitutability of secondary materials is
virtually zero using currently available technology. For the other >
commodities, the substitutability of secondary materials varies quite
widely. This subject is touched upon in more detail in following sec-
tions of this Summary.
4. THE IMPACT OF DISCRIMINATORY TAXATION ON VIRGIN
RAW MATERIALS COSTS WAS COMPUTED
Data required to estimate the impact of discriminatory taxes and
tax benefits on virgin raw materials costs were identified along with
ii
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EXHIBIT I
SUMMARY OF MAJOR DISCRIMINATORY
TAXES AND TAX BENEFITS
Tax/Tax Benefit
The Percentage
Depletion Allowance
Foreign Tax Credit
Expensing of Mine
Exploration and
Development
Expenditures
Effect on Income
Reduces Federal Income Taxes
payable
Reduces Federal Income
Taxes payable
Defers Federal Income
Taxes payable
Expensing of Intangible Defers Federal Income
Drilling and Development Taxes payable
Costs
Capital Gains Treat-
ment of Income from
Timber Sales
Minimum Tax on
Tax Preferences
State and Local
Resource Taxes
Reduces Federal Income
Taxes payable
Increases Federal Income
Taxes payable
Increases total taxes
payable
Measure of Impact
The amount of the reduction in Federal Income
Tax payable if percentage depletion is elected
in preference to cost depletion
The amount of the reduction in Federal
Income tax payable if taxes paid to foreign
governments are treated as credits against
income taxes payable rather than deductions
to taxable income.
The present value of the amount of Federal
Income Tax payments deferred to future
years if subject expenditures are treated as
current year expenses in preference to
capitalization and amortization over
several years.
The present value of the amount of Federal
Income Tax payments deferred to future
years if the subject expenditures are
treated as current year expenses in pref-
erence to capitalization and amortization
over several years.
The amount of the reduction in Federal Taxes
payable if income from sales of harvested
timber treated as capital gains as opposeJ
to ordinary income
The amount of the limitation on the reduction
in Federal Income Taxes payable which can
be obtained by use of "tax preference" items
such as percentage depletion or capital gains
The amount of the resources taxes payable
ii-a
Applicability
Applicable to U. S. and foreign
mineral extraction by companies
taxable in the U. S.
Applicable to the foreign taxes
paid by corporations subject to
the U. S. Income Tax.
Applicable to mining operations
of companies taxable in the U. S.
Not applicable to petroleum
production.
Applicable to petroleum and
natural gas drilling operations
of companies subject to the U. S.
Income Tax
Applicable to timber '*r-/«»sting
operations in the U. ';.
Applicable to taxable *r,tities
using "tax preference items
Applicable in some taxations to
mining, drilling and •ur.
operations.
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EXHIBIT II
INCIDENCE OF SIGNIFICANT
DISCRIMINATORY TAXES AND TAX BENEFITS
FOR THE COMMODITIES OF INTEREST
Tax/Tax Benefit
Percentage Depletion
Foreign Tax Credit
Expensing of Mine
Exploration and Develop-
ment Expenditures
Expensing of Intangible
Drilling and Development
Costs
I'apital Gains Treatment
of Income from Timber
Sales
Minimum Tax on Tax
Preferences
State and Local
Resources Taxes
Aluminum
Bauxite
X
X
Pulp & Paper
Timber
-
X
Sand
X
_
Glass
Lime-
stone
X
_
Feld
spar
X
_
Iron
Ore
X
X
Steel
Coal
X
X
Lime-
stone
X
_
Plastics &
Petroleum
X
X
Rubber
Natural
Gas
X
X
X
X
X
X
X
X
X
X
X
X
il-b
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EXHIBIT III
EQUIVALENT PRIMARY AND SECONDARY
PRODUCTS SELECTED FOR EVALUATION
Commodity
Aluminum
Pulp and Paper
Glass
Steel
Plastics
Rubber
Primary Product
Primary Aluminum
Ingot
Primary Newsprint
Primary Paperboard
Primary Bottle
Quality Glass
Raw steel
Thermoplastics —
Polyethelene. PVC.
Polystyre.-e
Thermosetting plastics
SBR (Synthetic Rubber)
Equivalent
Secondary Product
Secondary Aluminum
Ingot
Secondary Newsprint
Secondary Paperboard
Secondary Bottle
Quality Glass
Raw steel
None
None
Reclaimed Rubber
Comments
Substitutability exists primarily in ingot for making aluminum caw tings
Secondary newsprint may be freely substituted for primary newsj/rint
in end uses.
Secondary and primary paperboard while substitutable in many applica-
tions, often have differing appearance and strength characteristic* which
affect market acceptance.
Production of most products using a mix of primary and secondary
materials is possible, subject to limitations on the proportion of
secondary materials. Limits vary from product to product.
Secondary glass (cullet) may be freely substituted for virgin mat«r/,als
for up to 100% of product content if cullet is of the same grade an-:
color as the glass to be produced.
In most cases, raw steel made from scrap is fully substitutable !•,'
raw steel made from virgin materials.
There are process limitations on the proportion of scrap which :• % ,
be used in the manufacture of steel.
Thermoplastics are not recycled due to problems of separating &-•,•.
matching specific waste plastics for use in making like formula \a v.ucts
Thermosetting plastics cannot be recycled using existing techno!'.^-
The proportion of reclaimed rubber which can be used in tires
(the principal rubber product) is limited by product performance
specifications.
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potential data sources. The primary published data sources used
included producer financial statements, SEC filings, IRS publications
ai-d records, as well as special tax studies. Congressional hearing
records, and industry association records. In general, the major
shortcomings of published data from all sources proved to be lack
of specificity and inadequate disaggregation. To obtain data not
publicly available, major producers of the commodities of interest
were contacted directly or through their trade associations and re-
quested to provide data with the stipulation that any information con-
sidered to be proprietary would be treated so that the source would
not be disclosed to any parties other than the Booz, Allen & Hamilton
staff.
The level of producer cooperation varied from company to com-
pany and within industries. The primary reasons advanced for limit-
ing cooperation by those contacted were company policy regarding
disclosure, the applicability of data to ongoing litigation, the cost
of putting data in a usable form, and misgivings concerning potential
Government use of the data.
Due to limitations inherent in the data base for the reasons dis-
cussed above, it was necessary to develop impact estimates in spite
of data gaps. Accordingly, a methodology was used which, in the
absence of contrary data, produced estimates of maximum impacts.
Thus, the impact estimates developed during the study are weighted
against understating the effect of discriminatory taxes and tax bene-
fits on virgin raw materials costs. A detailed explanation of the
estimating procedures used for each commodity studied is provided
in the individual commodity chapters of this report (Chapters III -
VII).
Estimates were prepared for the years 1970 through 1972 for
all virgin raw materials except petroleum and natural gas used in the
production of rubber and plastics. The 1970-1972 period reflects
the operation of current rules governing the tax elements evaluated.
In the case of petroleum and natural gas, estimates for the years
1969 through 1971 were prepared to make use of specific data ele-
ments available for those years which were not available for 1972
at the time the study was conducted.
Exhibit IV, following this page, shows the estimated impacts
of discriminatory taxes and tax benefits on the unit cost of producing
primary aluminum, newsprint, paperboard, glass, steel and petrol-
eum and natural gas. The estimates shown are for 1972 with the
exception of petroleum and natural gas for which 1971 estimates are
provided. Unlike the other commodities indicated, petroleum and
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MAXIMUM ESTIMATED IMPACT OF
DISCRIMINATORY TAXES AND TAX BENEFITS
ON THE COST OF SELECTED COMMODITIES - 1972
Tax Element
Percentage Depletion
Foreign Tax Treatment
Expensing of Mine
Exploration & Development
Expenditures
Expensing of Intangible
Drilling & Development
Costs
Capital Gains Treatment
of Income From Timber
Sales
Minimum Tax on
Preferences
State and Local
Resources Taxes
Total (After Tax)
% of Price
Total (Before Tax)
% of Price
Aluminum
(S Per
Ingot Ton)
S 1.35
1.51
1.02
Pulp & Paper
Newsprint
($ Per Ton)
$ -
Paperboard
($ Per Ton)
1.14
2.48
Glass
($ Per Ton)
$0.20
Steel
(5 Per Ton of
Raw Steel)
$0.90
0.27
0.27
Petroleum
($ per BBL)
For 1971
$0.25
0.13
0.01
Natural Gas
($ per MCF)
For 1971
$0.015
0.002
(0. 08)
$3.80
0.7
$7.92
1.5
-
$1.14
0.7
$2.28
1.4
-
$2.48
1.4 - 2.2
$4.96
2.8 - 4. 3
-
$0.20**
1.4
$0.40
2.7
(0. 19)
$1.25
1.7?
$2.60
3.5*
(0. 04)
(0. 06)
$0.29
9.8
$0.60
20.2
(0.002)
(0. 007)
$0. 008
4.4
$0.017
9.3
* Percent of estimated average cost of producing raw steel @ $75. 00 (ton)
** Includes estimated percentage depletion for limestone, soda ash (a limestone derivative) and feldspar
Note: Impacts are shown as tax savings associated with tax benefits (after tax basis). Before tax impacts represent the amount
that prices would have to be increased to fully affect the effects of the removal of tax benefits.
iii-a
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natural gas are raw materials used in making plastics and rubber. As
is explained in Chapter VII. the procedures for estimating the tax
element impacts on the cost of producing plastics and rubber differed
somewhat from those used for estimating impacts for other commodities.
Accordingly, a detailed impact estimate for each tax element was not
prepared for plastics and rubber. Estimated total impacts of discrim-
inatory taxes and tax benefits on the cost producing selected plastic
products and rubber for 1971 are summarized on Exhibit V. following_
this page.
Estimates for specific tax elements as they relate 10 specific
commodities were not prepared in those cases where:
The tax element would not be applicable
(e.g., percentage depletion does not apply
to timber operations)
The tax element would not produce a significant
impact
Because of the data limitations discussed above, the figures
shown on Exhibits IV and V represent order of magnitude estimates.
They are, however, sufficiently accurate to permit a general assess-
ment of their significance in terms of relative virgin versus secondary
raw materials usage.
5. DISCRIMINATORY TAXES AND TAX BENEFITS ARE
LIKELY TO HAVE SOME MARGINAL IMPACT ON
RELATIVE RAW MATERIALS USE IN PRODUCING
THE COMMODITIES OF INTEREST
It can be stated conceptually that any measures to provide tax
treatment equalization to virgin and secondary materials would cause
the relative cost of using secondary materials to decrease at all levels
of use. Accordingly, tax treatment equalization should produce some
increase in relative secondary materials use.
The degree to which secondary materials use will increase will
depend upon the amount of the change in relative cost as it relates to
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EXHIBIT V
.ESTIMATED IMPACT OF DISCRIMINATORY
TAXES AND TAX BENEFITS ON THE COST
OF PRODUCING SELECTED PLASTIC
AND RUBBER PRODUCTS - 1971
($ PER POUND)
LOW
HIGH
Products
After Tax
$ Price
Before Tax
%of
$ Price
After Tax
% of
$ Price
Before Tax
%of
$ Price
High Density
Polyethelene
Low Density
Polyethelene
Polyvinyl
Chloride
Polystyrene
0.0004 0.27 0.0008 0.54 0.0007 0.52 0.0014 1.04
0.0002 0.16 0.0004 0.32 0.0006 0.47 0.0012 0.54
N/A N/A
0.0004 0.25
N/A N/A 0.0003 0.^3
0.0008 0.50 0.0009 0.72
0.0006 0.46
0.0018 1.42
SBR (Synthetic
Rubber) 0.0007 0.2 0.0014 0.4 0.0017 0.7 0.0034 1.4
Note: Impacts are shown as tax savings associated with tax benefits (after tax
basis). Before tax impacts represent the amount that prices would have
to be increased to fully offset the effects of the removal of tax benefits.
iv-a
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the marginal cost of accessing and using additional secondary materials.
Estimating the marginal cost of secondary materials is beyond the scope
of this study; however, the following points can be made:
The price behavior of the secondary materials used
to produce the commodities of interest (except
plastics where secondary materials are not used)
suggests that the marginal costs of bringing addi-
tional supplies into the market place are high in the
short run.
The long run marginal costs of the secondary
materials of interest are not known; however, it
appears likely that a not insignificant cost com-
ponent relates to the market risk inherent in
developing secondary materials supplies which
is in turn a function of price volitility, A potential
means of dealing with such costs is through the
development of municipal reclamation centers
which could absorb market price fluctuations.
This could prove feasible particularly in areas
where such a scheme would provide cost advan-
tages over other means of waste disposal.
That the long run marginal cost of obtaining addi-
tional secondary materials may be relatively high
is suggested by the fact that for all of the commod-
ities studied, significant increments to the market
supply of secondary materials must be developed
from the post consumer waste stream which is the
highest cost source of secondary materials due to
the mixed character of the waste and the attendant
separation problems and the relatively dispersed
nature of the sources which imposes higher trans-
portation costs. As above, the use of municipal
reclamation centers may provide a means of
adjusting costs, if the costs of alternative dis-
posal techniques are built into the equation. At
the present time, such cost offsets are not re-
flected in the marketplace.
In the short run, limits to the US3 of secondary
materials are imposed by the characteristics
of manufacturing technology in use. In the long
run, technological change and the development
of new manufacturing capacity capable of using
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secondary materials could significantly reduce
these barriers.
In general, the use of secondary materials requires
less energy than does the use of primary materials.
The manufacturing capacity to produce equivalent
output also requires less capital investment in
many cases, particularly for aluminum, pulp and
paper, and steel. In view of the current energy
shortage and the capital squeeze faced by producers,
these factors should operate in favor of increased
secondary materials use over the long term.
In view of the uncertainties outlined above, no conclusive state-
ments can be made regarding the impact of discriminatory taxation
on relative raw materials use. Given the magnitude of the impacts
indicated on Exhibits IV and V and the indications that the marginal
cost of increased secondary materials use may be relatively high,
the best that can be said is that tax treatment equalization alone
may cause some marginal increase in secondary materials utiliza-
tion. It should be kept in mind, however, that there are additional
forces in operation which may beneficially influence secondary
materials usage.
Specific commodity impacts are discussed below:
(1) Tax Treatment Equalization May Have Some
Marginal Impact on Relative Use of Aluminum
Scrat
The substitutability of secondary aluminum for primary
aluminum is limited by the following:
Primary and secondary ingot manufacturing
processes are not compatible thus increased
scrap usage will require secondary aluminum
capacity expansion.
Secondary ingot competes with primary ingot at
present only in casting applications. Were
secondary ingot to capture a 100% share of the
VI
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casting market output could be increased up to
12. 5%. Additional secondary ingot substitution
would require advances in technology and changes
in the alloy content of secondary ingot.
At the present time, soaring foreign aluminum prices
have caused strong aluminum scrap export demand which has
caused scrap prices to increase to a point where domestic
producers are faced with a scrap shortage. They cannot
outbid foreign producers for available supplies in the face
of controlled product prices. Thus, while scrap market
supplies may be increasing due to large price increases,
domestic producers are faced with decreasing supplies.
This situation should correct itself upon price decontrol;
however, there is unlikely to be any secondary capacity
expansion as long as the situation persists.
The energy crisis and the capacity squeeze faced by
aluminum producers tend to auger well for secondary pro-
duction increases over the long term as secondary produc-
tion requires less than 10% of the energy and about 10% of
the capital required for equivalent primary output.
As with other commodities, the marginal cost of alumi-
num scrap is not known; however, given the fact that readily
accessable supplies are in use and the limitations on substi-
tution discussed above, it appears that tax treatment equali-
zation would have at best a marginal impact on secondary
output. In the long run, the factors discussed above may
lead to increased secondary output, although the degree to
which such output is likely to increase cannot be estimated
at this time.
(2) The Ultimate Impact Tax Treatment Equalization
on Waste Paper Usage Is Indeterminate
Potential for increased use of waste paper in paper
manufacturing does exist with the degree of substitution
feasible varying by product. Indeed, there is evidence that
some mills are increasing the proportion of waste paper in
their products due to a shortage of virgin fibers related to
difficulties and costs of obtaining labor for lumbering opera-
tions. The ultimate degree of substitution will, of course.
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depend on the marginal cost of wastepaper and the technological
limits to substitution for specific products.
The above notwithstanding, history indicates that waste -
paper market supplies are relatively insensitive to price in the
short term indicating that an adjustment of relative wastepaper
and virgin fibre costs of the order indicated on Exhibit IV would
produce only marginal short term increases in secondary fibre
usage.
In the long run, the impact of tax treatment equalization is
indeterminate as the long run marginal cost of secondary fibre
is not known. As with other waste materials, however, addi-
tional market supplies would have to be drawn from the post
consumer waste stream which leads to the conclusions that such
costs may be relatively high. Nevertheless, the American Paper
Institute has extimated that use of old corrugated boxes, from
commercial sources, may increase by as rruch as 34% over the
next three years.
(3) Tax Treatment Equalization Is Likely to Have Only
a Marginal Impact on the Relative Use of Scrap Glass
At the present time, industrial source cullet (scrap glass)
is fully utilized. While cullet recovery from post consumer
waste is in limited practice, the economics of collection separa-
tion and transportation are unfavorable. While precise quanti-
tative data are not available, it appears unlikely that an adjust-
ment in materials costs up to a maximum of $0. 40 per ton
(See Exhibit IV) would be sufficient to offset such costs.
Were municipalities to absorb collection and separation
costs in reclamation centers, the economics of recycling
could potentially be improved.
(4) Tax Treatment Equalization May Cause Some
Marginal Increase in Steel Scrap Usage
At the present time, about 18% of steel output is
accounted for by electric furnaces consuming scrap. Any
change in relative materials costs in favor of scrap would
van
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tend to make electric furnace production more attractive.
Some limited increase in scrap utilization in other steel-
making processes may also be expected, subject to techno-
logical limitations on substitution.
The major barrier to the development of additional
electric furnace capacity is the potential shortage of electrical
power in both the long and the short term.
During 1973, a scrap shortage developed as export
buyers outbid domestic purchasers for available supplies.
This situation developed as foreign steel prices increased
at a much faster rate than domestic prices which are sub-
ject to price controls. With a return to a free market, this
situation should correct itself. While the domestic-foreign
price imbalance exists, however, scrap for domestic pro-
ducers should remain in short supply, subject, of course,
to the extension of scrap export limitations. Accordingly,
in the short run tax treatment equalization should have
little, if any. usage impact.
In the long run, the degree to which scrap utilization
increases will depend on the marginal cost of bringing addi-
tional quantities of scrap into the market place. Such costs
will undoubtedly include some discounting of market risk.
Definitive statements as to the effectiveness of tax treat-
ment equalization are not possible as neither the short nor
the long run marginal costs of additional scrap are known.
As indicated in preceding sections, however, the establish-
ment of mechanisms such as municipal reclamation centers,
if they prove feasible, can provide a means of accommodat-
ing market risk.
It should be pointed out, however, that readily access-
able sources of steel scrap are currently in use thus addi-
tional market supplies will have to be drawn from higher cost
sources.
(5) Tax Treatment Equalization is Unlikely to Influence
the Relative Use of Secondary Materials in the
Manufacture of Plastics and Rubber
Thermosetting plastics cannot be remelted and reused
in any currently available process, thus tax treatment equali-
zation should have no impact.
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Thermoplastics would require sorting by grade for reuse
in making plastics. Given that there are many grades and types
of thermoplastics, the cost of sorting and grading from a mixed
waste stream would be prohibitive. A change in relative mater-
ials costs of the order indicated on Exhibit V should not be suf-
ficient to offset the other costs of recycling.
The use of reclaimed rubber, principally from tires has
been declining for two reasons:
Product (tire) performance specifications
which limit the proportion a reclaimed
rubber which can be used
Increased costs of reclaiming rubber from
old tires caused by increased use non-
rubber tire components (e. g., steel and nylon
belts)
Given changes in relative materials costs through tax
treatment equalization of the order indicated on Exhibit V,
it is unlikely that tax equalization alone would be sufficient
to cause producers to consider any significant increases in
their use of reclaimed rubber.
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TABLE OF CONTENTS
Page
Number
LETTER OF TRANSMITTAL
EXECUTIVE SUMMARY i
I. INTRODUCTION 1
II. TAXES AND TAX INCENTIVES 7
III. THE ALUMINUM INDUSTRY 22
IV. THE PULP AND PAPER INDUSTRY 36
V. THE GLASS INDUSTRY 48
VI. THE STEEL INDUSTRY 53
VII. THE RUBBER AND PLASTICS INDUSTRIES 68
APPENDIXES
xi
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INDEX OF EXHIBITS
Following
Page
I. SUMMARY OF MAJOR DISCRIMINATORY
TAXES AND TAX BENEFITS 2
II. INCIDENCE OF SIGNIFICANT
DISCRIMINATORY TAXES AND TAX
BENEFITS FOR THE COMMODITIES 2
OF INTEREST
III. EQUIVALENT PRIMARY AND SECONDARY
PRODUCTS SELECTED FOR EVALUATION 2
.IV. MAXIMUM ESTIMATED IMPACT OF
DISCRIMINATORY TAXES AND TAX
BENEFITS ON THE COST OF SELECTED
COMMODITIES - 1972 5
V. ESTIMATED IMPACT OF DISCRIMINATORY
TAXES AND TAX BENEFITS ON THE COST
OF PRODUCING SELECTED PLASTIC AND
RUBBER PRODUCTS - 1971 ($ PER POUND) 5
VI. PERCENTAGE DEPLETION RULES 8
VII. REGULATIONS PERTAINING TO FOREIGN
TAX CREDITS 12
VIII. SUMMARY OF FOREIGN TAXES OF
COUNTRIES THAT HOST IMPORTANT
EXTRACTIVE INDUSTRIES 14
IX. RELATIVE TAX ADVANTAGES OF USE
OF WESTERN HEMISPHERE TRADE
CORPORATION 15
X. STATE AND LOCAL TAX LAWS
APPLICABLE TO CERTAIN RAW
MATERIALS 17
xii
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XI. STATE TAX LAWS APPLICABLE TO
TIMBER OPERATIONS
XII. IMPACT OF SELECTED TAXES AND TAX
BENEFITS ON THE COST OF PRODUCING
PRIMARY ALUMINUM INGOT 1970 - 1972
XIII. IMPACT OF SELECTED TAXES AND
TAX BENEFITS ON THE COST OF
PRODUCING PULP AND PAPER 1970-1972
XIV. WOOD PULP AND WASTEPAPER
CONSUMPTION AND PRICE INDICES
1964 - 1972
XV. YEARLY PRICE CHANGES FOR NO. 1
WASTE NEWSPRINT 1968 - 1973
XVI. YEARLY PRICE CHANGES FOR WASTE
PAPER 1968 - 1973
XVII. IMPACT OF THE PERCENTAGE
DEPLETION ALLOWANCE ON THE COST
OF PRODUCING SAND AND GLASS 1970-1972
XVIII. IMPACT OF SELECTED TAXES AND TAX
INCENTIVES ON COST OF RAW INTEGRATED
IRON ORE PRODUCTION 1970-1972
XIX. IMPACT OF SELECTED TAX BENEFITS ON
THE COST OF INTEGRATED METALLURGICAL
COAL PRODUCTS 1970-1972
XX. IMPACT OF SELECTED TAXES AND TAX
BENEFITS ON THE COST OF INTEGRATED
RAW STEEL PRODUCTION 1970-1972
XXI. THERMOSETTING PLASTICS
XXII. THERMOPLASTICS
XXIII. SIMPLIFIED FLOWCHART FOR SBR
(SYNTHETIC RUBBER)
Following
Page
17
29
41
45
46
46
51
61
62
62
69
69
73
xlii
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Following
Page
XXIV. SIMPLIFIED FLOWCHART FOR
SELECTED PLASTIC RESINS 73
XXV. IMPACT OF SELECTED TAXES AND TAX
BENEFITS ON THE COST OF PRODUCING
CRUDE OIL AND NATURAL GAS 76
XXVI. IMPACT OF SELECTED TAXES AND TAX
BENEFITS ON THE COST OF PRODUCING
SBR RUBBER - 1971 76
XXVII. IMPACT OF SELECTED TAXES AND TAX
BENEFITS ON THE COST OF PRODUCING
SELECTED PLASTICS RESINS - 1971 77
APPENDIXES
xiv
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I. INTRODUCTION
The Resource Recovery Division of the EPA, Office of
Solid Waste Management is responsible for evaluating alternative
means of encouraging secondary materials recovery and reuse.
In connection with this responsibility, the Resource Recovery Div-
ision is examining the influence of discriminatory taxation on the
relative use of virgin and secondary raw materials in the manu-
facturing process. The purpose of this study has been to quantify
the tax impact and to assess the influence of discriminatory taxa-
tion on the relative use of virgin and secondary raw materials in
the manufacture of the following products:
Aluminum
Pulp and Paper
Glass
Steel
Plastics
Rubber
1. THE PRIMARY STUDY OBJECTIVE HAS BEEN TO IDENTIFY
DISCRIMINATORY TAX TREATMENT AND ESTIMATE ITS
IMPACT ON RAW MATERIALS COSTS
The primary objective of the study has been to identify taxes
and tax benefits applicable on a discriminatory basis to virgin or
secondary materials use and to estimate their impacts on raw mater-
ials costs. A secondary study objective has been, on a qualitative
basis, to assess the degree to which discriminatory taxation may be
expected to influence the relative use of virgin and secondary raw
materials in the manufacture of the six products identified above.
-------
The major tasks completed in conducting the study were as
follows:
Identification of discriminatory elements of tax-
ation.
The identification and matching of virgin raw
materials and their equivalent secondary mat-
erials substitutes; and the establishment of
equivalent material input and output ratios.
Identification of tax data needs and accessible
data sources.
Tax data collection and evaluation.
Computation of tax impacts on relative materials
costs.
Assessment of the significance of tax related
material cost differentials in terms of relative
virgin and secondary raw materials use.
2. DISCRIMINATORY TAXES AND TAX BENEFITS WERE IDENT-
EFIED
Discriminatory taxes and tax benefits were identified through ex-
tensive research of Federal, state, and Local tax regulations and a
comprehensive review of related tax literature including specialized
tax journals. The applicability of discriminatory tax elements which
is summarized on Exhibit I and II, following this page, and the rules
governing their application are discussed in detail in Chapter I! of
this report.
3. EQUIVALENT PRIMARY AND SECONDARY MATERIALS WERE
IDENTIFIED
Virgin raw materials and substitute secondary raw materials
consumed in the manufacture of the six products were identified. They
are summarized on Exhibit III, following Exhibit II. Production proc-
esses related to both secondary and primary raw materials use were
analyzed for each product of interest and relative raw materials
-2-
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EXHIBIT I
SUMMARY OF MAJOR DISCRIMINATORY
TAXES AND TAX BENEFITS
Tax/Tax Benefit
The Percentage
Depletion Allowance
Foreign Tax Credit
Expensing of Mine
Exploration and
Development
Expenditures
Effect on Income
Reduces Federal Income Taxes
payable
Reduces Federal Income
Taxes payable
Defers Federal Income
Taxes payable
Expensing of Intangible Defers Federal Income
Drilling and Development Taxes payable
Costs
Capital Gains Treat-
ment of Income from
Timber Sales
Minimum Tax on
Tax Preferences
State and Local
Resource Taxes
Reduces Federal Income
Taxes payable
Increases Federal Inco>-t<
Taxes payable
Increases total taxes
payable
Measure of Impact
The amount of the reduction in Federal Income
Tax payable if percentage depletion is elected
in preference to cost depletion
The amount of the reduction in Federal
Income tax payable if taxes paid to foreign
governments are treated as credits against
income taxes payable rather than deductions
to taxable income.
The present value of the amount of Federal
Income Tax payments deferred to future
years if subject expenditures are treated as
current year expenses in preference to
capitalization and amortization over
several years.
The present value of the amount of Federal
Income Tax payments deferred to future
years if the subject expenditures are
treated as current year expenses in pref-
erence to capitalization and amortization
over several years.
The amount of the reduction in Federal Taxes
payable if income from sales of harvested
timber treated as capital gains as opposed
to ordinary income
The amount of the limitation on the reduction
in Federal Income Taxes payable which can
be obtained by use of "tax preference" items
such as percentage depletion or capital gains
The amount of the resources taxes payable
Applicability
Applicable to U. S. and foreign
mineral extraction by companies
taxable in the U. S.
Applicable to the foreign taxes
paid by corporations subject to
the U. S. Income Tax.
Applicable to mining operations
of companies taxable in the U. S.
Not applicable to petroleum
production.
Applicable to petroleum and
natural gas drilling operations
of companies subject to the U. S.
Income Tax
Applicable to timber harvesting
operations in the U. S.
Applicable to taxable entities
using "tax preference" items
Applicable in some locations to
mining, drilling and timber
operations.
2-a
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EXHIBIT II
INCIDENCE OF SIGNIFICANT
DISCRIMINATORY TAXES AND TAX BENEFITS
FOR THE COMMODITIES OF INTEREST
Aluminum
Tax/Tax Benefit
Percentage Depletion
Foreign Tax Credit
Expensing of Mine
Exploration and Develop-
ment Expenditures
Expensing of Intangible
Drilling and Development
Costs
Capital Gains Treatment
of Inconne from Timber
Sales
Minjmum Tax on Tax
Preferences
State and Locai
Resources Taxes
X
X
Pulp & Paper
Timber
X
Glass
Steel
X
Sand
X
X
X
LJme-
stone
Feld
spar
X
X
Iron
Ore
X
X
X
X
Coal
X
X
X
X
X
X
X
X
Plastics & Rubber
Natural
Gas
Petroleum
X
X
X
X
X
X
X
2-b
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EXHIBIT III
EQUIVALENT PRIMARY AND SECONDARY
PRODUCTS SELECTED FOR EVALUATION
Commodity
Aluminum
Pulp and Paper
Glass
Steel
Plastics
Rubber
Primary Product
Primary Aluminum
Ingot
Primary Newsprint
Primary Paperboard
Primary Bottle
Quality Ola.--&
Raw steel
Thermoplastic?--
Polyethelene. PVC.
Polystyrene
Thermosettmg plastics
SBR (Synthetic Rubber)
Equivalent
Secondary Product
Secondary Aluminum
Ingot
Secondary Newsprint
Secondary Paperboard
Secondary Bottle
Quality Glass
Raw steel
None
None
Reclaimed Rubber
Comments
Substitutability exists primarily in ingot for making aluminum castings
Secondary newsprint may be freely substituted for primary newsprint
iii end uses.
Secondary and primary paperboard while substitutable in many applica-
tions, often have differing appearance and strength characteristics which
affect market acceptance.
Production of most products using a mix of primary and secondary
materials is possible, subject to limitations on the proportion of
secondary materials. Limits vary from product to product.
Secondary glass (cullet) may be freely substituted for virgin materials
for up to 100% of product content if cullet is of the same grade and
color as the glass to be produced.
In most cases, raw steel made from scrap is fully substitutable for
raw steel made from virgin materials.
There are process limitations on the proportion of scrap which may
be used in the manufacture of steel.
Thermoplastics are not recycled due to problems of separating and
mniching specific waste plastics for use in making like formula products
Thermosettmg plastics cannot be recycled using existing technology
The proportion of reclaimed rubber which can be used in tires
'the principal rubber product) is limited by product performance
specifications.
2-c
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input and output ratios were developed to provide a basis for estimating
the dollar impacts of discriminatory tax treatment on equivalent pro-
duct costs.
In conducting this analysis specific attention was given to ident-
ifying and assessing technological and economic barriers to the sub-
stitution of secondary raw materials for virgin raw materials.
4. TAX DATA REQUIREMENTS AND SOURCES WERE IDENTIFIED
AND DATA WAS COLLECTED
The data required to compute the impact of identified discrim-
inatory taxes and tax benefits were identified along with potential
data sources. Initial efforts were directed at identifying and acquiring
of publically available data including:
Producer financial statements
SEC filings
Internal Revenue Service publications and records
Records of court cases
Other sources, including Congressional hearing
records, tax studies, industry tax publications,
and publications of various government agencies
Useful data were obtained from producer financial statements and
SEC filings, particularly for 1972 as a result of more complete inform-
ation disclosure than in prior years. IRS data proved to be of limited
value due to age (up to ten years out of date) and levels of aggregation.
Such data proved to be useful when it was up to date and related to in-
dustries when integration and diversification are limited. Court cases
provided little useful data as available decisions were in settlement of
litigation regarding tax returns filed up to fifteen years in the past.
-3-
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Data from various other sources was found to be useful, although
the adequacy of data from all public sources was limited by lack
of specificity and inadequate disaggregation.
To obtain required data which were not publicly available major
producers of the products covered by the study were contacted directly
or through their trade associations and requested to provide data.
The following rules governing the handling of company data were
stressed:
Company data would be treated in confidence
Access would be restricted to Booz,
Allen & Hamilton, Inc. staff
Data would be used only for this study
Data would be presented in the final re-
port so as not to be attributable to a
specific producer.
The names of companies contacted and providing
data would not be disclosed.
The level of producer cooperation obtained varied from company-
to-company and from industry-to-industry. Data for two industries
was provided in aggregated form through the industry trade associations.
Data of this type proved to be highly useful. In other cases, data of
varying degrees of usability was provided. The results of producer
contacts have produced the following conclusions:
Producers are extremely reluctant to release any
unpublished data related to tax matters.
Release normally requires the consent of
the board of directors or the chief exec-
utive officer.
Obtaining consent is time consuming and re-
quires repeated personal contacts at the
senior executive level.
-------
Delivery of specific tax data requires a sig-
nificant producer clerical effort which must
be delivered on a spare time basis.
Those producers which declined to provide data most frequently
expressed the following reasons:
Company policy regarding the release of propri-
etary data
The pertinence of data to ongoing tax litigation
Lack of staff available to gather and summarize
the data
The high cost of gathering and summarizing the
data
Misgivings regarding Government use of the data
The data obtained from producers and from published
sources, however, were sufficient to permit the development of
reasonably accurate tax impact estimates.
5. THE IMPACT OF DISCRIMINATORY TAXATION ON
RELATIVE MATERIALS COSTS WAS COMPUTED
The impact of discriminatory taxation on relative materials
costs was computed using best available data. Where specific tax
data were limited, a synthesis approach was used which was
weighted against understating possible tax impacts. The methods
used to compute tax impacts for each product of interest are ex-
plained in detail in Chapters III-VII of this report. Impacts are
summarized on Exhibits IV and V. following this page.
6. THE SIGNIFICANCE OF COST DIFFERENTIALS RELATED
TO DISCRIMINATORY TAXATION WAS ASSESSED IN
TERMS OF RAW MATERIALS CHOICES
The significance of raw material cost differentials related to
discriminatory taxation was assessad for each product of interest
•5-
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MAXIMUM ESTIMATED IMPAC1 O!"
DISCRIMINATORY TAXES AND TAX BENEFITS
"JN THE COST OF SELECTED COMMODITIES - 1972
Tax Element
Percentage Depletion
Foreign Tax Treatment
Expensing of Mine
Exploration & Development
Expenditures
Expensing of Intangible
Drilling & Development
Costs
Capital Gains Treatment
of Incomt Prom Timber
Sales
Minimum Tax on
Preferences
State and Local
Resources Taxes
Total (After Tax)
% of Price
Total (Before Tax)
% of Price
Aluminum
(S Per
Ingot Ton)
S 1.35
1.51
1.0?
-
-
-
(0. 08)
33.30
0.7
S7.92
1.5
Pulp i Paper Glass Steel
Newsprint Paperboard (S Per Ton of
(S Per Ton) ($ Per Ton) (S Per Ton) Raw Steel)
S - S - $0.20 $0.90
0.27
0.27
-
1.14 2.48
-
(0.19)
SI. 14 $2.48 $0.20— $1.25
0.7 1.4 - 2. 2 1.4 1.7*
$2.28 $4.96 $0.40 $2.60
1.4 2.8-4.3 2.7 3.5*
Petroleum
($ per BBL)
For 1971
$0.25
0. 13
-
0.01
-
(0. 04)
(0. 06)
$0.29
9.8
$0.60
20.2
Natural Gas
($ per MCF)
For 1971
$0.015
-
-
0.002
-
(0.002)
(0.007)
$0.008
4.4
$0.017
9.3
* Percent of estimated average cost of producing raw steel @ $7b. CO (ton)
** Includes estimated percentage depletion for hmesione, sorla ash (a limestone derivative) and feldspar
Note: Impacts are shown as tax savings associated with tax benefits (after tax basis). Before tax impacts represent the amount
that prices would nave to be increased to fully affect the effects of the removal of tax benefits.
5-a
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EXHIBIT V
ESTIMATED IMPACT OF DISCRIMINATORY
TAXES AND TAX BENEFITS ON THE COST
OF PRODUCING SELECTED PLASTIC
AND RUBBER PRODUCTS - 1971
($ PER POUND)
LOW
HIGH
Products
After Tax
%of
$ Price
Before Tax
%of
$ Price
After Tax
% of
$ Price
Before Tax
%of
$ Price
High Density
Polyethelene
Low Density
Polyethelene
Polyvinyl
Chloride
Polystyrene
0.0004' 0.27
0.0002 0.16
N/A N/A
0.0004 0.25
0.0008 0.54 0.0007 0.52 0.0014 1.04
0.0004 0.32 0.0006 0.47 0.0012 0.54
N/A N/A 0.0003 0.23
0.0008 0.50 0.0009 0.72
0.0006 0.46
0.0018 1.42
SBR (Synthetic
Rubber) 0.0007 0.2 0.0014 0.4 0.0017 0.7 0.0034 1.4
Note: Impacts are shown as tax savings associated with tax benefits (after tax
basis). Before tax impacts represent the amount that prices would have
to be increased to fully offset the effects of the removal of tax benefits.
5-b
-------
in terms of their possible influence on raw materials choices. The
following specific factors were considered in each case:
Cost differentials
The market availability of'secondary materials
Technological aspects of secondary materials use
The following chapter discusses taxes and tax incentives found
to be discriminatory.
-6-
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II. TAXES AND TAX INCENTIVES
There are no unique taxes or tax incentives applicable to
the users of secondary raw materials which are not also applicable
to users of virgin raw materials. Taxes and tax incentives appli-
cable only to producers and users of primary raw materials are
identified and discussed in the balance of this chapter. The follow-
ing topics are included:
Depletion
Minimum Tax on Tax Preferences
U. S. Tax treatment of taxes paid to foreign
governments
State and local taxes
Tax treatment of mine exploration intangible
drilling and development costs
Tax treatment of capital gains
A discussion of the relationships among certain tax incen-
tives is provided in the last section of the chanter.
1. DEPLETION
Depletion isthe exhaustion of mineral resources as a result of
extraction. A deduction is allowed on tax returns in order to com-
pensate mineral producers for capital consumed in the process of
extraction. The depletion tax deduction may be computed on the basis
of cost (cost depletion} or on the basis of a percentage (percentage
depletion) of the gross income from mining, whichever results in
the greater tax deduction.
.7-
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EXHIBIT VI
PERCENTAGE DEPLETION RULES
Mineral
Iron Ore
Percent
U.S.
Foreign
15%
14%
Mining Process*
Extraction from the Ground
Transportation to the plant or mills for other mining processing
Sorting ) When applied for purpose of
Concentrating) bringing to shipping grade
Sintering ) and form
Loading for shipment
if within 50 miles
Coal
Bauxite
Anorthosite
Clay
Latente
U. S. 10% . Extraction from the ground
Transportation to the plant or rmlls for other mining processing if within 50 miles
Cleaning
Breaking
Sizing
Dust Allaying
Treating to prevent freezing
Loading for shipment
U.S.
Foreign
22%
14%
For Ores Customarily Sold in the Form o* a Crude Mineral Product:
Extraction from the ground
Transportation to the plant or mills for other mining processing if within 50 miles
Sorting ) When applied for purpose of
Concentrating) bringing to shipping grade
Sintering ) and form
LOP ding for shipment
For Ores Not Customarily Sold in the Form of a Crude Mineral Product:
Extraction
Transportation to the pLint or mills for other mining process if within 50 miles
Crushing
Grinding
Beneficiating
Cyamdation
Leaching
Crystalizatioii
Precipitation (excluding electrolytic deposition, roasting, thermal or electric
smelting or refining)
Equipment processes
Limestone
Quartzsand
Quart zite
Nepheline Syenite
Feldspar
Lithium (Foreign)
U.S.
14%
Extraction
Transportation to the plant or mills for other mining process if within 50 miles
Crushing and grinding (not fine pulverization)
Size classification
Drying to remove free water (not to change physical or chemical identity or composition
Washing or cleaning (not to activate or change the physical or chemical structure)
Natural Gas
and oil
U. S. &
Foreign
22%
Extraction at the well before conversion or transportation
Processes included for purposes of computing gross income
7-a.
-------
The basis for cost depletion is the total value of a mineral
deposit, with value defined as the cost to the producer of the mineral
deposit, (land, mineral rights, cost of developing the deposit, etc.)
divided by the total estimated recoverable mineral units (e. g., tons
of coal) in the deposit. The quotient provides the unit basis for cost
depletion. Cost depletion for a given period is computed by multi-
plying the number of mineral units extracted during that period times
the unit depletion basis.
Percentage depletion is measured by applying the percentage
provided in the Internal Revenue Code for the particular mineral
to the gross income (defined below) from its extraction. Exhibit VI.
following this page, lists the various minerals covered by this study
and the applicable percentage depletion rates. The Exhibit also
shows the point in the processing of the mineral at which a price
is applied to determine the gross income for computing percentage
depletion.
(I) Depletion Allowances in Excess of Cost Were Initially
Allowed to Encourage Development of Mineral Sources
The depletion allowance, specifically percentage deple-
tion, is an extention of the discovery value concept originating
during the gold rush days of 1849. Under this concept, the
fair market value of a mine (its discovery value) could be sub-
stantially greater than the cost of mine development. In 1918
Congress recognized the discovery value concept by allowing
depletion to be taken on the fair market value of the property
at the time of the discovery or within 30 days thereafter.
Because the regulations governing depletion on the basis of
fair market value were difficult to administer, percentage
depletion was adopted in 1926 for oil and gas and in 1932 for
coal, metals, and sulphur. The 1964 Internal Revenue Code
extended the percentage depletion allowance to almost all
metallic and nonmetallic minerals.
(2) The Measure of the Tax Benefit Provided by Depletion
is the Reduction in Taxes Payable Associated With Using
Percentage Depletion in Preference to Cost Depletion
The deduction for cost depletion is limited to actual pro-
ducer costs; the deduction for percentage depletion, however.
-------
is available even though producer investment has been fully
recovered. The deduction for percentage depletion can
exceed the original cost of the property. Therefore, per-
centage depletion, to the extent that it exceeds cost depletion,
is considered to provide a discriminatory tax benefit for pur-
poses of this study.
(3) The Tax Rules Pertaining to Percentage Depletion
Include Precise Definitions and Income Limitations
The amount of the percentage depletion deduction is de-
pendent not only on the depletion precentage used but also
on the following three factors:
A precise definition of "gross income" to which
the depletion precentage is applied and from which
taxable income is calculated
A maximum limit on the amount of percentage
depletion which can be claimed of 50% of the taxable
income from mining properties
There are a multitude of definitions for "mining
properties". A mining property is generally defined
as each separate interest owned by a taxpayer in each
mineral deposit in each separate tract or parcel of
land. Under the tax code, certain mineral interests
may be aggregated in computing depletion and
taxable income. Thus, if the amount of taxable
income from a property does not permit the full
amount of available depletion to be taken, due to
the 50% limitation, then the combination of income
from that property with income from other properties
which have taxable income in excess of the 50%
limit, may permit the full amount of the depletion
deduction taken to be increased. The rules governing
aggregation are extremely complex.
The definition of gross income and the 50% limit on
taxable income for percentage depletion are presented below.
-9-
-------
Definition of Gross Income
Gross income is defined separately for oil and gas pro-
ducers and for mining operations. Oil and gas gross income
is determined by the amount for which the oil or gas is sold
at the well head or near the vicinity of the well. If the oil or
gas is not sold at the well head and other production, trans-
portation, or manufacturing costs are incurred by the extractor,
then gross income is computed by using the representative mar-
ket or field price at the well head.
Gross income for mining operations is not limited to the
sales value at the mine but is extended to include the value of
certain treatment processes and transportation costs to the
treatment plant. The treatment process are listed in the tax
code (see Exhibit I). If the minerals are not sold after the
allowable treatment which would determine gross income, a
representative market or field price must be used to calculate
gross income.
Representative field prices are determined for an ore
or mineral of a like kind or grade. The weighted average of
competitive selling prices is an important factor in deter-
mining the field prices. Prices estaolished in a transaction
between divisions of an integrated producer cannot be used.
Taxable Income Limitations
The total amount of percentage depletion which can be
claimed is limited to 50% of the taxable income from a mining
property. The taxable income from a mining property is cal-
culated by deducting from gross income the development ex-
penses deducted in computing taxable income, costs of exploiting
the natural resource including the maintenance of geological
and land departments, interest on money borrowed to develop
mines, state income taxes, and a fair share allocation of over-
head items. The depletion deduction itself and charitable
contributions are not deducted from gross income in arriving
at the taxable income for the 50% limit computation.
-10-
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2. MINIMUM TAX ON TAX PREFERENCES
Under the Tax Reform Act of 1969, Congress imposed a 10%
tax, effective for years ending after 1969. on items designated as
preference items. Preference items were identified as those items
in the tax code which, while available to all taxpayers, are advan-
tageous primarily to high income taxpayers, and the application of
which results in the reduction of a taxpayers effective tax rate.
The excess of allowable percentage depletion, over the adjusted
cost of a mineral property is defined as a tax preference item.
Also, for a corporation in the 48% tax rate bracket, 3/8 of total
capital gains claimed is a tax preference item.
The tax on preferences is levied primarily on domestic source
income. The tax is imposed on the total amount of tax preferences
less the following amounts:
A $30, 000 annual exemption per corporation
The income taxes paid for the taxable year,
excluding income taxes on accumulated earn-
ings and personal holding companies.
If the $30, 000 exemption plus the regular income tax liability is
in excess of the total amount of tax preferences available, the
excess amount may be carried forward for seven years and used
to offset the preference items in the following years.
The tax reduces the effective tax benefit of percentage deple-
tions and capital gains. Accordingly, the minimum tax on pref-
erences mitigates the benefits provided by certain tax incentives.
For the oil and gas companies this reduction has been estimated
to be from 2. 5 to 4 percent of the percentage depletion benefit.
The impact of the minimum tax on preferences on the other
materials considered in the study is lower.
3. U. S. TREATMENT OF TAXES PAID TO FOREIGN
GOVERNMENTS
The regulations governing foreign taxes are applicable to all
foreign operations of U. S. companies. For purposes of this study.
-11-
-------
however, the impact of the tax rules are treated as applying to pri-
mary material users and not to secondary material users due to
the almost non-existent imports of secondary -materials, 'and the
fact that U. S. companies do not process post-consumer waste
overseas.
The gross taxable income of corporations operating inter-
nationally can vary widely, depending upon international transfer
pricing policies, corporate organization structure, the degree of
integration of operations, and other factors.
(1) U. S. Companies That Pay Foreign Income Taxes Can
Generally Credit Such Taxes Against Their U. S. Tax
Liability
The United States taxes its citizens on their worldwide
income. A U. S. company thus could be taxed on the same
income by the U. S. government and also by a foreign govern-
ment. Internal Revenue Service Code Section 901 allows a
credit for the amount of income taxes imposed by foreign
countries. The credit is intended to pla-ie foreign and
domestic source income on an equal footing insofar as the
United States income tax is concerned and is also designed
to facilitate overseas investment.
Regulations pertaining to foreign tax credits are shown
in Exhibit VII, following this page.
(2) The Measure of the Tax Benefit Associated With the
Foreign Tax Credit is the Reduction in Taxes Payable
Obtained by Treating Foreign Taxes Paid as a Credit
Rather than as a Deduction
The magnitude of the benefit provided by foreign tax
credits varies with the effective tax rate of the foreign coun-
tries imposing taxes and the treatment of the taxes paid on
U. S. tax returns. Taken as a credit, foreign taxes are
subtracted directly from the U. S. tax liability. Taken as
a deduction, foreign income taxes reduce taxable income.
The taxpayer has the option of treating foreign taxes paid
as either a credit or a Deduction. However, all foreign
taxes must be treated uniformly.
-12-
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EXHIBIT VII
REGULATIONS PERTAINING TO FOREIGN TAX CREDITS
1. A taxpayer who pays taxes to a foreign country may be entitled to
a tax credit if his foreign source income is subject to U. S. income
tax.
2. Limits on the Credit
There are two alternative methods on computing the foreign tax
credit—the "per country method" and the "overall' method... In
neither case can the credit exceed the actual amount of foreign
tax paid. (Refer to text for explanation)
3. Who Gets the Credit
The credit is allowed to all citizens and corporations as to both
taxes paid to a foreign country or a possession of the United States.
4. Special Rule for Foreign Mineral Operations
A domestic mining company operating in a foreign country pays foreign
taxes on its mineral income. It must also include its foreign mineral
income, along with its other foreign income, in its U. S. tax base.
Effective for tax years after 1969, the excess of foreign tax credits
resulting from the allowance of a percentage depletion deduction on
foreign mineral income cannot be used in determining the tax credit
limit under the "overall" country method. A country by country cal-
culation must be made of the effect of percentage depletion on U.S.
taxes on foreign mineral income. The amount of foreign income taxes
paid which can be included in determining the tax credit limit under the
"overall" method must be reduced by the amount that the foreign in-
come tax exceeds the amount of U.S. tax calculated after application of
the depletion deduction. Any excess of foreign tax credits resulting
from high foreign tax rates may, however, be included in determining
the "overall" tax credit limit.
5. Credit of Domestic Corporation for Taxes of a Foreign Subsidiary
A domestic corporation which owns 10% or more 01 the voting stock
in a foreign corporation is entitled to a credit for a proportion,
based on dividends received, of ihe taxes paid by the foreign corp-
oration to a foreign country of United Sxates possession. A credit
is also allowed to a domestic corporation for foreign taxes paid by
a subsidiary of a foreign corporation described in the preceding sent-
ence. In such a case, however, in order for the credit to be avail-
able, the foreign corporation must own 50% or more of the foreign
subsidiary's voting stock.
-------
Where the effective tax rate of a foreign country is
higher than the U. S. rate, a company may by using an
"overall" limitation, claim a credit for the total taxes that
it has paid to all foreign countries. The company's credit
using the "overall" method is limited. The limit is deter-
mined by calculating the U. S. tax on all income, from all
sources, including foreign and multiplying this amount by
a fraction, the numerator of which is the total foreign
taxable income and the denominator of which is total
foreign and domestic income. For example, assume the
following operating results for a company with operations
in the U. S. and two foreign countries:
Taxable
Income
Country A $1,000
Country B 1,000
U. S. 1,000
Total $3,000
If income were to be taxed separately in each country,
the applicable taxes would be:
Taxable Tax
Income Rate Tax
Country A $1,000 40% $400
Country B 1,000 60% 600
U. S. 1,000 48% 480
If all income, regardless of source, were subject
to U. S. taxes, the applicable U. S. tax would be:
Taxable Tax
Income Rate Tax
U. S. $3.000 48% $1,440
Under the "overall' method, the maximum foreign
tax credit would be computed as follows:
$2, OOP (Total Foreign Taxable Income) $. 44Q _ $g6Q
$3.000 (Total Taxable Income) * ' " *
Thus, while the company paid $1, 000 ($400 + $600) in
foreign taxes, the allowable 'tax credit under the "overall"
method is limited to $960.
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If the allowable tax credit were computed on a "per
country" basis, it would be limited to $880 as follows:
$1.000
x $1,440 = $480
Since the tax paid in Country A was $400. the allowable
tax credit is limited to $400 as the tax credit cannot
exceed the tax paid in each country. The allowable
tax credit for taxes paid in Country B, however, is
limited to $480 by the above formula even though
$600 in taxes were actually paid.
Exhibit VIII, following this page, summarizes
relevant tax legislation of Venezuela, Canada, and
Jamaica. These countries host important U. S.
mineral operations.
(3) United States Law Provides Several Other Methods
of Sheltering Earnings of Foreign Operations From
the full Effect of U. S. Taxation
Under U. S. tax regulations, a corporation engaged in
foreign trade can organize and conduct operations in such a
way as to minimize the effects of the U. S. tax burden on
overseas enterprises. The regulations are numerous and the
provisions extremely complex. The more important means
of managing foreign operations to achieve maximum tax
savings are presented below.
Western Hemisphere Trade Corporations
U. S. corporations controlling foreign based
mining enterprises can operate as "Western
Hemisphere Trade Corporations" (WHTC).
They can do so by incorporating a domestic
subsidiary which controls overseas operations.
A subsidiary can qualify as an WHTC if:
Its entire business, other than incidental
purchases, is carried on in the Western
Hemisphere.
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EXHIBIT Vin
SUMMARY OF FOREIGN TAXES OF COUNTRIES
THAT HOST IMPORTANT EXTRACTIVE INDUSTRIES
The Range of Foreign Taxes and Their Impact Upon Gross and Taxable Income Varies Widely. Depending Upon International Transfer Pricing Policies.
Corporate Organizational Structure and Degree of Integration of Operations. Below is a Summary of Relevant Tax Legislation of Three Countries that Host
Important U. S. -Owned Extractive Industries
VENEZUELA (1)
Corporations, partnerships and joint ventures
which are engaged in the exploitation of mines.
hydrocarbons and related activities are subject
to a tax for all their income. Their gross income
comprises the amount of sales. Exports of petrol-
eum and iron are. whether procured or not. con-
sidered as sales. The National Executive establishes
basis for export prices. When the reference prices
exceed realized prices, an extra income tax payment
will be made for the tax on t!.e difference between
th° taxable income f i om the books and that using the
reference prices. Depletion, depreciation anc"
amorti7ation of assets are allowed.
Depreciation--The cost ol UIP concession is
considered to be its purchase price and related
expenses plus the initial -xploitation and ell
exploration taxes.
Depletion—Is calculated in the unit of production
basis, taking into consideration the unamortized
cost, 'he proven reserves for the area and the
production of ih- field.
Exploration expenses, tangiole and intengible
drilling coata are also allowed-
The /nrnme tax rate for income from oil and mining
activities 10 a flat 60%. but the following adiustments
to the tax may be applicable:
. Credit for new investment
. Credit for increase in export sales
. Credit for losses
. 30-50 tax (discussed below)
SO-SO iflx-coi-iparues engaged In the extraction of
petroleum or n-.irung are subject to an additional
tax (50-50 tax). The tax is calculated by subtract-
ing from the net after-tax income the total taxi's
incurred during the year, any excess is taxed at SOft.
In addition, other provisions of Venezuelan Law
may be applicable to a particular company's
activities.
CANADA (2)
The following provisions of Canadian law apply
to mining and petroleum. Otherwise, mining and
petroleum companies operating in Canada are
subject to the same rules that apply to all Cana-
dian corporations. The corporate tax rate in
Canada for 1972 is 50%.
. Taxpayers whose principal business is not
mining or petroleum are allowed* deductions
for Canadian exploration and development
expenses.
. All taxpayers are allowed deductions for foreign
exploration and development expenses.
. Acquisition of mining properties and royalty
interests treated as exploration and develop-
ment expenses, end proceeds on disposals
of such properties are fully taxable subject
to transitional rules for those owned at
December 31. 1971.
. Three year tax exemption for new mines are to
be withdrawn after 1975 and replaced by an
accelerated writeoff of capital equipment and
on-site facilities, including townsite facilities
such as sewage plants, roads, hospitals and
schools. The accelerated writeoff also applies
to a major expansion of an existing mine
where capacity 19 increased by at least 25%.
. The present system of automatic percentage
depletion for operators (33%) and nonoperators
C5%> will continue until 1976. However, af.er
1976, depletion will be based on amounts ex-
pended on eligible expenditures since Novem-
ber 7. 1969. Taxpayers will be allowed $1 of
of depletion for each $3 of eligible expenditures
with a limit of 33-1/3% of production profits
per year. For this purpose, royalty income
will be deemed to be production profits.
A Federal corporate tax abatement on mining
profitb of 15 percentage points was also intro-
duced. This abatement which commences in
1977 will also apply in the Yukon and Northwest
Territories.
JAMAICA (3)
Mining companies are subject to the same
regulations governing all corporations
operating in Jamaica. All companies pay a
basic company"profits tax and an "additional"
company profits tax. The rate depends
upon the class of company (agricultural.
open, intermediate or close) and it ranges
from 25% to 35%. The rate of additional
company profits tax is 15%.
In addition, there are certain import duties.
tonnage taxes, excise taxes applicable to
all companies, and preferential legislation
has been enacted to cover various industries.
No such legislation exists for bauxite opera-
tions although special concessions have
occasionally been granted to attract foreign
capital into the island.
(1) Petroleum and iron ore
(2) Principally Iron ore
(3) Bauxite
14-a
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Its gross income for the current taxable
year and the two preceding taxable years
was derived:
95% or more from sources outside
the United States
90% or more from the active conduct
of a trade or business
A WHTC is allowed, as a deduction in computing
the amount of income subject to tax, an amount equal
to a fraction of its taxable income as computed without
this deduction. For 1971 and subsequent years, the
deduction is 14/48 or approximately 29.17%—a reduc-
tion of close to one third in the amount of U. S. tax
otherwise payable. Other advantages of the WHTC are
discussed in Exhibit IX, following this page. As indi-
cated in the Exhibit, the second main advantage of a
WHTC is that domestic shareholders are not taxed on
dividends until they are received and corporate share-
holders, in addition, are not taxed on 85%-100% of divi-
dends received. Without the WHTC benefit, dividends
from a foreign corporation wculd be taxed not as re-
ceived, but as earned and the exemption of 85%-100%
of dividends received from taxation would not apply.
Less Developed Country Corporations (LDCC)
Special tax treatment is also available to Less
Development Country Corporations (LDCC). An
LDCC is a corporation operating in a less developed
country as designated by the President of the United
States which derives at least 80% of its gross income
in the less developed country, and has at least 80%
of its assets invested in such a country.
The tax benefit associated with an LDCC involves
the regulations cohering the taxation of dividends re-
ceived from a foreign corporation. Normally, dividends
received from a foreign corporation are taxed on the
full amount of the dividend declared, regardless of the
amount of tax paid on that dividend to a foreign govern-
ment. U.S. taxes ov. dividends received from an LDCC
may be computed on the net amount of dividends received,
after deducting taxes paid to foreign governments.
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• EXHIBIT IX
RELATIVE TAX ADVANTACCS OF USE OF
WESTERN HEMISPHERE TRADE CORPORATION
THE GREATEST ADVANTAGE OF USING A WHTC TO CONDUCT FOREIGN OPERATIONS IS THAT. AS A4I*. CORPORATION. THE DOMESTIC SHAREHOLDERS ARE NOT TAXABLE ON IMAGINARY
DIVIDENDS NOT ACTUALLY RECEIVED FROM IT. ADDITIONALLY. CORPORATE SHAREHOLDERS ARE ALLOWED THE DIVIDENDS RECEIVED DEDUCTION (100% OR 8SK) FOR DIVIDENDS RECEIVED
FROM A WHTC
OTHER VALUABLE ADVANTAGES OF A WHTC INCLUDE
• THE INCOME OF A WHTC IS SUBJECT TO U i TAX AT 34/48THS (OR 70.8%) OF THE FULL
CORPORATION TAX RATE. WHEREAS INCOME OF THt FOREIGN CORPORATION IS
TAXABLE TO ITS UJ SHAREHOLDERS AT THE FULL CORPORATION OR INDIVIDUAL
TAX RATE. Ei lilFR WHERE ACTUALLY DISTRIBUTED TP THEM OR WHERE REQUIRED
TO BE REPOHTCP BY THEM AS IMAGINARY DIVIDENDS.
• IT Ib POSSIBLE 10 TRANSFER Phl'PER1Y TO A WHTC IN EXCHANGE FOR SHARES OF
I fS STOCK TAX-FREE (WITHOUT CAPITAL GAIN) ON THE 01 HER HAND. TRANSFERS
OF PROPERTY TO A FOREIGN CORPORATION IN EXCHANGE FOR ITS STOCK REQUIRE
CLEARANCE FROM THE INTfcRN/.L REVENUE SERVICE.
• THE DOMESTIC PAREUT COMPANY OF A WHTC IS TAXABLF ON NOT MORE THAN 15%
OF DIVIDENDS ACTUALLY RECEIVED FROM THE WHTC. IS TAXED AT THE CAPITAL
GAIN KATE ON GAINS REALIZED ON A SALE OF STOCK OF A tf.lll.. ANO CAN LIQUIDATE
THE CORPORATION TAX FREE-TH^T is. WITIiaUl RECOGNITION OF GAIN ?N1HE
OTHLR HAND, THE DOMES'! iC PARENT OF A CFC (CONTROLLED FOREIGN CORPORATION)
NOW IS TAXABLE AT THE FULL CORPORATION TAX RATE (4854 OF ALL OVER $25.000)
WITHOUT ALLOWANCE OF THE DIVIDENDS RECEIVED DEDUCTION.ON ALL EARNINGS
OF A FOREIGN CORPORATION EITHER (1) WHEN EARNED BY THE FOREIGN
CORPORATION. BEFORE BEING DISTRIBUTED BY IT. OR (2) PRIOR TO DISTRIBUTION OF
SUCH EARNINGS.
• UNITED STATES SHAREHOLDERS OF A CFC ARE REQUIRED. IN MANY INSTANCES. TO PAY
DOMESTIC TAXES ON ITS FOREIGN-EARNED INCOME BEFORE SUCH INCOME IS ACTUALLY
DISTRIBUTEOTO THEM. WHEREAS A WHTC IS SUBJECT TO UNITED STATES TAX CURRENTLY
• A UNITED STATES CORPORATION THAT IS A SHAREHOLDER OF A WHTC CAN GET CAPITAL
GAIN TREATMENT OF GAIN ON A SALE TO IT OF A PATENT. INVENTION. OR SIMILAR
PROPERTY. WHEREAS GAIN ON A SIMILAR SALE TO A FOREIGN CORPORATION CONTROLLED
BY THE DOMESTIC CORPORATION IS DENIED CAPITAL GAIN TREATMENT AND TAXED AS
ORDINARY INCOME
• THF INCOME OF A WHTC CAN BE INCLUDED IN A UNITED STATES CONSOLIDATED INCOME
TAX RETURN. WITHOUT LOSS OF THE SPECIAL WHTC DEDUCTION
• A WHTC CAN OBTAIN THE BENEFITS OF TAX TREATIES OF THE UNITED STATES WITH OTHER
COUNTRIES.
• THE WHTC AND ITS SHAREHOLDERS ARE SPARED THE HEAVY BURDEN OF INCREASED ACCOUNTING
AND REPORTING REQUIREMENTS IMPOSED BY THE UNITED STATES ON SHAREHOLDERS OF A CFC.
15-a
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The tax benefit associated with an LDCC is some-
what limited by the provisions governing foreign tax
credits. For non LDCC's a credit can be taken for the
full amount of foreign taxes paid on dividends received.
The amount of the credit which can be taken for foreign
taxes paid on dividends received from an LDCC is limited
to the effective foreign tax rate applied to the cash divi-
dend actually received (dividend declared, less foreign
taxes paid).
U.S. Corporation in a U.S. Possession
A U.S. domestic corporation that receives 80%
or more of gross income for three years from sources
in U.S. possessions, and 50% of its gross income is
from trade or business (as opposed to interest) in the
possession, may qualify income for exemption from
taxation. The applicable U.S. possessions are specif-
ically defined in the tax code; they include the Panama
Canal Zone, Wake and Midway Islands, but do not include
the Virgin Islands or Puerto Rico.
Controlled Foreign Corporations
A controlled foreign corporation (CFC) is the
least advantageous means of operating a business a-
broad. If an CFC is established, it should be operated
and organized in such a way as net to allow dividends
tc be taxable to its U.S. shareholders as imagninary
dividends under Subsection F. Income exempt from
such treatment includes:
Income from producing goods abroad
Income from sales of goods for use, con-
sumption, or depreciaxion with the country
of incorporation.
The timing of the repatriation of profits and the
exclusion of Controlled Foreign Corporation can also
impact U.S. tax liabilities.
When profits of U.S. owned foreign operations
are declared to the permanently reinvested.
U.S. taxes do not need to be paid or accrued.
-16-
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When imaginary dividends are declared, a
company merely accrues U.S. taxes on its books.
Such taxes are paid when dividends are actually
repatriated.
Tax aspects of each form of organization vary, but adequate
tax planning allows U.S. enterprises to reduce their income tax
liability.
4. STATE AND LOCAL TAXES
Various states impose severance, occupation and modified property
and local jurisdictions taxes on timber lands, mines and wells. These
taxes tend to act as a disincentive to production of virgin materials.
Taxes are identified in Exhibit X, following this page, for certain
important virgin raw material producing states. As the Exhibit shows,
these taxes vary substantially in amount, rate, and form of application.
State taxes pertaining to forest lands are discussed in Exhibit XI.
These taxes, tax rates, and their applicability also vary greatly from
state to state. Some act of incentives, some as disincentives.
5. MINE EXPLORATION AND DEVELOPMENT EXPENDITURES
AND INTANGIBLE DRILLING AND DEVELOPMENT COSTS
Both miners and oil and gas producers may elect for tax pur-
poses to expense certain exploration and development expenditures.
(I) Under Certain Circumstances, Mine Exploration and
Development Expenditures May Be Deducted Currently
Domestic mining companies (excluding oil and gas pro-
ducers) may expense all miae exploration expenditures pro-
vided that the amount expensed is recaptured once the mine
reaches production or is sold. Recapture is accomplished
as previously deducted exploration expenditures are included
in income or if the mining company reduces the amount of
depletion claimed.
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EXHIBIT X
STATE AND LOCAL TAX LAWS
APPLICABLE TO CERTAIN RAW MATFRIALS
Major Type
Commodoty Producing State of Tax Tax Rate
Iron Ore
Bauxite
Petroleum
Gas
Coal
Sand and Gravel
Minnesota
Michigan
Arkansas
Te»as
Louisiana
Califori'i:
Oklahoma
Wxas
Louisiana
California
New Mexico
West Virginia
Kentucky
California
Missouri
New Jersey
Illinois
Occupational Tax on Mining
Royalty Tax
Occupational Tax on Production o!
Taconites. Iron Sulphates and Derived
Concentrates
Production Tax
Severance Tax
Prodjction Tax
Petroleum Tax
Pi eduction Ttx
Production Tax
Production Tax
Production Tax
Srverancp Tax
Production Tax
Ad Valorem Tax
Conservation Tax
Emergency School Tax
Natural Gas Processors Tax
S» verance Tax
Production I'qi ipnicnt Tax
Pnvilegc Tax
^pocisl local taxes on production of
iirtural resources
Spvrinncp TJX
None
None
Nunc
None
15i% of value of iron ore at the mine less credits for labor on low grade ores lesearch and
exploration (reducing rate to about 14%)
15% of value of Taconites. Semi-Taconites and Iron Sulphides
154% for permission to explore and mine (gross value of mining is reduced by loyally tax to
avoid duplication of tax)
lli% per gross ton plus I/ IOC per ton for each lit iron content in excess of 55% (higher rate
applies if price index is over 110)
Added tax on production (per gross ton)-
1971 - 4C 1972 - ?C 1973 - 9; 1974 - 9C 1975 - IOC 1976 - IOC 1977 - 12« 1978 - 12{
Low grade iron ore is taxed during mine construction at 17o of annual capacity multiplied by
percentage of completion of construction after construction tax rate is 2% of annual average
production
Underground bcneficiated and agglomerated tax iron ore is taxed at 2% to 3% of property
depending upon annual shipments and process involved
liC per ton
Oil production tax is 4 60 per 42 gallon ban el of oil 'if value exceeds $1 per barrel, tax is 4.67i
of market value)
C rude petrnleum tax is 3/16C per 42 gallon barrel
1BC to 26C per 42 gallon harrel depending upon gravity
Hale per barrel is determined annually depending upon the amount requited to support the
division of oil and gas Hate has been running at 003 'iC per 42 gallon barrel
5% of gross value of production on the first $150 monthly gross if producing under 3 barrels
ilailv anil 7% on the balance
7J% of market value (condcnsates are taxed at lower oil rate)
2 1C per MCI~ (effective .lulv I. IS74. 1 1 i7o of value at severance)
See Pott oleum Hate has been running at about .0015C per 10.000 cu ft of gas
Ad Valorem Production tax based on assessed value of 150% of product value (less royalties
and trucking) times assessment ratio which i.s certified locally
14% of severed value
2 55% of severed value
45/100% of product value
2{% of severed value
27% ('% prior to M.iy ri. I'i72) of pimlurl value times assessment ratio levied on production
i-qiiipinent for scvernrt c. treatment or storage
Uusmess and occupational tax • 3 5% of gioss proceeds or gross income
Local taxes range from 1/2% to 1% of gross income
4% of sales, minimum 30? per ton strip mines are nlsn under special license
17-a
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EXHIBIT XI
STATE TAX LAVS APPLICABLE TO TIMBER OPERATIONS
TIMBER
STATE TAX LAWS APPLICABLE TO FOREST LANDS GENERALIY FALL INTO FOUR GROUPS-
ID EXL1SPTIOH A'lO REBATE LAWS. (2) MODIFIED PROPERTY TAX LAWS. (31 YIELD TAX LAWS. (4) SEVERANCE TAX LAWS. MODIFIED
PROPERTY TAX LAWS IN TURN FALL UNDEH THREE SUBGROUPS- (1) MODIFIED ASSESSMENT. 12) MODIFIED RATE. (3) DEFERRED PAYMENT.
AKO BmAI b TAXES'
ALABAMA.CALII un.'HA. CO; ORAOO.HAWAII.IDAHO.IOWA,
NL.VHA.-Pil!,HE. fJCWJERStv. NORTH CAROLINA.PUERTO RICO.
HHOntlflA,;0
I
I Mmifi
nTY TAX LAIVS*
ALABAMA. .".oK.ViSts. MIMECTICUT. FLORIDA. HAWAII. IDAHO,
InlOIA'JA. 13'.'A. LOUISIANA. MAINE. MARYLAND. MASSACHUSETTS.
V..CIUI-.Arl .liril.'CSOTA, MISSISSIPPI. MISSOURI. MEW HAMPSHIRE,
NLIV JEISSEY. N:'.V. EXICO. NOW YORK. NORTH DAKOTA. OHIO. OREGON.
!>E':NSYLV£N:A. PUERTO RICO. RHODE ISLAND. VIRGINIA.WASHINGTON.
WlblO.'lSIN
Al ADAMA LUM .CCHCUT. HAWAII. IDAHO. LOUISIANA. MASSACHUSETTS.
MICHIGAN. l.lir.'I.ESJTA. MISSISSIPPI. MISSOURI, NEW HAMPSHIRE. NEW
YORK. ORF COM. WASHINGTON. WISCONSIN
ALABAMA. ARKANSAS. I OUISIANA, NEW MEXICO, OREGON. VIRGINIA
REMOVES FOREST LANDS AND TIMBER OR TIMBER ALONE FROM
THE I-ROPERTY TAX ROLLS EITHER FOR A TERM OF YEARS OR.
INSC IE CASES. INDEFINITELY TO QUALIFY FOR EXEMPTION.
FOREST TRACTS MAY NEED TO COMPLY WITH CERTAIN FOREST
MANAGEMENT REQUIREMENTS REBATE LAWS PERMIT LANDOWNER
TO MPLY FOR ABATEMENT OF TAXES LEVIED
UNDER THE MODIFIED PROPERTY TAX LAVA OF THE MODIFIED ASSESSMENT
TYPE A FIXED ASSESSMENT PER ACRE MAY DE PROVIDED THE MODIFIED RATE
LAAS ARE VARIED BUT HAVE IN COMMON THE USE OF A TAX RATE THAT
DIFFI RS FROM THE MILLAGE RATE APPLICABLE TO REAL PROPERTY IN
GENERAL
YIEL" TAX LAWS ARE DESIGNED TO AID FORESTRY BY RELIEVING TIMBER
FROM PAYMENT OF ANNUAL PROPERTY TAXES AND IMPOSING INSTEAD A
TAX AT THE TIME OF TIMBER HARVEST
SEVERANCE TAXES ARE SIMILAR IN SOME RESPECTS TO YIELD TAXES BUT
IMPOSED SOLELY FOR REVENUE PURPOSES
• TAX RATES AND APPLICABILITY VARY WIDELY FROM STATE TO STATE
SUURCE: TIMBER TAX JOURNAL. 1972
FOREST INDUSTRIES COMMITTEE ON TIMBER VALUATION AND TAXATION
WASHINGTON. DC
17-b
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Mine development expenditures may be expensed as
incurred up to the point where the mine reaches full pro-
duction. Depreciable property, such as trucks 'or buildings.
however, must be capitalized. In addition, expenditures
for the purpose of decreasing operating costs may not be
expensed.
Once full production is reached, expenditures to
maintain the established production as the working face
of the mine recedes may be expensed.
(2) Intangible Drilling and Development Costs
May Be Expensed as Incurred
Oil and gas producers may expense intangible drill-
ing and development costs as they are incurred. Such costs
include labor, fuel, power, materials and supplies, rentals
and other expenditures necessary to locate and develop a
well. Expenditures for tangible or salvageable assets may
not be expensed, however, as they may be reused in other
locations.
(3) The Tax Benefits Associated With Current Write-Offs
Depend on the Amount and Timing of the Tax Defer-
ment and the Taxpayer's Opportunity Cost of Capital
The benefit derived from the write-off of certain
costs as expenses rather than as depreciation can be
measured by the present value the deferred tax payments.
6. CAPITAL GAINS
Under Federal tax regulations, gains from the sale or
exchange of certain capital assets held for more than six months
are provided preferential tax treatment. The gains from such a
sale are taxed at a lower effective rate than are normal operating
profits. The basis for this preferential tax treatment is that
capital gains accumulate ovtr the period (often an extended
period) that assets are held but are realized when the assets
are sold or exchanged.
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Timber is particularly affected by capital gains since timber
producers may treat the cutting of timber for sale or use as a
capital gain. Prior to 1944, capital gains treatment was available
only for the sale of a timber tract. In 1944 capital gains treatment
was extended to cover timber harvesting. Similar treatment is
available to companies disposing of coal or domestic iron ore
under royalty contracts.
(t) Proceeds From the Sale or Exchange of Timber Are
Subject to Capital Gains Treatment
Capital gains from timber disposal may result from
the following:
Sale of standing timber
Disposal of timber under a cutting contract
(includes Federal and privately owned lands)
Cutting by the taxpayer
In each case, the timber must be held for six or more months.
Each of the above means of disposal is discussed below:
Sale of standing timber. Capital gains on the
sale of standing timber are computed as the
difference between the sales price and the ad-
justed cost of the timber to the seller.
Disposal under a cutting contract. The excess
of the payments received under a cutting contract
over the adjusted cost of the timber may be
treated as a capital gain. A cutting contract is
a lease with payments based on the amount of
timber cut. To qualify for capital gains under
a cutting contract, the trees need not be cut into
lumber: Christmas treesr cordwood and pulp-
wood also quaLty. This is applicable on both
Federal and private lands.
Timber cut by owner, A taxpayer (individual or
corporate) cutting owned timber for sale or own
-If-
-------
use, may elect capital gains treatment. Capital
gains, however, must be taken on the amount of
timber cut in a given taxable year, whether it is
sold or not.
The capital gains election is binding and applies to
all timber owned by the taxpayer cut in subsequent
years. IRS permission is needed for any change.
If a capital gain election is not made, no gain or
loss is recognized when the timber is cut, but
income is recognized when the timber is sold in
the form of logs, pulpwood, or firewood and is
taxed as ordinary income.
(2) Capital Gains Treatment is Available to Taxpayers
Disposing of Coal or Domestic Iron Ore Under
Royalty Contracts
If a producer disposes of coal or iron ore which has
been held for six months or more under a contract retaining
an economic interest in the coal or iron ore (a royalty con-
tract) he may elect capital gains treatment.
7. IF PARTICULAR TAX INCENTIVES ARE ELIMINATED.
ALTERNATIVE TAX TREATMENTS MAY BENEFICIALLY
BE USED
As indicated in the previous sections, differential tax rates
and tax treatment of some deductions and credits provide a tax
advantage to selected groups of taxpayers. If the tax treatment
resulting in special benefits is eliminated, alternative tax treat-
ments are still available. Some of these alternative treatments
have been discussed in defining the tax benefits, specifically for
depletion, foreign tax credits, Western Hemisphere Trade Cor-
porations, and capital gains taxes; for example, cost depletion
would be taken in lieu of percentage depletion, and foreign taxes
could be taken as a deduction instead of a credit.
If producers were not permitted to deduct exploration, and
intangible drilling costs currently, an alternative to capitalization'
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and depreciation would be an abandonment loss deduction. A
depreciable asset which loses its usefulness ana is abandoned
is allowed a retirement loss deduction. Therefore, while it may
be necessary to capitalize exploration and other costs initially,
it will not be necessary to carry the costs if the drilling or mine
explorations prove unsuccessful.
Therefore, the maximum impact of eliminating tax incen-
tives would only occur if all tax options are closed. Since this
is not likely to occur, any maximum impact analysis, such as
those which follow, probably overstate the dollar impact of tax
removal.
The following chapter discusses the impact of discriminatory
taxation on the aluminum industry.
-21-
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III. THE ALUMINUM INDUSTRY
This chapter addresses the impact of discriminatory taxes and
tax benefits on the relative use of virgin and secondary materials in
the production of aluminum.
1. THE ALUMINUM INDUSTRY IS COMPOSED OF TWO
DISTINCT SUB-INDUSTRIES. PRIMARY ALUMINUM AND
SECONDARY ALUMINUM
The primary and secondary aluminum industries are related
but largely separate in terms of production processes used and mar-
kets served.
Primary aluminum producers can remelt industrial process
aluminum scrap which is compatible in alloy content and purity with
their primary products. Aluminum fabricators also remelt internally
generated scrap. Neither primary producers nor fabricators are able
to make extensive use of scrap of mixed alloy content.
Secondary aluminum smelters, which consume about 80% of the
total aluminum scrap supply are capable of making use of most types
of mixed alloy post-consumer scrap. About 90 percent of secondary
aluminum output is marketed to the aluminum casting industry with the
balance consumed in the production of steel.
While secondary aluminum may not be substituted for primary
aluminum in most primary aluminum end uses, primary aluminum
may be substituted for secondary aluminum in casting. At the present
time about 20 percent of the aluminum consumed by the casting indus-
try is obtained from primary producers.
For purposes of this analysis, secondary aluminum has been
defined as functionally equivalent to primary aluminum at the alumi-
num ingot stage of production, subject to the limits on cross substi-
tution mentioned above. Equivalency does not exist prior to the ingot
stage as primary and secondary aluminum processing techniques are
not compatible.
-------
The secondary aluminum industry cannot make extensive use
of recycled beverage cans due to their high magnesium content.
Primary producers manufacturing can stock may remelt old beverage
cans for reuse as can stock. While this is currently being done by
several major primary producers the economics of this practice on
a large scale are undefined. However, there may be difficulty in
obtaining an expanded supply of old cans.
2. THERE ARE SEVERAL TAX BENEFITS AVAILABLE TO
PRIMARY ALUMINUM PRODUCERS WHICH ARE UNAVAILABLE
TO SECONDARY PRODUCERS
There are no identifiable taxes or tax benefits applicable to
secondary aluminum production which are not also applicable to
primary production. There are several elements of taxation.
however, which are unique to primary production. They are as
follows:
Regulations providing tax benefits
The percentage depletion allowance on
bauxite
The foreign tax credit
Western Hemisphere Trade Corporation
allowances
Tax treatment of mine exploration and
development costs
State taxes applicable to bauxite mining
-23-
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3. THE IMPACT OF EACH ELEMENT OF TAXATION
ON THE COST OF PRODUCING PRIMARY ALUMINUM
INGOT HAS BEEN COMPUTED
The impact of the taxes and tax benefits discussed above on
the cost of producing primary aluminum ingot were computed for the
period 1970-1972. The analysis covered producers accounting for
approximately 70 percent of domestic bauxite consumption. The
primary sources of data used in estimating tax impacts were financial
statements and statistical data published by producers and the Alumi-
num Association, and copies of Form 10K filed by producers with
the SEC.
Primary aluminum producers contacted, for the most part,
were unwilling to provide tax data beyond that publicly available.
One producer, however, did provide proprietary tax data which was
used to verify impact estimates based upon analysis of published
data. The analytical procedures used in preparing impact estimates
are discussed below.
(1) Raw Materials Conversion Ratios Were Developed
for Primary and Secondary Aluminum Manufacturing
To provide a basis for estimating tax impacts on a per
unit of output basis, the following materials conversion ratios
were developed:
Material Inputs to Produce
1 Ingot Ton of Primary
Aluminum Ingot
Material Quantity
Bauxite 4. 0 tons
Baked Caroon 0. 6 tons
Cryolite 0. 03 tonr-
Aluminum Fluoride 0.04 tons
-54-
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Analysis of tax impacts was limited to those associated
with bauxite production. The impact of discriminatory taxa-
tion on the cost of the other materials listed above is not
significant.
On the basis of discussions with industry sources, it was
assumed that aluminum scrap would be converted to secondary
ingot essentially on a ton for ton basis.
(2) Dollar Tax Impacts Per Ton of Bauxite Produced
Were Computed for the Years 1970-1972
The dollar impact of each element of taxation on the cost
per ton of bauxite mined was computed for each primary pro-
ducer evaluated. Separate estimates were prepared for each year
over the period 1970 - 1972. Analytical procedures used were
as follows:
Depletion Tax Benefits
The procedures used in estimating unit depletion
tax benefits were as follows:
Annual bauxite production quantities were
obtained from published producer statistics.
Adjustments were made where required to
eliminate purchased bauxite from aggregate
statistics.
The amount of cost depletion claimed annually
by each producer was estimated on the basis
of depletion entries on SEC Form 10K.
Percentage depletion was computed by
applying the allowable percentage depletion
rate for bauxita to the quantity of bauxite
mined by each producer in a given year
tim.es a cut off price per ton of bauxite
supplied by an industry source. Computa-
tions were based primarily upon foreign source
bauxite as domestic bauxite production is only
10% of the total.
-25-
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The excess of percentage over cost deple-
tion was obtained by subtracting estimated
cost depletion from estimated percentage
depletion.
The net tax benefit was derived by multiplying
the excess of percentage depletion over cost
by 0.48.
To evaluate the impact of ',he 50 percent limi-
nation on percentage depletion (see Chapter
II) which would not be reflected in the above
computations, a separate estimate of the
reduction in each producer's tax liability
attributable to depletion was developed using
a process of elimination. Essentially, re-
ductions in taxes payable attributable to all
non-depletion items including accelerated
depreciation, foreign tax credits, the invest-
ment credit and other items were estimated
with the balance considered to be attributable
tc depletion. Data sources included SEC
filings, notes to financial statements,
supplemented in some cases by data made
available by producers.
Estimated tax benefits derived using both
above methods were compared and the lesser
indicated benefit was used for subsequent
analysis. The lesser indicated benefit was
used to reflect the operation of the 50 percent
depletion limitation where possible. Tf thp
first above procedure produced the lesser
indicated benefit, then the 50% percent limita-
tion would not be reflected. If the second pro-
cedure used (process of elimination) produced
the lesser indicated benefit, the difference in
benefits was assumed to approximate the im-
pact on benefits of the 50 percent limitation.
Care was taken not to overestimate the magni-
tude of non-depletion itens therefore weighting
the analysis toward understating rather than
overstating the reduction in benefits imposed
by the 50 percent limitation.
-26-
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As indicated above, the estimating procedures may
be expected to overstate rather than understate the
tax benefit associated with the percentage depletion
allowance.
Foreign Tax Credits
The procedures used in estimating tax benefits
derived from foreign tax credits were as follows:
Foreign revenue from bauxite production
was estimated by applying average bauxite
prices, provided by industry sources, to
bauxite production. Pre tax profits were
estimated to be equal to 11 percent of revenue
on the basis of published data (Fortunes 500)
regarding the profitability of foreign mining
operations.
Foreign taxes paid were computed by applying
a 30 percent tax rate to estimated pre-tax
profits. The tax rate used is that prevailing
in major bauxite producing countries.
The full amount of foreign taxes paid was
assumed to be creditable against U. S. taxes.
The tax benefit associated with the foreign
tax credit was computed as 48 percent of
the foreign taxes paid. This procedure
assumes that tax benefits can be maximized.
i
Western Hemisphere Trade Corporations (WHTC)
WHTC tax benefits were computed as follows:
U. S. tax liabilities without the WHTC option
and prior to the application of the foreign tax
credit were computed as 48 percent of pre-
tax income from bauxite mining.
The WHTC option reduces the U. S. tax liability
Dy 34 percent. Thus the WHTC tax benefit was
computed as 34 percent of the U. S. tax liability
estimated above (before application of the foreign
tax credit).
-------
The procedures used in estimating WHTC and foreign
tax credit benefits are based upon the assumption that
maximum advantage can be taken of both benefits.
The tax code states that the foreign tax credit which
which may be taken by a WHTC is limited to the
effective WHTC tax rate which is 34 percent. Since
the foreign tax rate assumed is 30 percent, this
limitation would not affect the computations.
Tax Treatment of Exploration and Development Costs
Benefits associated with the expensing of mine explora-
tion and development costs were estimated primarily
from analysis of expense accounts on producer
financial statements. Adjustments were made
where required to isolate development expenses
attributable to mining activities. The basis for
estimating the tax benefit in each year was com-
puted as the net reduction in the current years
tax liability achieved through treating such costs
as expenses rather than capital investments. The
dollar value of the tax benefits was considered to
be the time value of the deferred tax liability dis-
counted at 6.5 percent over an average period of
12. 5 years. The discount rate used reflects a
ronsej:yative_estimate of cost borrowing while the
cutoff point (12. 5 years) reflects an estimated
amortization period, were costs capitalized.
State Taxes
The impact of state taxes on production costs was
estimated by applying Arkansas state tax rates
($0.15 per ton of bauxite.)
The estimating procedures described above may be considered
conservative in that they are weighted against understating benefits.
-28-
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PERCENTAGE DEPLETION. FOREIGN TAX TREATMENT.
AND THE TAX TREATMENT OF EXPLORATION AND
DEVELOPMENT EXPENSES HAVE NEARLY EQUAL •
IMPACTS ON THE COST OF PRIMARY ALUMINUM
PRODUCTION
The impacts -of applicable taxes and tax benefits on the cost of
producing bauxite and primary aluminum ingot for the period 1970-
1972 are shown on Exhibit XII, following this page. The estimates
shown cover approximately 70 percent of U. S. owned bauxite ship-
ments, and consequently may be expected to be generally represen-
tative of industry operations.
The table below summarizes the estimated net after tax reduction
in the cost of producing aluminum ingot in 1972 attiibutable to dis-
criminatory taxes and tax benefits, assuming 4. 0 tons of bauxite ore
are required per ton of aluminum ingot.
Per Ton Basis
$
Depletion $1.35 35.5
Foreign tax credit 0. 78 20. 5
WHTC 0.73 19.2
Exploration and
development expenses 1.02
State Taxes (0.08)
Total $3.80
As indicated, percentage depletion is the largest single item contri-
buting to cost reduction, although foreign tax regulations and explora-
tion and development cost ;ax treatment combined account for about
67 percent of total cost reduction. The impact of state taxes as
might be expected is negligible.
The largest computed net tax benefit, $4. 36 per ingot ton in
1970, would be equal to about 0. 9 percent of the current price of
aluminum ingot ($500 per ton). On & pretax basis the net tax benefit
would be $8. 72 per ton, equal to about 1. 8 percent of the price of
aluminum ingot.
-29-
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i.xnmi i x>i
IMI'AC'I <•>'• SIJI I (.TEH I'AX) '! .\V|) r/\x
ijr.Ni:' irs ON mr COST 01 IMU-III- .r
1'RIMAHY ALUMINl.M INC.OT I "70 !!.• ; •*
US TAX TREATMENT
nEPLETION
TAXES PAID OR DEEMEU
PAID TO FOREIGN GOVERNMENT
WESTERN HEMISPHERL
TPADF CORPORATION (WHTCl
EXPLORATION AND
DEVELOPMENT EXPENSES
STATE TAXES
DOLLARS PER TON ft PERCENT OF PRICE 0
BAUXITE
1972 1971 1970
t X S % S K
0317
0195
0182
OJV)
(00201
2.4-3 «
1420
13-18
182S
01-0.2
0264
0195
0182
0280
(0 020)
1826
1420
13-18
2.028
01-02
0360
0191
0179
0380
(0 020)
2.5-3 6
1413
I.31J
2733
01-02
ALUMINUM INGOT ©
1972 1971 1970
S % S % S K
121-1.35
0 70 0 78
0 664 7}
031 1 02
(007-008)
LESS
THAN 1
LESS
TNANI
LESS
THAN1
LESS
THAN 1
LESS
THAN1
09S10S
0 70-0 78
0 G6-0 73
100-1 12
(007-008)
LESS
THAN1
LESS
THANI
LESS
THAN 1
LESS
THAN 1
LESS
THAN 1
130144
069-076
064472
1 36-1 52
(007-008)
LESS
THANI
LESS
THANI
LESS
THAN 1
LESS
THAN 1
LESS
THAN 1
TOTAL IMPACT @ ©
348
6.895
301
649P
1090
73-103
341-380
LESS
THANI
3.24360
LESS
THAN 1
3324 36
LESS
THAN 1
PRICE LATA FOR BAUXITE AND ALUMINUM INGOT
BAUXITE 137(1-S10S14 LONG 9RY TON
1971 - J1C t1'LJ,.G OHV TON
1972 - SIO $14 LONG DRY TON
COMPANIES RESPONDING SHOWED AN AVERAGF PRICE
OF SI3 00 IN 1972. SI300 IN 1971 AND SI2 80 IN 1970 THE S10-S14
FIGURE COVERS A LARGER PCRCtNTAGE OF PRODUCTION
ALUMINUM INGOT
1972 SO 26 IB
1971 SO 25 IB
1970 SO 27 IB
TOTAL IMPACT DOES NOT INCLUDE SIMILAR BENEFITS THAT MAY BE DERIVED FROM
CARBON. CRYOLITE OR ALUMINUM FLUORIDE. SUCH BENEFITS ARE NOT MATERIAL.
BENEFITS ASSOCIATED WITH THE EXCLUSION OF GROSS UP ON DIVIDENDS
OF LESS DEVELOPED COUNTRY CORPORATIONS AND WITH THE EXCLUSION
OF CONTROLLCU FOIIEILN SUBSIUIAKIFS WCIIt NOT FOJNU TO BC MATERIAL
MATERIAL REQUIREMENTS FOR ONE TON OF ALUMINUM INGOT
36 -4 0 TONS OF BAUXITE
6 TONS OF BAKED CARBON
D3 TONS OF CRYOLITE
04 TONS OF ALUMINUM FLUORIDE
* Note Impacts arc shown on an after tax basis
APPROXIMATELY 70KOF US-OWNED BAUXITE SHIPMENTS ARE
COVERED IN THIS EXHIBIT
NOTt WHILE DATA USED IN THESE EXHIBITS WERE OBTAINED FROM
RELIABLE SOURCES. THE SCOPE OF THE BOOZ. ALLEN ASSIGNMENT
DID NOT INCLUDE AN AUDIT OR INDEPENDENT VERIFICATION OF
Tiirsr DATA
29-a
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5. THE INFLUENCE OF DIFFERENTIAL TAXATION ON RAW
MATERIALS USE MUST BE EVALUATED IN LIGHT OF
INDUSTRY CHARACTERISTICS AND THE CURRENT
INDUSTRY SITUATION
As indicated previously in this chapter, the technology of
primary aluminum production limits the substitution of aluminum
scrap for primary raw materials in the primary aluminum produc-
tion process. In the marketplace, however, secondary aluminum
may be substituted for primary aluminum. Approximately 20 per-
cent of the aluminum consumed by the casting industry, the major
consumer of secondary aluminum, is supplied by primary producers.
This market, which in total is equal to about 13 percent of secondary
production, provides the greatest potential for increasing secondary
producers' share of total output.
Lesser potential exists, in the near term at least, for substi-
tuting secondary aluminum in uses traditionally limited to primary
aluminum. The primary barrier to substitution, ovher than avail-
ability, is provided by the fact that the alloy content and purity of
primary aluminum required for many uses cannot economically be
duplicated in secondary aluminum production. Nevertheless, some
substitutability undoubtedly does exist although its extent has not
been investigated within the scope of this study.
(1) There Are Several Factors Currently Favorable
to Prospects for Expanded Secondary Aluminum
Production
There are several elements of the current economic
and energy situations which appear to be favorable to expanded
secondary aluminum production:
Primary aluminum processes arp highly energy
intensive which make both current output and
new capacity sensitive to energy shortages and
costs.
25 percent or more of primary aluminum
ingot costs are accounted for by electrical
energy
-30-
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Significant expansion of domestic aluminum
production will require concurrent availability
of electric power generating capacity
Primary aluminum output has recently been
adversely affected by electric power shortages,
especially in the Pacific Northwest
Secondary aluminum production, on a per unit basis,
requires less than 10 percent of the energy consumed
in primary production.
At the present time, worldwide aluminum capacity,
with some energy constrained exceptions, is vir-
tually fully in use. Capacity must be expanded in
the near term. Secondary capacity, on an equiva-
lent tonnage basis, requires slightly more than 10
percent of the capital required for primary capacity
and can be developed more rapidly.
The Arab oil embargo has fostered concern regard-
ing the potential export policies of bauxite and
alumina exporting countries most of which are in
the LDC category. While no overt actions have
been taken, the possibility of action raises a new
element of risk regarding the accessibility and cost
of raw materials.
These factors may be viewed both singly and in combina-
tion as favorable to an expanded role for secondary aluminum
production.
(2) Both Price Levels and Price Stability WiR Affect
Prospects for the Increased Use of Aluminum Scrap
At the present time, available prompt industrial aluminum
scrap is virtually fully committed, either 1o domestic or export
markets. Thus, the only source of additional market supplies
is post-consumer waste. This scrap component is the most costly
to use due to the costs associated with scrap separation, con-
centration and transportation. The extent to which the market
supply of scrap from this source will expand is a function of
the price of scrap and price stability,
-31-
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The current aluminum scrap and secondary aluminum
price situation is peculiar as domestic secondary aluminum
producers are faced with a shortage of scrap. This situation
has resulted from the following influences:
Worldwide aluminum prices, reflecting surging
demand, have increased by more than 50 percent
over 1972 levels. This magnitude of increase
has been applicable to both primary and secondary
aluminum.
Domestic primary and secondary aluminum prices,
which are controlled, are currently about 20 percent
lower than world prices.
Aluminum scrap prices move very closely with
secondary aluminum prices. As a consequence,
export scrap demand has caused scrap prices
which are not controlled to increase to the point
where domestic secondary producers cannot
profitably compete for incremental scrap
supplies.
Were price controls on aluminum to be removed, domestic
aluminum prices would undoubtedly adjust to eliminate this situa-
tion. At the present time, the situation can be described as
positive from the point of view of expansion of the market supply
of scrap but negative in terms of domestic secondary producer
market access and capacity expansion. Assuming that alumi-
num prices are decontrolled, however, the outlook for in-
creased secondary aluminum production should be favorable.
The volatility of the price of aluminum scrap presents a
risk related barrier to the investment in collection and separa-
tion equipment needed to increase the market supply of old
aluminum scrap in the long run. The degree of price volitility
can be seen in the behavior of the price of aluminum clippings
between 1969 and 1971. In 1969, with strong demand, prices
reached $295 per ton while, by the end of 1£71, reflecting
slack demand, prices had decreased by $145 per ton or 50
percent. Similar volitility in terms of price increases has
been demonstrated during the recent demand surge. A large
component of the volitility of aluminum scrap prices is
-------
directly attributable to the volitility of alumirum ingot prices
on world markets. Thus, a sharp change in the quantity of alumi-
num demanded in the marketplace will be reflected in aluminum
prices and in turn in scrap prices. As a consequence, stabiliza-
tion of scrap prices would require stabilization of aluminum
capacity and demand relationships into a reasonably predictable
pattern, something which has never been achieved. At the
present time, demand for aluminum has exceeded or is on the
verge of exceeding worldwide production capacity. A cyclical
downturn in future demand could, however, send prices into a
downward spiral.
Significant expansion of secondary production in the long
run, then, may require that some mechanism be developed to
accommodate the risks associated with scrap price instability.
One such mechanism could be developed through the establish-
ment of municipal reclamation centers which would provide
aluminum scrap to dealers at adjustable prices designed to pro-
vide them with a reasonable profit in the face of fluctuating
market prices. The feasibility of this type of arrangement
would depend, of course, on the expected net cost to munici-
palities or regional governments in relation \o the costs of other
disposal alternatives such as land fill, The basis for such an
arrangement would involve internalizing disposal costs not now
reflected in the cost and price of scrap.
Stabilizing the market supply of post consumer aluminum
scrap and internalizing disposal costs, which may permit the base
market price of scrap to be reduced, could provide the basis for
increasing the share of aluminum output by secondary producers.
This is applicable both to general scrap and aluminum cans.
Whether such an arrangement is practical will depend, as
indicated above, on the relative net cost of reclamation as
opposed to alternative disposal options.
7. TAX TREATMENT EQUALIZATION MAY HAVE SOME
MARGINAL IMPACT ON RELATIVE USE OF ALUMINUM SCRAP
If the tax treatment of primary and secondary materials is
equalized by providing equivalent benefits to scrap processors , the
aluminum scrap supply curve will shift but the shape of the
supply curve will not be altered. The degree to which the supply
curve shifts, as well as its shape, will determine the amount of
-33-
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additional scrap to be placed on the market at any given price. The
greater the slope of the supply curve, the larger will be the incre-
mental market supply of scrap.
The relatively small changes in the market supply of scrap
accompanying very large changes in price suggests that the short run
supply curve is relatively flat (i. e., supply is relatively inelastic to
price) and that, consequently, only marginal changes in the market
supply of scrap would result from tax treatment equalization.
Of more importance, however, is the shape of the long run scrap
supply curve. The shape of this curve is not known; however, the
following observations are possible:
The shape of the supply curve will depend in the
long run on marginal cost of scrap, which will
include a risk component related to price
instability.
Tax treatment equalization, because scrap price
instability is related to product demand patterns,
will have at best a marginal price stabilizing
influence.
If the long run marginal cost of scrap includes a
substantial risk component, it is likely that the
long run supply curve would be flat and the supply
impact of tax equalization marginal. If, on the
other hand, the municipal reclamation program
were adopted, the risk would be minimized and the
slope of the long run supply curve steepened which
would cause tax equalization or any reduction in net
cost to have a greater impact or. market supplies.
The long run marginal cost of scrap, exclusive of
risk, is also of paramount importance in assessing
impacts. The magnitude of such costs in relation to
the benefits provided by tax equalization will be a
key determinant ol changes in the market supply of
scrap. Such costs are not, however, known.
The short and the long run demand curves for snrap must also be
considered in evaluating the impact of tar equalization. The shape and
location of the short run scrap demand curve is determined by the
-34-
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short run demand curve for secondary aluminum ingot, but becomes
vertical when the point on the curve is reached which represents
limits of current secondary aluminum smelter and remelt furnace
capacity. At the present time, as noted above, price controls have
created a domestic scrap shortage. In a free market, however, it
is probable that secondary smelters would be operating at close to
capacity thus allowing for minimal, if any, short run impact of tax
equalization.
The long run demand curve for aluminum scrap is dominated
by several elements:
The long run aluminum ingot demand curve
The relative cost of scrap vs. primary raw
materials
The substitutability of scrap for primary materials
in end product applications
An increase in the cost of virgin materials relative to secondary
materials would cause the demand curve to shift to the right thus
theoretically increasing the quantity of scrap demanded at any given
price. The extent of the shift will be controlled by the relative change
in the cost of scrap vs. secondary materials and the degree that scrap
may be substituted for primary materials in end uses. The degree of
substitutability is limited given the present state of the art, as has
been pointed out previously. In the long run, however, technological
change may permit increased substitutions.
In the short run, then, the impact on scrap demand of any tax
equalization action which increases the cost of virgin raw material
is likely to be minimal, The long run consequences of such an action
will depend on aluminum ingot demand as well as cost and technological
factors described above which cannot be evaluated within the scope of
this study.
The impact of tax equalization on scrap consumption both in the
short and the long run depends on both the supply and demand factors
discussed above.
The following chapter addresses the impact of discriminatory
taxation on the pulp and paper industry.
-35-
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IV. THE PULP AND PAPER INDUSTRY
This chapter addresses the impact of discriminatory taxes and
tax benefits on the relative use of virgin and secondary materials in
the pulp and paper industry.
1. PULP AND PAPER PRODUCTS MADE FROM VIRGIN AND
SECONDARY MATERIALS COMPETE IN THE MARKET PLACE
Pulp and paper products made from virgin and secondary materials
are substitutable for the most part in the market place. Accordingly,
the point at which virgin and secondary materials are subject to substitu-
tion is in the final product stage (e.g., combination box board is a sub-
stitute for folding box board produced from virgin materials) for purposes
of this analysis. It should be pointed out, however, that secondary fibre
may be substituted for virgin fibre to a limited degree during processing.
The specific pulp and paper products selected for analysis in this
study were newsprint and paperboard (folding box board). Both of these
products are produced from virgin and secondary materials and compete
in the market place. Although the specific properties of products pro-
duced from virgin and secondary materials differ, in some cases signi-
ficantly, they are mutually substitutable in many end uses.
2. CAPITAL GAINS TREATMENT OF TIMBER PROFITS IS THE
BASIS FOR DISCRIMINATORY TAXATION IN THE PRODUCTION
OF PULP AND PAPER
As discussed in Chapter II, timber operators are allowed to
treat profits from the cutting and sale of timber as capital gains.
This option, which is not available to secondary fibre collectors and
dealers, effectively reduced the net cost of harvesting timber for use
in the manufacture of pulp and paper. The net cost reduction or tax
benefit associated with the capital gains option is measured as the net
reduction in a timber operators tax liability in comparison with the tax
liability had timber harvesting profits been treated as ordinary income.
There are special state and local taxes applicable to timber lands
which are not assessed at. any stage of secondary fibre collection and use.
Because of the diverse nature of these taxes, some of which provide
-36-
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incentives, some disincentives, no attempt was made to quantify them.
The analysis of discriminatory taxation in the production of pulp and
paper is focused entirely on the capital gains option.
3. THE IMPACT OF THE CAPITAL GAINS OPTION WAS
COMPUTED FOR THE MANUFACTURE OF NEWSPRINT
AND PAPERBOARD
The impact of the capital gains option on unit output costs was
computed at the following pulp and paper processing stages:
Roundwood - timber after harvesting
Groundwood pulp and newsprint
Chemical woodpulp and paperboard
Timber operations of pulp and paper producers accounting for
approximately 56 percent of domestic production were analyzed for the
period 1970-1972. The analytical data base used was primarily that
provided by producer published financial and statistical data and
copies of Form 10 K on file with the Securities and Exchange Commission.
Data available in the public files of the Internal Revenue Service proved to be
of limited value due to the level of data aggregation. Individual com-
pany tax returns could not be and were not reviewed.
Producers contacted were unwilling to make available specific
information beyond that available publicly. Producers did, however,
provide assistance in interpreting data published by them, i'n confirm-
ing the validity and reasonableness of data adjustments made, in quanti-
fying materials conversion ratios (quantities of raw materials required
to produce a final product) and in providing independent confirmation of
product price levels.
-37-
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(1) Raw Materials Conversion Ratios Were Developed
for Newsprint and Paperboard Manufacturing
To provide a basis for assessing the capital gains benefit
on a unit of output basis at each major production step, the
following materials conversion ratios were used:
Product
Groundwood
Pulp
Chemical
Wbodpulp
Newsprint
Folding
Boxboard
Input
1. 0 cords* Round wood
1. 6 cords Roundwood
1. 0 tons Groundwood
Pulp
1.0 tons Chemical
Woodpulp
Output
1.0 tons Groundwood
Pulp
1. 0 tons Chemical
Woodpulp
1. 0 tons Newsprint
1.0 tons Folding
Boxboard
* One cord equals approximately 1. 2 tons
** Newsprint normally is produced using 75-80% groundwood and
20-25% semi bleached chemical fiber; however, the ratio of 1.1
is sufficiently accurate for this analysis.
Detailed process flow diagrams for manufacturing news-
print and paperboard are provided in Appendix A to this report.
(2) Dollar Capital Gains Benefits Per Unit of Timber
Harvested Were Computed for the Years 1970 - 1973
Capital gains benefits per unit of timber harvested were
computed for those producers included in the study. Data re-
garding specific timber plots or the ultimate usage of specific
timber harvested, were not available. Accordingly, it was
necessary to use aggregate annual data regarding timber har-
vested for each producer analyzed.
Similarly, producers contacted were unwilling to make
capital gains data available regarding specific timber lands and
were unable because of the multiple uses of timber cut in a given
location to provide capital gains data relating to timber harvested
-38-
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for use specifically in manufacturing pulp and paper. Because of
these data limitations, it was necessary to make use of aggregate
capital gains data covering all timber operations.
To isolate capital gains applicable to timber operations,
those components of total capital gains for each producer analyzed.
which were allocable to non-timber operations (real estate, secur-
ities investment, special items, etc.) were identified and appro-
priate adjustments made. Producers contacted during the study
were particularly helpful in confirming the reasonableness of these
adjustments.
The tax benefit associated with the capital gains option was
estimated by computing the tax liability for capital gains at the 30
percent capital gains rate and the 48 percent corporate rate for
ordinary income. The difference in the tax liabilities so derived
was considered to be the measure of the capital gains tax benefit.
The aggregate annual capital gains benefit computed for each pro-
ducer analyzed was divided by the total amount of timber harvested
to provide an estimate of the capital gains benefit on a per unit
basis.
(3) The Impact of Capital Gains Benefits Was Estimated
at Each Major Production Stage for Newsprint and
Paperboard
The raw materials conversion ratios discussed above were
applied to the capital gains benefits computed for harvested
timber to provide an estimate of the value of such benefits in
relation to the following intermediate and final products:
Unbleached groundwood pulp
Chemical woodpulp
Newsprint
Folding boxboard
The values of the capital gains benefits have been computed
in terms of dollars per ton and as a percentage of the prevailing
-39-
-------
prices of the above products. Dollar benefits and the relation-
ship of benefits to prevailing prices in each case are displayed
as a low-high range with the limits of the range defined as follows:
The low end of the range represents the lowest
per unit benefit computed in each year among the
producers analyzed as applied to the highest price
shown for the product of interest
The high end of the range represents the largest
per unit benefit computed among the producers
analysed applied to the lowest price shown for the
product of interest
(4) The Methodology Used in Computing Capital Gains
Benefits and the Available Data Base Have
Limitations Which Must Be Recognized
As discussed above, capital gains benefits per unit of
timber harvested were computed on the basis of all timber har-
vested by the producers analyzed. Thus, the benefits derived
represent an average of benefits derived from timber cut for
all uses including lumber. Because trees cut for lumber are
normally several years older than those cut for pulp and paper
and have a higher value, it is probable that the estimates of
capital gains benefits derived overstate to some extent the benefits
applicable to wood used in producing pulp and paper.
The capital gains benefits computed for timber harvested
during 1971 are effectively reduced by capital losses claimed
during that year resulting from various circumstances including
losses on real estate operations. Available data, including that
gathered by direct producer contacts, did not permit adjustments
for capital losses on non-timber operations to be made. Accord-
ingly, indicated 1971 capital gains benefits should not be regarded
as representative of normal operations. Producer contacts did
confirm, however, that the impact of capital losses would have
no material effect on benefits computed for timber harvested
during 1970 and 1972.
-40-
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4. THE IMPACT OF CAPITAL GAINS TAX BENEFITS VARIES
DEPENDING ON THE GRADE AND QUALITY OF THE FINAL
PRODUCT AND THE DOLLAR VALUE OF COMPUTED
CAPITAL GAINS
Exhibit XIII, following this page, contains estimates of capital
gains tax benefits for the years 1970 - 1972.
As indicated on the Exhibit the magnitude of computed tax bene-
fits in relation to product prices varies widely. The table below sum-
marizes the magnitude of capital gains benefits in relation to pulp and
paper product prices for the years 1970 and 1972:
After Tax Benefit as
% of Price
1970 1972
Groundwood Pulp 0. 8 - 2. 2 0.6-1.6
Chemical Pulp 0.8-1.8 0.6-1.1
Newsprint 0.5-1.0 *
Folding Boxboard and
Paperboard 0. 7 - 2. 4 0. 5 - 1. 6
Figures for 1971 have not been included in the table as the effect of
capital losses, discussed above, make them non- representative. The
variations in the magnitude of benefits shown result from two factors:
Differences in computed tax benefits
Differences in product prices
Differences in product prices are most significant for paperboard.
Depending on product grade and quality, the price of paperboard may
vary by as much as $60 per ton (1972). For the other products
analyzed, the primary differential in the magnitude of capital gains
benefits in relation tc price is caused by the range of the dollar
values of computed capital gains.
It should be noted that the relationships shown on Exhibit XIII
and the above table have been developed on an after tax basis.
Thus, if capital gains benefits were removed, producers at each
stage of production, assuming no substitution, would require price
increases of approximately double the amounts and percentages
-41-
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EXHIBIT XIII
IMPACT OF SELECTED TAXES AND
TAX BENEFITS ON THE COST OF PRODUCING
PULP AND PAPER 1970-1972
DOLLARS PER TON AND PERCENT OF PRICE
1972
1971
1970
U. S. Tax
Treatment
Capital Gains
Total Impact
Capital Gains
Total Impact
Capital Gains
Total Impact
Roundwood
($ per Cord)
$
High
1. 14
1. 14
0.32
0.32
1.55
l.!)5
$
Low
0.54
0.54
0.15
0.15
0.73
0. V3
Unbleached Groundwood
Pulp (1) (2)
$
High
1.14
1. 14
0.32
0.32
1.55
1.55
$
Low
0.54
0.54
0.15
0.15
0.73
0.73
% %
Range
0.6 = 1.6
0.6 - 1.6
Less than 1
Less than 1
0.8 - 2. 2
0.8-2.2
Newsprint (1)
$
High
1. 14
1. 14
0.32
1.55
1.55
$
Low
0.54
0.54
0.15
0.73
0.73
% %
Range
Less than 1
Less than 1
Less than 1
Less than 1
0.5-1.0
0. 5 - 1.0
Chemical
Woodpulp (1)(3)
$
High
1.82
1.82
0.51
0.51
2.48
2.48
$
Low
0.86
0.86
0.24
0.24
1. 17
I. 17
% %
Range
0.6-1.1
0.6 - 1. 1
Less than I
Less than 1
0.8-1.8
0.8-1.8
Folding Boxboard
and Paperboard
$
High
1.82
1.82
0.51
0.51
2.48
2.48
S
Low
0.86
0.86
0.24
0.24
1. 17
1. 17
% %
Range
0.5-1.6
0.5-1.6
Less than 1
Less than 1
0.7-2.4
0.7-2.4
Price Per Ton
U) Groundwood Pulp (-inbleached)
Newap' 'lit
Ground wood Pulp (bleached!
Chemical pulp (including suLfate, sulfite. bleached.
unbleached, or semi-bleached
Paperboard including folding box board
Nn'.e: Price depends upon quality and location
1972
72 - 88
164
91 -102
145-154
115-175
1971
72 - 88
154
80 -100
145-165
108-174
1970
72 - 88
151
80 -100
139-162
105- 168
(2) Material requirement for groundwood pulp used for newsprint
1. 0 cords of pulpwood for 1. 0 tons of ground wood pulp
(3) Material requirements and yield factors for one ton of chemical
pulo used for kraft vary depending on a variety of factors. This
exhibit assumes 1.6 cords of roundwood. Also required: waste
papers and other fibers, sulfur, chlorine, sodium hydroxide.
sodium sulfate, lime and other chemicals
This exhibit covers approximately 56% of total
paper produced in the U. S.
(4) The data for 1971 reflect investment losses which effectively reduced
capital gains from timber operations.
Note: While data were obtained from reliable sources, the scope of
the Booz. Allen assignment did not include an audit or independent
verification of these data.
Note: Impacts are shown on an after-tax basis
41-a
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shown to restore after tax profits to levels achieved with capital
gains benefits in force. For the lowest priced paperboard indicated,
for example, price increases of $3. 64 per ton or 3. 2 percent would
be required to bring after tax profits up to achieved 1972 levels, in
the absence of capital gains benefits. A price increase of only one
percent for high value paperboard products would be required to
restore 1972 profits to levels actually achieved. This assumes,
of course, that increased net costs are passed through all produc-
tion stages to the consumer.
The probable effect of capital gains benefits on pulp and paper
processors' raw materials choices is discussed below.
5. THE IMPACT OF TAX TREATMENT EQUALIZATION ON
RAW MATERIALS CHOICES WILL DEPEND ON SEVERAL
SHORT AND LONG RUN VARIABLES WHICH INFLUENCE
RELATIVE COSTS
The influence of capital gains benefits on pulp and paper pro-
ducers' decisions to use virgin raw materials as opposed to second-
ary raw materials must be considered in the light of basic production
economics and the current industry situation. These factors are dis-
cussed in detail below.
(1) Demand for Pulp and Paper Products is Balanced
With Production Capacity
During the 1960 "s, capacity to produce pulp, paper, and
paperboard chronically exceeded demand, leading to low prices,
underutilized capacity, and low producer rates of return on
investment. During 1971, industry profitability was at its
lowest point since 1938, with profits averaging 2. 3% of sales
and returns on stockholders equity averaging 4. 8%. In 1972,
reflecting sharply increased demand and firmer prices, profit
margins increased to about 3. 8% of sales, and return on stock-
holders equity rose to about 8.5%.
-42-
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At the present time, demand in almost all product classi-
fications is becoming balanced with production capacity with pro-
ducer backlogs increasing monthly. This situation is expected
to continue, at least for the next few years, because additional
production capacity is not being installed at a rate sufficient to
meet anticipated demand. This lack of capacity development
results from the following factors:
Return on investment, including that for 1972, has
not been sufficient to justify new capacity.
Significant investments--an estimated $1.6 billion
for the 1971-74 period are currently being under-
taken for pollution control. At the present time,
the ability of the industry to attract significant
additional capital for capacity expansion is limited.
Producers, in light of the experience of the 1960's,
are reviewing capacity expansion plans with great
caution to avoid the development of future excess
capacity problems.
Major capacity additions take about three years to
bring on stream. Thus commitments to expansion
made currently will not have any near-term impact
on output.
Given current and anticipated capacity and demand relation-
ships and the absence of price controls, it is probable that rates
of return will increase to a point that would make new capacity
attractive. Capital requirements for pollution control will
probably remain a factor, however, limiting capacity expansion
into 1978, since development of 1978 capacity must begin by
1975--in less than two years.
Current indications are that capacity will expand by about
3% per year through 1975 which provides some margin for
potential growth in wastepaper usage.
-43-
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(2) Despite Logistical Barriers, Use of Secondary Fibres
in Existing Pulp and Paper Plants Appears to Be
Increasing
Pulp and paper plants currently in existence are located
primarily in rural areas, in proximity to virgin material
sources of supply. The rural location of these plants puts
them far from large waste paper sources which are in large
densely populated urban areas creating logistical and cost bar-
riers to the maintenance of a steady flow of secondary fibres.
Wastepaper originating in the converting segment of the
paper and paperboard industry is virtually 100% recovered at
the present time. The recovery rate from commercial as
opposed to manufacturing sources (primarily used boxes and
cartons) although not known with precision has potential for
increase.
The largest potential source of wastepaper recovery is
municipal waste. The logistics of collecting and separating waste
in sufficient quantities to make recovery economical in the past
minimized recovery increases. Ongoing activities for recovery
of such waste have taken place in the production of secondary
newsprint and corrugated boxes in locations where available
supplies are sufficient to make secondary materials use economical.
The potential for increased usage of secondary fibres from
commercial sources is not known with precision at this time. The
general practice currently prevailing is for users of boxes and
cartons to contract for disposal with private collectors who nor-
mally do not attempt any recycling. While the logistical barriers
discussed above would apply in a somewhat more limited sense
to the increased use of secondary fibres from commercial
sources, there are encouraging signs. The American Paper
Institute has estimated that the use of old corrugated boxes may
increase by as much as 34% over the next three years.
Recent developments indicate that the use of secondary
fibres in existing plants is increasing, although the extent of the
increase is not clear. Two major factors appear to account for
this increase:
A developing shortage of virgin fibres related not to
a shortage of wood, but to difficulties and costs of
obtaining labor for lumbering operations.
-44-
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The lower capital costs and shorter lead times
required to expand secondary production.
The energy shortage, which has made secondary
fibres more attractive as their use appears to re-
quire less energy than do virgin fibres.
In essence, the above factors appear in combination to have
altered the relative cost of using virgin and secondary mater-
ials in some applications, especially paperboard manufacturing.
The extent of the substitution will depend ultimately on the incre-
mental costs of obtaining additional volumes of wastepaper in
relation to the increased cost of obtaining and using virgin fibres.
(3) The Market Supply of Secondary' Fibres Appears to Be
Relatively Insensitive to Price in the Short Term
The quantity of wastepaper generated from all sources
in any given time period is directly related to the quantity of paper
produced in that period. Paper and paperboard are non-durable
products, thus the opportunity to recycle waste from prior years'
production, as, for example, with metal scrap, does not exist.
In periods of rapidly increasing paper output, therefore, prices
for wastepaper tend to increase sharply, as supplies from
accessable industrial and commercial sources tend to lag demand.
Conversely, when output growth tails off, wastepaper prices tend to
decline sharply in the face of excess market supplies. Since only
a relatively small proportion of the wastepaper entering the solid
waste is recycled, wastepaper price behavior in the face of
relatively small changes in consumption suggests that the short
run marginal cost of recycling additional proportions of the waste-
paper supply is high. This is supported by the fact that additional
recycling would require use of wastepaper from the commercial
and post consumer waste streams which, as indicated previously,
are higher cost sources.
Exhibit XIV, following this page, compares consumption
and price behavior for wood pulp and wastepaper. The volitility
of wastepaper prices, reflecting the factors discussed above is
clearly evident. From 1969 to 1971, wastepaper prices declined
by 19. 3% reflecting sluggish paper demand. As paper demand
grew rapidly in 1972, wastepaper prices increased by 19. 7%.
Reported wood pulp prices on the other hand have demonstrated
significant historical stability which indicates that market supplies
have been significantly more responsive to demand than is the case
-45-
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Source: Consumption indices computed from American Paper Institute data
Price indices—Bureau of Labor Statistics. Wholesale Price Index
EXHIBIT XIV
WOOD PULP AND WASTEPAPER
CONSUMPTION AND PRICE INDICES
1964 - 1972
Wood Pulp
Consumption
Year
1972
1971
1970
1969
1988
1967
1966
1965
1964
Index
126.2
119.5
116.8
1)8.9
111.6
100.0
99.7
91.9
86. 8
% Change
From Prior
Year
+ 5. 6
+ 2.3
- 1.8
^ 6.5
+ 11.6
+ 0.3
+ 8.5
+ 5.9
N/A
Wood Pulp
Prices
Wastepaper
Consumption
% Change
From Prior
Index
111.1
112.0
109.5
100.0
100.0
100.0
100.0
100.1
98.1
Year
-1.0
+2.3
+9.5
0.0
0.0
0.0
-0. 1
+2.0
N/A
Index
115.8
113.1
110.3
110.3
103.7
100.0
99.1
95.3
91.6
% Change
From Prior
Year
42.4
+2.5
0.0
+6.4
+3.7
+1.0
+4.0
+4.0
N/A
Wastepaper
Prices
Index
133.9
111.9
124.9
138.7
130.0
100.0
134.4
127.3
118.3
% Change
From Prior
Year
+19.7
-10.4
- 9.4
+ 6.7
+30.0
-25.6
+ 5.6
+ 7.6
N/A
45-a
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with wastepaper both in the short and the long run. As
indicated previously, however, a shortage of wood pulp has
developed due to labor and energy factors. It is too early
to judge, however, whether the factors causing the short-
age are of a temporary or a long term nature.
The volatile nature of wastepaper prices is further demon-
strated by the range of price fluctuation within given years as
indicated on Exhibits XV and XVI following this page. The
pattern of fluctuations tends to highlight the short term mar-
ket supply rigidity discussed above.
In the short run (1-2 years), therefore, it is probable
that tax treatment equalization would cause secondary fibre
use to increase only marginally, if at all.
(4) The Long Run Responsiveness of the Market Supply
oT Wastepaper to Cost/Price Changes Depends on
Several Indeterminate Factors
If the cost of making wastepaper available in the market
place were to decrease, the quantity offered for sale at any
price should increase over the long run. Similarly, if the cost
of using virgin fibre were to increase relative to the cost of
using secondary fibre, the price producers would be willing to
pay for any given quantity of wastepaper should increase pro-
portionately. The magnitude of demand and or market supply
expansion will depend both on the change in relative cost/
price relationships, the long run marginal cost of recycling
additional wastepaper and the degree to which available technology
permits the substitution of wastepaper for virgin fibre.
As is the case with all scrap, the long run marginal cost
of recycling additional wastepaper probably has a significant
risk component related to market instability. The development
of municipal or regional reclamation, as discussed in Chapter III
could provide a means of risk accommodation. This, in turn,
could reduce the marginal cost of recycling causing the market
supply of wastepaper to become more responsive to price.
Other elements of marginal cost are also major determinants
of the long run wastepaper supply function. Such costs, however,
are indeterminate at this time.
-46-
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EXHIBIT XV
YEARLY PRICE CHANGES FOR
NO. 1 WASTE NEWSPRINT
1968 - 1973
(dollars per ton)
Year
1973
1972
1971
1970
1969
1968
Low
Price
$17.00
17.80
16.30
16.69
18.90
19.81
High
Price
$26.00
21.50
20.59
19.89
23.20
24.89
Price Changes
(Low-High)
$9.00
3.70
4.29
3.20
4.30
5.08
Source: Derived from data supplied by the
Bureau of Labor Statistics
46-a
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EXHIBIT XVI
YEARLY PRICE CHANGES
FOR WASTE, PAPER
1968-1973
(dollars per ton)
Year
1973
1972
1971
1970
1969
1968
Low
Price
• $24.69
23.04
19.34
20.02
25.20
18.17
High
Price
$42.53
25.68
22.99
25.63
26.29
27.13
Price Changes
(Low-High)
$17.84
2.64
3.65
5.61
1.09
8.96
Source: Derived from data supplied by the
Bureau of Labor Statistics
46-b
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Concerning technological barriers to substitution, the
following situation exists.
Wastepaper can be used for up to 100% of materials
inputs for newsprint* semi-chemical pulp and com-
bination board
Limits for kraft paper range from 5% to 25%
depending on type
For office, communications, and printing papers,
limits range from 10% to 80% depending on product
type and grade
Within the limits of current technology, then, potential
for increased use of wastepaper through substitution does exist.
The major long term barrier to substitution, subject to the
technological limitations discussed above, is cost.
(5) The Impact of Tax Treatment Equalization on Relative
Materials Use in the Long Run Is Indeterminate
On a pretax basis, the relative change in the cost/price
relationship of virgin materials and wastepaper used in news-
print manufacturing, using the highest computed capital gain
benefit, would be $3. 10 ($1. 55 x 2--see Exhibit XIII) per ton in
favor of wastepaper. with the capital gains benefit removed.
In the production of paperboard, the cost /price advantage
accruing to wastepaper would be $4. 96 before taxes ($2. 48 x 2--
see Exhibit XIII) using the highest computed capital gains benefit.
The impact of a change in relative cost/price relationships
of the order indicated above on long run relative materials usage
cannot be quantified as the long run marginal cost of recycling
wastepaper is not known.
It is probable that some substitution will occur; however,
the degree of substitution will be limited by both out-of-pocket
and risk related marginal costs of recycling.
The following chapter discusses the impact of discrimina-
tory taxation on the glass industry.
-47-
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V. THE GLASS INDUSTRY
This chapter addresses the impact of discriminatory taxes and
tax benefits on the relative use of virgin and secondary materials
in the production of glass.
1. SCRAP GLASS, KNOWN AS GULLET. MA Y BE SUBSTITUTED
FOR VIRGIN RAW MATERIALS IN THE PRODUCTION OF GLASS
Cleaned and sorted cullet may be substituted for virgin raw
materials in the production of glass. If the cullet used is compatible
in color and composition with the glass it is used to make, the final
product would be indistinguishable from glass produced using virgin
raw materials in characteristics and end use.
The substitutability of cullet for virgin raw materials, primarily
sand, is limited in generally prevailing production processes by the
requirement for cullet of like color and composition. The Glass Con-
tainer Manufacturers Institute estimates that about 13% of glass cur-
rently produced is cullet based. However, the cullet used is virtually
all generated within the glass producing process. With the exception
of color and composition requirements, there are no significant
process constraints to substantial substitution of cullet for virgin
materials in the manufacture of glass.
2. THE PERCENTAGE DEPLETION ALLOWANCE PROVIDES
THE BASIS FOR DISCRIMINATORY TAX BENEFITS
APPLICABLE TO THE PRODUCTION OF GLASS
The basis for discriminatory tax benefits applicable to the
production of glass from virgin raw materials is provided by the
percentage depletion allowance which may be applied to the mining
of sand. There are no taxes or tax benefits applicable to secondary
materials processing which are not likewise applicable to virgin
raw materials process
There are state taxes applicable to sand mining and mine
exploration and development cost may be treated as expenses for
-48-
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tax purposes, however, the impact of these tax elements was found
to be so minor as to not war rent specific consideration.
3. THE IMPACT OF THE PERCENTAGE DEPLETION ALLOWANCE
ON THE COST OF PRODUCING SAND WAS COMPUTED
The impact of percentage depletion on production costs for
sand and glass was computed. The analytical procedures used in
preparing the computations are described below.
(1) Raw-Material Conversion Ratios Were Developed
for Glass Production
To provide a basis for estimating the percentage depletion
impact in terms of units of output, the following material input
relationship's per ton of glass produced were developed:
Material Quantity
(pounds)
Sand 1.299
Soda Ash 426
Feldspar 157
Limestone 358
Gullet 200
The above malenal input relationships were developed
from published data and confirmed by industry sources. The
input mix shown is representative of that used in making bottle
quality glass.
Detailed analysis of tax effects was confined to sand.
Preliminary estimates of the impact of percentage depletion
tax benefits on the cost of limestone, soda ash, and feldspar
per ton of glass were as follows:
While limestone and soda ash, which is a derivative
of limestone account for 32% by weight of material
-49-
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inputs per ton of glass, the maximum possible tax
benefit per ton of glass attributable to the percent-
age depletion allowance benefit available to limestone
producers is $0. 015 after taxes and $0.03 before taxes
based upon estimates for limestone contained in
Chapter VI.
For 1970, the average per ton value of feldspar ship-
ments was $13. 28. If it is asnumed that this price
represented the cutoff price for computing percentage
depletion, then the maximum amount of depletion
claimed would be $1.86 per ton without regard to the
50% limitation. The total tax shelter provided by
percentage depletion would be $0.89 per ton of feld-
spar or $0. 07 per ton of glass. The net percentage
depletion tax benefit per ton of glass representing
the difference between percentage and cost depletion
net tax effects, while not computed due to lack of cost
depletion data would, of course, be less than 0. 07 per
ton. Since the computed percentage depletion benefits
applicable to limestone and feldspar which are sub-
stantially overstated represent less than 0. 5 percent
(one-half of one percent) of the price per ton of bottle
quality glass, no further attempts at refinement were
considered warranted.
(2) The Dollar Impact of Percentage Depletion Per
Ton of Sand and Glass Produced Was Computed
For the Period 1970-1972
The impact of percentage depletion on the cost of producing
glass and sand was computed for the years 1970-1972. The analy-
sis covered producers accounting for approximately 10 percent
of domestic glass quality sand output. The procedures used in
preparing the impact estimates were as follows:
Production statistics for glass quality sand were
obtained from producers
The amount of cost depletion claimed annually by
each producer was estimated on the basis of deple-
tion entries on SEC Form 10K.
-50-
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Percentage depletion was computed by applying
the allowable percentage depletion rate for glass
quality sand mined by each producer annually
times cut off prices supplied by producers.
The excess of percentage depletion over cost de-
pletion was derived by subtracting estimated cost
depletion from estimated percentage depletion.
The depletion tax benefit was computed by multiply-
ing the excess of percentage depletion over cost by
0.48.
To evaluate the impact of the 50 percent limitation
on percentage depletion (see Chapter II) which
would not be reflected in the above computations
a separate estimate of the reduction in each pro-
ducer's tax liability attributable to depletion was
developed using a process of elimination. Essen-
tially, reductions in taxes payable attributable to
all non-depletion items were estimated with the
balance considered to be attributable to depletion.
Data sources included SEC filings, notes to finan-
cial statements, and other available data.
Estimated tax benefits derived using both above
methods were compared and the lesser indicated
benefit was used for subsequent analysis
It should be noted that the above estimating procedures
may be expected to overstate rather than understate the tax
benefit associated with the percentage depletion allowance as
procedures for assessing the impact of the 50% depletion
limitation were applied conservatively so as to understate
rather than overstate potential tax benefit reductions.
4. DEPLETION TAX BENEFITS PROBABLY HAVE ONLY A
MARGINAL IMPACT ON PRODUCER MATERIALS CHOICES
The estimated impact of the percentage depletion allowance on
the cost of producing sand and glass is shown on Exhibit XVII, follow-
ing this page. On an after tax basis, the maximum computed
-51-
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EXHIBIT XVU
IMPACT OF THE PERCENTAGE DEPLETIO.V
ALLOWANCE ON THE COST OF PRODUCING
SAND AND GLASS 1970-1972
(IS TAX TREATMENT
DEPLETION
DOLLARS PER TOM & PErJCEMT C? PRICE ©
GIASS DUAL!!1- "4 3
is;?
S ! -,
017 51
1P7*.
S 1 1
0.17 | 51
:S79
! *
017 I SI
GLASS ©
1972
S
Oil
K
LESS THAN 1
1271
S I X
Oil LESS THAN 1
1370
$ X
0.11 LESS THAN 1
PniCE DATA
SAND $3 31 PER TON
CLASS SU79-S15'.8PERTUM
THIS EXHIBIT '.OVERS APPROXIMATELY 10% OF TOTAL GLASS-
QUALITY SAND MINED IN THE U S
NOTE. WHILE DATA WERE OBTAINED FROM RELIABLE SOURCES.
THE SCOPE OF THE BOOZ. ALLEN ASSIGNMENT DID NOT INCLUDE
AN AUDIT OR IHIOEPEM3EMT VERIFICATION OF THESE DATA.
»»"=RAGE MATERIAL REQUIREMENTS FOR ONE TON OF
GLASS (BOTTLE DUALITY)
SAND
SODA ASH
FELDSPAR
LIMESTONE
CULLET
1.299 LBS.
426 LBS.
157 LBS.
353 LBS.
200 LBS.
OTHER MATERIALS (POTASSIUM, MAGNESIUM) MAY BE
ADDED. DEPENDING UPON QUALITY.
SOURCE BOOZ. ALLEN 8 HAMILTON. INC
Imparts jro &hnwn on :in s.ftrr-l.-i\ Uasis,
51-a
-------
percentage depletion benefit is $0.17 per ton for sand and $0.11 per
ton for glass. If computed benefits applicable to limestone, soda ash
and feldspar, which admittedly are substantially overstated, are
included the percentage depletion benefit would be approximately
$0.19 per ton after taxes and $0. 38 per ton before taxes. Total
benefits would be equal to approximately 1. 2% of the price of glass
after taxes and 2. 5% before taxes.
Industrial source cullet is currently almost fully recovered.
Additional cullet use could require cullet recovery from post-
consumer waste, primarily from glass in bottles. While bottle
recovery for cullet is in limited practice, the economies of collec-
tion, separation and transportation are unfavorable. While precise
quantitative data are not available, it can be stated that an adjust-
ment of relative materials costs up to a maximum of $0. 38 per ton
in favor of cullet would likely be insufficient to offset high collection,
separation and transportation costs.
Were municipalities or regional governments to absorb collec-
tion and separation costs in reclamation centers, the economies of
recycling could potentially be improved. The impact of such practices
on cullet usage will depend on the costs involved, which are not known
at this time.
The following chapter discusses the impact of discriminatory
taxation on the steel industry.
-52-
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VI. THE STEEL INDUSTRY
This chapter presents findings and conclusions regarding the
impact of discriminatory taxes and tax benefits on the relative use
of virgin and secondary materials in the manufacturing of steel.
1. STEEL SCRAP MAY BE SUBSTITUTED FOR VIRGIN
RAW MATERIALS IN THE STEELMAKING FURNACE
In the manufacture of steel from virgin raw materials, coke,
iron ore, and limestone are charges into a blast furnace to produce pig
iron which is in turn treated in a steel making furnace to produce
steel. Steel scrap may be substituted for pig iron in the steelmaking
furnace. Accordingly, it may be said that steel scrap and pig iron
produced from virgin materials are functionally equivalent at the
raw steelmaking stage of production. For most uses, steel produced
from scrap is indistinguishable from steel produced from virgin raw
materials.
Limitations on the substitutability of scrap for pig iron are
related to the type of steelmaking process used. The limitations
connected with each of the three primary steel making processes
are summarized briefly below:
The basic oxygen process is currently the most
widely used steelmaking process accounting for
56 percent of 1972 raw steel production. Current
practice limits scrap usage to 30 percent of the
basic oxygen furnace (EOF) charge, the balance of
the charge being molten pig iron. Scrap usage in
BOF's could be increased by installing facilities
to preheat scrap prior to charging the furnace.
The electric furnace which accounced for about
18 percent of 1972 raw steel output is designed
to accept a 100 percent scrap charge.
-53-
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The open hearth furnace which is being rapidly
displaced by the basic oxygen furnace is normally
charged with about 44 percent scrap. This method
of steelmaking, however, is expected to decrease
rapidly in use.
THERE ARE SEVERAL ELEMENTS OF TAXATION
APPLICABLE TO THE PRODUCTION OF VIRGIN RAW
MATERIALS USED IN STEELMAKING WHICH ARE NOT
APPLICABLE TO THE COLLECTION AND MARKETING
OF STEEL SCRAP
As indicated above, the virgin raw materials used in steel-
making are iron ore. coal (coke) and limestone. There are several
elements of taxation applicable to the production of these materials
which are not applicable to the collection and marketing of steel
scrap. These are summarized below:
Iron Ore
The percentage depletion allowance
Tax treatment of mine exploration and
development costs
The foreign tax credit
Mineral related state taxes
Coal
The percentage depletion allowance
Tax treatment of mine exploration and
development costs
Mineral related state taxes
-54-
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Limestone
The percentage depletion allowance
There are no taxes or tax benefits applicable to the collection
and marketing of steel scrap which are not also applicable to
virgin raw material production. The nature and applicability
of the taxes and tax benefits identified above are discussed in
Chapter II.
3. THE COST IMPACT OF APPLICABLE TAXES AND
TAX INCENTIVES WAS COMPUTED FOR THE
MANUFACTURING OF RAW STEEL
Virgin raw material used in manufacturing steel are produced
by both non-integrated raw material suppliers and integrated steel
producers. To isolate any impact differentials possibly related to differ-
ing degrees of integration, impacts were separately computed cover-
ing the following production stages:
Non-integrated production of iron ore
Non-integrated production of coal
Integrated steel production including:
Iron ore, coal, and limestone production
by integrated producers
Raw steel production
(1) Raw Materials Conversion Ratios Were Developed
for Steelmaking
To provide a basis for developing estimates of tax
-55-
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impacts on a unit of output basis, the following raw material
inputs per ton of steel produced were used:
Material Quantity
(tons)
Iron Ore 1. 20
Coal 0.60
Limestone 0. 18
Steel scrap 0. 45
These input quantities represent a weighted average of
material currently used in open hearth and basic oxygen
furnaces* Material usage in electric furnace steelrnaking
was excluded from consideration as virgin raw materials
are not used to any significant degree with this process.
(2) Estimates Were Prepared of the Impacts of Applicable
Taxes and Tax Benefits on the Cost of Iron Ore Produc-
tion by Non-Integrated Mining Companies for the Period
1970 - 1972
The impact of applicable taxes and tax benefits on the
cost of iron ore production for the period 1970 - 1972 was
computed for U. S. producers accounting for approximately
34 percent of non-integrated iron ore output. Specific taxes
and tax benefits included in the analysis were percentage
depletion, tax treatment of exploration and development expenses
and state taxes. The procedures used in preparing the impact
estimates are described below:
Percentage Depletion
Tax benefits associated with the excess of per-
centage depletion over cost depletion were com-
puted as follows:
Annual iron ore production quantities were
obtained from producers
-56-
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The amount of cost depletion claimed
annually by each producer was estimated
on the basis of depletion entries on SEC
Form 10K.
Percentage depletion was computed by apply-
ing the allowable percentage depletion rate
for iron ore mined by each producer annually
times cut off prices supplied by producers.
The excess of percentage depletion over
cost depletion was derived by subtracting
estimated cost depletion from estimated
percentage depletion.
The depletion tax benefit was computed by
multiplying the excess of percentage deple-
tion over cost by 0. 48.
To evaluate the impact of the 50 percent limit-
ation on percentage depletion (see Chapter
II) which would not be reflected in the above
computations, a separate estimate of the
reduction in each producer's tax liability
attributable to depletion was developed using
a process of elimination. Essentially, re-
ductions in taxes payable attributable to all
non-depletion items were estimated with the
balance considered to be attributable to
depletion. Data sources included SEC
filings, and notes to financial statements,
supplemented in some cases by data made
available by producers.
Estimated tax benefits derived using both
above methods were compared and the lesser
indicated benefit was used for subsequent
analysis
It should be noted that the above estimating pro-
cedures may be expected to overstate rather than
understate the tax benefit associated with the percen-
tage depletion allowance as procedures used to
-57-
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estimate the impact on benefits of the 50%
depletion limitation were applied conservatively
to ensure against overstating the reduction in
benefits attributable to the limitation.
Tax Treatment of Exploration and Development
Costs
Benefits associated with the expensing of mine
exploration and development costs were estimated
on the basis of data made available by producers
and analysis of expense accounts on producers'
financial statements. Adjustments were made
where required to isolate development expenses
attributable to mining activities. The basis for
estimating the tax benefit in each year was com-
puted as the net reduction in the current year's
tax liability achieved through treating such costs
as expenses rather than capital investments.
The dollar value of the tax benefits was considered
to be the time value of the deferred tax liability
discounted at 8. 5 percent over an average period
of 12.5 years.
State Taxes
The impact of state taxes on production costs was
estimated by applying state tax rates to iron ore
production values and /or quantities by geographic
source. The discount rate used represents a
conservative estimate of the cost of borrowing
while the time period used (12. 5 years) repre-
sents an amortization period were expenditures
capitalized.
(3) The Impact of Applicable Tax Benefits on the Cost
of Metallurgical Grade Coal Production Was
Computed for Non-Integrated Producers
The tax benefits provided by the percentage depletion
allowance and the expensing of mine exploration and develop-
ment costs were computed for non-integrated coal producers
accounting for 20 percent of domestic metallurgical grade
coal production. "The period covered was 1970-1972.
Analytical procedures used were the same as those used in
the analysis of non-integrated iron ore production.
-58-
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(4) The Impact of Applicable Taxes and Tax
Benefits on the Cost of Integrated Raw Steel
Production Was Separately Estimated
Separate estimates were prepared of the impact of
applicable taxes and tax benefits on the cost of integrated
steel production for the period 1970-1972. Estimates were
based on data covering producers accounting for about 54
percent of domestic steel shipments. Analytical procedures
used were as follows:
The Percentage Depletion Allowance
Domestic depletion benefits for coal,
limestone and iron ore were computed
on the basis of aggregated proprietary
tax data provided by several producers.
Foreign depletion tax benefits applicable to
iron ore for which data was not made avail-
able by producers was estimated using the
procedures described above for non-integrated
iron ore production
The Foreign Tax Credit
Tax benefits associated with foreign tax credits
applicable to iron ore mining operations were
estimated as follows:
Revenues from foreign operations and for-
eign taxes paid were obtained from producer
financial statements, SEC filings and, to a
limited extent, from direct producer contacts.
Estimates were developed on the basis of
foreign iron ore production statistics and
iron ore cut-off prices supplied by producers
of that portion of total foreign revenues
attributable to iron ore mining operations.
-59-
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Foreign taxes paid were estimated on the
basis of the assumption that the share of
total foreign taxes paid in a given year attri-
butable to iron ore mining operations was
proportional to the share of total foreign
revenues attributable to such operations
The foreign taxes paid were assumed to
be fully creditable against U. S. taxes
The tax benefit associated with the foreign
tax credit was estimated as 48 percent of
the foreign tax credit taken (equal to foreign
taxes paid). This represents the differential
in tax liability resulting from the treatment
of foreign taxes paid as a tax credit rather
than as a deduction.
Tax Treatment of Mine Exploration and
Development Costs
Exploration and development expenses were esti-
mated in aggregate for all integrated producer
mining operations as disaggregated data were not
available. Estimating procedures used were
the same as those described previously for non-
integrated iron ore and coal mining.
State Taxes
State Taxes applicable to integrated iron ore mining
were estimated using the same procedures as described
for non-integrated iron ore mining. The impact of
state taxes on the unit cost of coal and limestone
production were evaluated and found not to be
material.
-60-
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4. THE PERCENTAGE DEPLETION ALLOWANCE IS THE MOST
SIGNIFICANT TAX BENEFIT INFLUENCING THE COST OF
NON-INTEGRATED IRON ORE PRODUCTION
Exhibit XVIII, following this page, summarizes the impact of
applicable taxes and tax benefits on the cost of non-integrated iron
ore production over the period 1970-1973. The range indicated in
each year represents the highest and lowest computed impacts for
those producers analyzed.
Variations in computed depletion benefits can be attributed
to the influence of the 50 percent limitation (see Chapter II) on per-
centage depletion .which is in turn influenced by producers' profit-
ability. The benefits associated with exploration and development
expenses will vary from producer to producer and from year to year
depending on the level of exploration and development activity. The
costs attributable to state taxes vary depending on the location of
mines and, in some cases, the grade and type of iron ore produced.
The range of computed tax impacts per ton of iron ore for
1972 is summarized below.
High Low
Depletion $0.66 113.8 $0.20 87.0
Exploration and
Development
Expenses 0.10 17.2 0.08 34.8
State Taxes (0.18) (31.0) (0.05) (21.8)
Total $0.58 100.0 $0.23 100.0
The percentage depletion allowance has clearly the overriding
influence on production costs. It may be said that state taxes and
the benefits of expensing exploration and development costs are
mutually offsetting in most cases. (See Exhibit XVIII for 1970, '71
data).
-61-
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EXHIBIT XVIII
IMPACT OF SELECTED TAXES AND TAX INCENTIVES
ON COST OF NON INTEGRATED IRON ORE PRODUCTION
1970-1972
U S TAXll'EATr/ENT
DflFTlCN
EX'IORATIC'I AND DEVELOPMENT
E/r -:ES
S1AIE IAVCS
DOLLARS PER TON 8 PERCENT OF IRON DIE PRICE ©
1972
s s s •• %
HIGH
055
CIO
(0181
MEDIAN
C27
009
(Oil)
IC.V
070
Ol'J
19 Oil
PAHCE
1 159
LESS
THAN 1
ILSS
THA'. 1
1971
S S S S *
HIGH
037
020
1021)
'.•ECIAN
027
013
10 IS)
LOW
on
010
10061
RANGE
0632
0618
LESS
THA1I
1970
: s s % »
IUGH
ICO
CM
(013)
VEOIAN
028
Oil
1009)
LOW
016
009
100)1
RANGE
0393
0513
021.2
s r.
10TAI IIJK'.Cr O'i3
02S 1 023
1 2 1 2 1 0 35
02S 015 1 0132
101 1 0 30
021
1.294
PRICE DATA FOR mm CUE
DCiis.snc
IRON ORE -NATURAL $
IRON ORE -PIUETS
NOTE THE PRICE OF NATURAL
OF THE ORE
THE PRICE Or PELLETS IS HIGI
OF A'JDItlONAL PREPARATION
THCIt ADDITIONAL COSTS ARI
1972
11 17 '2 82
1778
1911
II 42 12 7:
1775
19)0
KC1120I
16 '1C
1971
9S8
II 17
FOȣICH
IS7I 1970
398 993 •
11 17 1080
IRON ORE DEPENDS ON THE SOURCE AND CHEVICAl STRUCTURE
Efl THAN THAT OF NATURAL IRON ORE BECAUSE
COSTS TO OETIRVIME CROSS INCOVE FOR DEPLETION
INCLUUIO IN THE -F C S ""IE VALUE 'PRICE USED
OC'JEflTS ASSOCIATED WITH THE CAPITAL GAINS TREATMENT OF ROYALTIES OH IRON
WtHE EVA'.UAfFO AND WERE HOT FOUND TO BE MATERIAL
ni' nun r n/\rn M-.I i< m n,i >,F r 'n-nis1 nir nurAii:[i< rnc'.i in i I/.CIE
.l^ nir i'.in't L>I fin MI il/ AiiiN ASsiu'i-Eni uinrj'jT iMCLUUt A>:
rApiirr niv :I«IA
APPROXIMATELY 3!KOF RON ORE MINED BY NOH
INTEGRATED U S COMPANIES IS COVERED BY THIS
EXHIBIT
•: li ;. c I ci:c sli.i-
61-a
-------
5. PERCENTAGE DEPLETION AND THE TAX TREATMENT
ALLOWED FOR EXPLORATION AND DEVELOPMENT COSTS
HAVE NEARLY EQUAL IMPACTS ON THE COST OF NON-
INTEGRATED METALLURGICAL GRADE COAL PRODUCTION
Exhibit XDC, following this page, summarizes the impact of
percentage depletion and the tax treatment allowed for exploration
and development expenses on the cost of non-integrated metalurgi-
cal grade coal production for the period 1970-1972. The range of
impacts indicated in each year results from the following:
• The operation of the 50 percent percentage
depletion limitation (see Chapter II) which
varies with profitability
The level of exploration and development
activity in each year by each producer
As indicated on the Exhibit, percentage depletion accounts for
the largest share of total impact, up to 70 percent in 1972 (low),
however, in some cases, notably 1970 and 1971, depending on the
behavior of the variables identified above, the impact of tax trest-
ment allowed for exploration and development costs nearly equals
that of percentage depletion.
The maximum computed total tax benefit in any year is $0. 48
per ton in 1971 while the lowest computed benefit is $0. 16 per ton
also in 1971. The net cost reductions attributable to these benefits
were equal to 1.4 -4.0 percent of the 1971 price per ton of metal-
lurgical grade coal on an after tax basis.
6. THE PERCENTAGE DEPLETION ALLOWANCE IS THE
PRIMARY FACTOR INFLUENCING THE IMPACT OF
APPLICABLE TAXES AND TAX BENEFITS ON THE
COST OF INTEGRATED STEELMAKING
Exhibit XX summarizes the impact of the applicable taxes and
tax benefits on the cost of integrated raw steel production for the
period 1970-1972. The impacts indicated were computed independently
-62-
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EXHIBIT XIX
IMPACT OF SELECTED TAX BENEFITS ON THE
COST OF INTEGRATED METALLURGICAL COAL
PRODUCTS 1970-1972
U S TAX TREATMENT
DEPLETION
EXPLORATION AND
DEVELOPMENT EXPENSES
TOTAL IMPACT ©
t
HIGH
021
ffl6
037
1972
t
MEDIAN
019
Oil
010
t
LOW
Oil
007
024
OOLI
« *
RANGE
17 IS
OSI2
1227
ARSPERT
S
HIGH
012
01S
048
ON&PERC
1971
S
MEDIAN
021
Oil
012
ENTOFP
S
LOW
009
007
01S
MCE 0
% *
RANGE
0827
0614
1440
S
HIGH
0.20
OIS
016
1970
S
MEDIAN
017
Oil
028
S
LOW
Oil
0.07
OJO
% *
RANGE
1313
0715
1915
(ME
PRICE DATA FOR COAL
TALLURGICAL GRADE COAL)
rEAR PRICE
1972
1971
|57(l
S 1178
S 11 71
S 1017
SHORT TON
SHORT TON
SHORT TON
o
APPROXIMATELY 20KOF THE METALLURGICAL GRADE
COAL MINED IN THE UNITED STATES IS COVERED BY
THIS EXHIBIT
NOTE WHILE DATA WERE OBTAINED FROM RELIABLE
SOURCES. THE SCOPE OF THE BOOZ. ALLEN
ASSIGNMENT 010 NOT INCLUDE AN AUDIT OR
INDEPENDENT VERIFICATION OF THESE DATA.
BENEFITS ASSOCIATEDW1TH THE CAPITAL GAINS TREATMENT OF ROYALTIES ON COAL.WITH THE 5-YEAR AMORTIZATION OF
COAL MINE SAFETY EOUIPVENT AND WITH THE PARTIAL EXEMPTION OF EXPORT INCOME (DISC) WERE EVALUATED AND
WERE NOT FOUND TO BE -lAUdlAl
®
STATE TAXES (PRINCIPALLY WEST VIRGINIA). AND LOCAL TAXES. (PRINCIPALLY COMMUNITIES
IN WEST VIRGINIA) WERE EVALUATED AND NOT FOUND TO BE MATERIAL
SOURCE BOOZ ALLEN ft HAMILTON INC
Note: Impacts are shown on an after-tax basis
62-a
-------
EXHIBIT XX
IMPACT OF SELECTED TAXES AND TAX BENEFITS ON
THE COST OF INTEGRATED RAW STEEL PRODUCTION
1&70-1972
0!. 11 .'I Bl'ltSTT
F'jHlKj'!
At'll'S.Lt
TA- •" 1 .-. U(l """SI!
Ft M , '!• . .• u1 IV IMj
I- .'.•!. ..-..• ®
..'1 •'.' I- I/ C .MS
SI ". • 'IS
DOLLARS PER TON & PERCENT OF PRICF
IPOKORE
1112 1371 1970
'. 7
•,.'
2M
•. i 57
', ' i '
1' 1 j
S
M
,.;
•71
i H8
5055
*S J
; in
i
1 Ijii
1 7
171 It
19
OJ1
5i?
/3i
1 JiJ
4*49
4310
2525
IIS2I
CCAL
1972 1971 1970
.23
"1
23
...
S.«2
33
4 VI
4 J
LIVESTONE
1972 1971. 1170
024
.._
M
024
ii
QJ5
24
RAWSTEEl ®
1972 1971 MN~
904
255
275
(192)
12
IESS
1HAH1
USS
THAN 1
IESS
IMA1: i
Kl
325
2(1
'2171
14
LESS
1HAII 1
LESS
THAN 1
USS
THAN 1
.924
341
29)
1112)
14
ITSS
IHAN 1
LESS
THAN 1
LESS
IHAN 1
; ii .. o
i
I
1 I2S2
17
1347
195
1371
209
O
C T 1 i i El UArORIIIIMOIf CUAI L—'SIR'.E A"D 1AVJ STEEL
I",'?
1' ,\0"l DI •.".>TT.I'JAH1HAIV S IIII1M7
1' pltl.t It iLIL'IINAlUHAll ?'li
11 M 13)6
l-'ESiniE 1 70
P /S'ttLirOSTI M07
1471
II 4211 S7
9 'U
1171
IS2
U"!
1910
1010 1095
991
1037
1 65
(573
A.V.R.
'(Mill
M'O'I PRTUIOf 2 THE AUGCAI.'J I OF CX»LORATIOM
•I'.T ExPLnsisrosPECini. TA • ATERIALS
O
I It.ISA HC.IArEOV.lJHW'brEflNHfl'.r'Hi IT TRADE CU.II"jnATIONi IV.IITCI.
I >l ' :i I ' l"IOf '-'IVII ".nSOF I" 511' /Fl'llLDCOUTIlPY COUPOHATIOTIS
II' H't I ll»l I..M .11" If I '. I U' hklAl III 1 IJI! I'J.VL A1H IM'JN
I It I II I1. ' U l.ftL
©
AVCPACE QUANTITIES OF 'IATEPIAIS CONSUMED IN TMI
VA-l'J'ACTUnE • OF ONE TO'I OF HWtSIEEL WEIGHTED AVERAGE)
1972
ma-JucE "NET IONS) 120
CCAI I'.t 1 TO'ISI SI
LIVCS'ir.E IMTTOMSI II
SCdAPrjET TONS) 44
1971
120
5»
II
4S
1970
170
SI
11
44
•OUtS NOT INCLUDE ELECTRIC FURNACE
NHTT V.'IILE DATA I'SED IN THESE EXHI9HS KAS OBTAINED FROM PELIASLE
SOU'fC[S THE SCOPE Of TIIEOOOZ ALLEN ASSIGNMENT DIO NOT INCLUDE AN
AULIi UP IN'JtrrJCE'lT VERIFICATION OF THESE DATA
Note: Impacts are indicated on an after-tax basis
62-b
APPROXIMATELY 54X OF U S STEEL SHIPMENTS ARE
-------
of those shown for non-integrated iron ore and coal production.
Because much of the data used in preparing the analysis was supplied
on an aggregated basis by an industry source average impact rather
than ranges are shown. A comparison of the estimates developed for
integrated production with those developed for non-integrated iron
ore and coal production indicates, however, that the estimates pre-
pared for integrated production fall generally within the range of
those developed for non-integrated production.
The impact of the applicable taxes and tax benefits (after-tax
basis) on the cost of raw steel production is summarized below.
1972 1971 1970
% $ %
Depletion $.904 72.2 $.958 71.1
Foreign Tax Credit .265 21.3 .325 24.1
Tax Treatment of .275 22.0 .281 20.9
t
Exploration and
Development Costs
State Taxes (.192) (15.4) (.217) (16.1) (.182) (13.2)
Total $1.252 100.0 $1.347 100.0 $1.377 100.0
As is apparent, the percentage depletion allowance has the greatest
impact on costs amounting to about 70 percent of the net after tax
benefit per ton of raw steel produced. Regarding the cost impact of
all tax benefits, the following are pertinent:
The highest computed impact, $1. 377 per ton of
raw steel for 1970, represents approximately 2.1%
of the cost of producing raw steel. For finished
steel the impact would be equal to $1. 969 per ton,
assuming that 1. 43 tons of raw steel are required
to produce a ton of finished steel. This would be
equal to about 0. 9% of current average finished
steel prices ($228 per ton).
On a pre-tax basis, the impacts cited above would
be equal to $2.87 per raw steel ton, or about 4. 4%
of estimated 1970 raw steel production costs. For
finished steel, the pre-tax impact would be $4.10
per ton, or about 1. 8% of current finished steel
prices.
-63-
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(1) Low Cost Scrap Sources Are Almost Fully Utilized
To obtain an understanding of the market for steel scrap,
it is necessary to understand the three basic sources of scrap.
Steel Mills--Between the production of steel ingot and
the production of finished steel mill products, about
30% of the volume of ingot steel produced becomes
scrap. In general, steel mills are configured to
recycle such scrap internally. Scrap of this type
is referred to as "home scrap. " Home scrap is
the least costly of steel scrap, for obvious reasons,
and is, for practical purposes, 100% recycled.
Steel Fabricators--Steel scrap is also generated in
the production of products containing steel, such
as automobiles, appliances, and machinery. This
scrap is referred to as "prompt industrial scrap".
Prompt industrial scrap is usually purchased by
steel producers either through scrap processors
or directly from the scrap producers. Most scrap
from this source is currently recycled.
Post-Consumer Scrap--Discarded products containing
steel are the third source of scrap. Specific products
include automobiles, appliances, ships, machinery
and containers. Appliances and containers are usually
a part of the municipal solid waste system. Automo-
biles can move through several avenues such as from
the owner to the wreckers or to scrap processors for
sale through broker to steel producer. Heavy mach-
inery or ships generally move directly from owner
to scrap processor. Substantial quantities of readily
accessable post-consumer scrap are currently
recycled.
Because of the above factors, increased demand for scrap
will have to be met through recovery from scrap sources which
are difficult and costly to use.
-64-
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(2) The Current Volatility of Scrap Prices Presents a
Major Barrier to Its Increased Use
Relatively minor changes in the demand for scrap are
accompanied by very large fluctuations in the price paid by
producers for scrap. During the period from June 1972 to
June 1973, the price of No. 1 heavy melting scrap increased
from $35. 20 per ton to $55. 00 per ton, or 56 percent. Over
this period then, the raw materials cost of producing raw
steel in electric furnaces, using 100% purchased scrap, has
increased by approximately $19. 80 per ton before taxes and
$9. 90 after taxes. During the past five years the price of
No. 1 heavy melting scrap has fluctuated an average of $9. 93
per ton annually from low to high, with a minimum annual
fluctuation of $7. 83 per ton in 1968.
(3) Virgin Raw Material Markets Are Significantly
More Stable Than Scrap Markets
Vertical integration into the extraction of iron ore, coal,
and limestone is common among the major domestic steel pro-
ducers. About 70% of the iron ore consumed by U. S. producers
is produced domestically, with the balance imported, primarily
from Canada and Venezuela. The coal and limestone consumed
in making steel is produced domestically.
The practice of vertical integration and the stability of
supply from the mines result in a relatively stable producer
cost of raw materials with cost/price changes occurring grad-
ually over time in a manner that is somewhat easily forecasted.
Thus virgin material users are insulated from the large short-
term price fluctuations found by purchasers of scrap. Inte-
grated companies also have substantial investments in virgin
raw materials sources which will act to limit the degree to
which scrap will be substituted for virgin materials.
-65-
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(4) There Are No Major Technological Barriers to
Increased Scrap Usage
The greatest potential for future increased scrap
usage in steelmaking lies in the development of new electric
furnace capacity. As indicated previously, electric furnaces
can use up to 100% scrap. Basic oxygen furnaces can accom-
modate small percentage increases in scrap usage without
modification.
Additional scrap supplies, derived primarily from
post-consumer waste, would contain greater amounts of
impurities than scrap presently used. If such scrap repre-
sented a relatively minor proportion of total furnace input,
however, the additional impurities could be handled in the
manufacture of inexpensive steels without extensive techno-
logical change.
(5) Tax Treatment Equalization May Cause Some
Marginal Increase in Scrap Usage
At the present time, about 18% of steel output is
accounted for by electric furnaces consuming scrap. Any
change in relative materials costs in favor of scrap would
tend to make electric furnace production more attractive.
Some limited increase in scrap utilization in other steel-
making processes may also be expected, subject to the
technological limitations mentioned above.
During 1973, a scrap shortage developed as export
buyers outbid domestic purchasers for available supplies.
This situation developed as foreign steel prices increased
at a much faster rate than domestic prices which are sub-
ject to price controls. With a return to a free market,
this situation should correct itself. While the domestic-
foreign price imbalance exists, however, scrap for
domestic producers should remain in short supply, subject
of course to the extension of scrap export limitations.
In the long run, the degree to which scrap utilization
increases will depend on the marginal cost of bringing
additional quantities of scrap into the market place. Such
-66-
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costs will undoubtedly include some discounting of market
risk. Definitive statements as to the effectiveness of tax
treatment equalization are not possible as neither the short
nor the long run marginal costs of additional scrap are
known. As indicated in preceding chapters, however, the
establishment of mechanisms such as municipal reclama-
tion centers, if they prove feasible, can provide a means
of accommodating market risk.
The following chapter discusses the impact of dis-
criminatory taxation on the rubber and plastics industries.
-67-
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VII. THE RUBBER AND PLASTICS INDUSTRIES
This chapter addresses the impact of discriminatory taxation
on the relative use of virgin and secondary materials in the produc-
tion of rubber and plastics.
1. THE SUBSTITUTABILITY OF SECONDARY MATERIALS
FOR VIRGIN RAW MATERIALS IN THE MANUFACTURE
OF RUBBER AND PLASTICS IS LIMITED
Both rubber (synthetic rubber) and plastics are petrochemical
based. The basic materials used in producing both products are
crude petroleum and natural gas. For both rubber and plastics the
substitution of secondary materials for virgin raw materials in the
production process is extremely limited under present industry prac-
tices.
(1) Reclaimed Rubber is a Substitute for Rubber Produced
From Virgin Materials
Reclaimed rubber is a substitute for rubber produced from
virgin materials. In many uses, the proportion of reclaimed
rubber which can be used is limited by product specification
requirements. For example, high speed tires (automobile tires)
may contain only a limited proportion of reclaimed rubber for
reasons of performance and safety. Lower speed tires such as
those used on farm equipment may contain a higher percentage
of reclaimed rubber. The use of reclaimed rubber has been
declining in recent years for reasons which are discussed in
following sections of this chapter.
-68-
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(2) The Substitutability of Secondary Plastics For Virgin
Plastics is Limited
At the present time, the quantity of plastics which is re-
claimed is insignificant. Thermosetting plastics may not be
remelted as they are produced by a molecular bonding process
and would be destroyed by heat. In addition, it is not possible
to reduce such plastics by chemical means. Exhibit XXI, following
this page describes uses of the major thermosetting plastics.
Thermoplastics, described in Exhibit XXII, compose the
bulk of plastics entering the solid waste stream. Such plastics
may be remelted and reused. What remelting does take place,
however, is in practice, largely confined to in-plant scrap for
the following reasons:
Plastics for remelting must normally be segregated
by type and grade. Separation of mixed plastic
waste has proven to be impractical using commer-
cially available techniques. As an indicator of the
magnitude of the separation it may be noted that there
are more than 700 grades of polyethelene plastics
alone.
Degradation of resin properties occurs in the process
of reclamation.
Recycling of plastic waste is currently practiced to a
limited extent. The processes involved, however, require that
the plastic scrap be reprocessed into lower quality plastics for
uses not requiring exacting product performance properties.
Some examples include the reprocessing of milk containers for
use in making soil pipe and the manufacture of novelty items
from mixed scrap plastics. It is apparent, however, that such
reprocessing does not produce large volume plastic products.
For practical purposes thermosetting plastic scrap has no
virgin raw material counterpart because of the limitations on reuse
-69-
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EXHIBIT XXI
THERMOSETTING PLASTICS
Type
Alkyds
Arninos
Epoxies
Phenolics
Polyesters
Silicones
Uses
Electrical insulation, electronic com-
ponents, putty, glass-reinforce parts,
paints
Molding compounds, adhesives, laminating
resins, paper coating, textile treatments,
plywood dinnerware, decorating structures
Laminates, adhesives, flooring, linings,
propellers, surface coatings, filament-
wound structures (rocket cases)
Impregnating resins, brake lining, rubber
resins, electrical components, structural
board, laminates, glues, adhesives, binders
molds
Construction, auto-repair putty, laminates,
skis, fishing rods, boats and aircraft com-
ponents, coatings, decorative fixtures
Mold-release agents, rubbers, laminates
encapsulating resins, antifoaming agents,
water-resistant uses
69-a
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EXHIBIT XXII (1)
THERMOPLASTICS
Type
Polycarbonates
Polyamides
Polyurethanes
Polyet.hers
Phenoxies
Polyethylene
Polypropylene
Fluorocarbons
Polyvinyl
Chloride
Uses
Replacement for metals, safety helmets,
lenses, electrical components, photographic
film, die casting, insulator
Unlubricated bearings, fibers, gears, appli-
ances, sutures, fishing lines, tires, watch
straps, packaging bottles
Insulation, foam inner liners for clothing,
coatings, rocket fuel binders, elastomers
Coatings, pump gears, water-meter parts,
bearing surfaces, valves
Surface coats, adhesives, binders, electronic
parts
Packaging films and sheets, containers, wire
and cable insulation, pipe, linings, coatings,
molds, toys, housewares
Housewares, medical equipment (can be
sterilized), appliances, toys, electronic
components, tubing.and pipe (can be welded),
fibers and filaments, coatings
Electrical insulation, mechanical seals, gas-
kets, linings for chemical equipment, bear-
ings, frying-pan coatings, cryogenic appli-
cations
Pipe and tubing, pipe fittings, adhesives,
raincoats and baby pants, building panels,
wastepaper baskets, weather stripping,
shoes
69-b
-------
EXHIBIT XXII (2)
Type
Acrylics
Polystyrene
Cellulosics
Furanes
Uses
Decorative and structural panels, massive
glazing domes, automotive lens systems,
illuminated translucent floor tiles, windows
and canopies, signs, coating, adhesives,
elastomers
Insulation, pipe, foams, cooling towers,
thin-walled containers, appliances, rubbers,
automotive instruments and panels
Textile and paper finishes, thickening agents,
magnetic tapes, packaging pipe
Laminates, coatings, impregnants, linings
for rocket fuels, floor tiling, abrasive
wheels
69-c
-------
discussed above. In any event, such plastics account for a
minor share of plastics entering the solid waste stream.
Accordingly thermosetting plastics have not been considered
in subsequent analysis.
Thermoplastic scrap, keeping in mind the limitations dis-
cussed above, may be regarded as functionally equivalent to
virgin raw material based thermoplastic resins.
2. THERE ARE SEVERAL ELEMENTS OF TAXATION APPLICABLE
TO THE PRODUCTION OF VIRGIN RAW MATERIALS AND IN THE
MANUFACTURE OF RUBBER AND PLASTICS WHICH ARE NOT
APPLICABLE TO SCRAP COLLECTION AND REUSE.
There are no taxes or tax benefits applicable to secondary rubber
and plastics collection and use which are not applicable to virgin mater-
ials production. There are, however, several elements of taxation
unique to the production of petroleum and natural gas, the virgin raw
materials from which rubber and plastics are made. They are as
follows:
Regulations providing tax benefits:
The percentage depletion allowance on
petroleum and natural gas
The foreign tax credit
Tax treatment of well exploration and dev-
elopment costs and intangible drilling costs
-70-
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Applicable taxes
State taxes on petroleum and natural gas
Minimum tax on tax preferences (applic-
able to depletion)
Tax benefits associated with Western Hemi-
sphere Trade Corporations were excluded
from direct consideration as WHTC's play
only a minor role in the overall extraction
of petroleum and natural gas for U.S. con-
sumption.
3. THE IMPACT OF THE APPLICABLE TAXES AND TAX BENEFITS
ON THE COST OF PRODUCING RUBBER AND PLASTICS HAS
BEEN COMPUTED
The impacts of the taxes and tax benefits identified above on the
cost of producing SBR synthetic rubber and selected plastic resins were
computed for the period 1969-1971. The plastic resins included in this
analysis were as follows:
High and low density polyethelene
Polyvinyl chloride
Polystyrene
These resins are in common use and represent a large proportion
of the plastics entering the solid waste stream.
The primary sources of data used in estimating tax impacts were
as follows:
Consolidated tax data covering several major
petroleum and natural gas producers provided
by the American Petroleum Institute and the
Petroleum Industry Research Foundation, Inc.
-71-
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Published producer financial and production
statistics
SEC Form 10K
U.S. Department of the Interior, Bureau of Mines
Selected tax and statistical data provided by several
of the producers of petroleum and natural gas contacted
during the study.
Petroleum and natural gas, and petrochemical producers con-
tacted during the study, for the most part were unwilling to provide
proprietory tax data. Producers contacted, however, were quite
helpful in verifying data developed from the sources and developing
material balancing data and production cost flow estimates for the
production of petrochemical feedstocks and plastic resins.
The tax analysis performed covers petroleum and natural gas
producers accounting for approximately 60 percent of U.S. outputs.
The analytical procedures used in preparing the impact estimates
are described below.
(1) Materials Cost Flow Estimates Were Prepared For the
Production of Synthetic Rubber and Plastics
The dollar amounts of raw materials costs in the unit prices
of selected plastic resins and SBR rubber were computed to pro-
vide a basis for estimating tax impacts on intermediate and final
products. Cost/price flows were developed for the feedstocks
most commonly used in producing the plastic resins of interest
and SBR rubber. The cost/price components estimated at each
stage of production were materials, utilities, labor, overhead
and capital charges. The basic data used in preparing the es-
timates was obtained from a published source containing 1965
data. Current materials balancing and cost/price data provided
-72-
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by several petroleum chemical industry sources were used
to verify and update the published data. While the cost/
price data finally used do not reflect some recent component
changes, such as increased feedstock costs and some reduc-
tions in labor and overhead costs, total cost/price estimates
are in line with 1972 figures.
Materials and cost/price flow estimates for the produc-
tion of synthetic rubber are presented in Exhibit XXIII, follow-
ing this page. Similar flows are provided for the plastics of
interest in Exhibit XXIV. Since the plastics and rubber indus-
tries make use of several common intermediate products,
some of the detailed cost price data provided in Exhibit XXIII,
covering SBR rubber production, is not duplicated in
Exhibit XXIV, covering plastics production.
(2) Dollar Tax Impacts Per Barrel of Crude Petroleum
and Per Thousand Cubic Feet of Natural Gas Were
Computed for the Period 1969-1971
The dollar impacts of each applicable element of taxation
on the unit costs of producing crude petrolium and natural gas
were computed annually for the period 1969-1971. Estimates
for 1972 were not prepared as data for that year of the quality
obtained from industry sources for the period 1969-1971 were
not available. Analytical procedures used were as follows:
Depletion Tax Benefits
The procedures used in estimating unit depletion
tax benefits were as follows:
Annual units of domestic and foreign pro-
duction were obtained from industry sources.
Adjustments were made to place foreign
production on the same basis as domestic
production, that is, to exclude production
not reflected in tax data.
-73-
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EXHIBIT XXIII
SIMPLIFIED FLOWCHART FOR SBR
(SYNTHETIC RUBBER)
IOSTOCC COSH U'.TO '«»r.[ f KOI
I 10 I « THI CluDC OH v«icl Or
s >-o. •>! r\rn AUO 9r VARIOUS
• ""AMI: vnoi i\i • I ijAi^lA'j.co
•••:•••> 31-1 li Li'il In* . Jl
>i .'-LIS-. i •[ AMU <.iiou> vir
Itlt ll" LI ' 1 0 lift' f''
vFi"L.sn'. i .1 m.':C'S'sif
MA'
0£IS
• IlnVlfNI "1
• HMf«t J~
rnoouci NCOSTI
FCCOTDU
UII'.IT *1
ir :*>•,] (i >l
-.-.,«—y-
,'.V I
II
01
I)
(TIKI I
uTiuiitsA'iuC'iru'CAts
lAI^r^-O'-HtfA-l
IAF.'A1CHAI.1S
UB«a«f
<(
ii >i in iii
f I't*
!!••>
11
1
1
1 1
10
• , »
1IIIAL
I' It
M
11
"I
41
1'*
UHIT COST Of IUTA11 M 1 1
IlKTlCtllMM
t-MYirv
;r '•«>•(
ii'iii'ii;
IA' I.CHA»C[S
MHTII1MIM
IHKl
ei '/!••[
01
11
It
01
It
It
turn
COST
u
u
n
4
11
in
soimu TRirii^uciKuiCAiiiDusTiiruMiiiSANiiccoiiO'iin mumv c ruun.iin
CD THI i-'ioi.. r "Nrp'.Tsi'ifiieT"'*ri«n "TiipirTuPi; fnTor Tut COSTS
nii".i IAAUS'ilotA- LCI> ijii.i%iiCiiiHPia -i" HIAI tmcf
of Si• nuifi• '.in iui'1-ni'".iMii.'-ni-ioji'i IIUNCO:I'. oo:;\oi tinier-
A Hit I KliJIiCTM [| I'll IIMIIIOI Ml'l IMIUMi'MI l( IH'iC Cl IIICCFIICT
Of III! lA^tf A>IUIA4l*.'-|-|llVlS UK Ht. ' ' II ' M Ml 0 AMI l.ll'l 1 I'll
IA-.CI '.. CUilA'JI-AIIBIAl HIA'lC'If.l J,M,I U IV'SO"5If» U'J'.C VA'lOUS
' ot,injir. is
JTY
IDT;
•tut "I
•AOItlt J
J
t
f M H
IT o«
;*v rv
»•
mi'
. .
1 1
-U
11
CM
IHS
11 01
1 HAIIrl'.f
1C
17
II
OL
it
II 1
J«
•01
.1 ^
10'Al
f I.I
II
C9
14
IS
-. 'jf
10' I
I
;
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1
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J4I
in
•
SKI
•U'ADItHt
UllllliIS
1>90*>130VEIIIICA
CAPltAl CHAICIS
73-a
-------
EXHIBIT XXIV
SIMPLIFIED FLOWCHART
FOR SELECTED PLASTIC RESINS
MUOI on
01
OATUIAlCAl
iiintRi coin of i n rei iiimiit
MIUSO
AVIIACIIA» »«Tf IIALI COtn IK III
OllliruiMOISOLAIl IAICOOH
v«il l» Of mill iniMTIO
•Airman IOCOMJICTOI MOWII
TO •HfllOSIOCKCOSn
•niMiocicomof I
r
CMIOIIOI *ei ["" "*1
,J — 1 -L
«""««• 1 1 • innuucir
• IIIIAM- J
PRODUCT m com
EITKUEU
inmMiconui
AlTERHAnnolCOnMATIDl lOMMKIVtinCHLOCOfl
„„._„ ... II Of TOTAL
A,,,"!., .» — •» coro
«a m
CHLOIUHI in
•APHTHA \M UTIiULI 1141 HOI
UUOP.AUniMf.AO 0101 »l
CAIHALCMAMCI lll< IH<
IJII
!•
snttMi- -|
MIUM J
POLVCTHILf M WOPtl
niTITMlUIILOPfl
OOIM OMI
HlfiHDIHSIIY LDUOIISITT
Mt¥llH[tEbl POtVIIHIllhf
OOUCIIO»UII> >OI»ODUCIIO»COSTIAIIOOTHIRCOI»Ilin
INCIt ASfS IM FHDDIUTION COST ACCOUNT FOITMI OlffCHiKCISIEm EHflQOUCIION COSISANDISTIMICfS
I OICNIUESIMRMiJlJAirftfAlCOSTSAHa
73-b
-------
Annual cost and percentage depletion totals
applicable to foreign and domestic production
were provided by industry sources. The excess
of percentage depletion over cost reportedly
attributable to petroleum and natural production
was estimated on the basis of the asstnption that
the amount of depletion claimed would be pro-
portional to the well head value of the petroleum
and natural gas produced in a given period.
The depletion tax benefit was estimated by
multiplying the excess of percentage depletion
by 0.48, the corporate income tax rate.
The depletion tax benefit used in estimating total
tax impacts represents a weighted average of dom-
estic and foreign benefits.
Minimum Tax On Tax Preference Items (Depletion)
The procedures used to estimate the tax impact of
the minimum tax related to the depletion allowance
were as follows:
The total amount of taxes paid on preference
items was obtained from industry sources.
(The minimum tax did not become effective
until 1970). Deductions relating to specific
preference items were estimated and a
proportionate share of the taxes paid was
allocated to each.
The estimated minimum tax attributable to
the depletion allowance was allocated between
natural gas and crude petroleum output on the
same basis as the depletion allowance.
-74-
-------
Foreign Tax Credits
The procedures used in estimating tax benefits
derived from foreign tax credits were as follows:
The total amounts of foreign tax credits
taken annually were obtained from industry
sources
Foreign tax credits attributable to crude
petroleum and natural gas produced were
estimated on the basis of the assumption
that such credits would be proportional
to the share of total foreign revenues attri-
butable to petroleum and natural gas pro-
duction.
The tax benefit provided by the foreign tax
credit was computed as 48 percent of the
credit taken.
Tax Treatment of Exploration and Development Costs
The benefits associated with the tax treatment of ex-
ploration, intangible drilling, and development costs
were estimated on the basis of data regarding actual
expenditures obtained from industry sources. The
basis for computing the value of the tax benefit was
defined as the net reduction in the current year's tax
liability achieved through treating such costs as ex-
penses as opposed to capital expenditures. The dollar
value of the tax benefit was considered to be the time
value of the deferred tax liability discounted at 7 per-
cent over a period of ten years. The discount rate
used reflects the estimated cost of producer borrow-
ing while the time pariod used (10 years) represents
the estimated amortization period were expenditures
capitalized.
State Taxes
The impact of state taxes on crude petroleum and
natural gas production costs was estimated on the
basis of severance and production taxes actually
.75-
-------
paid by those producers included in the study.
The taxes paid were allocated between natural
gas and crude petroleum output on the basis of
gross revenues attributable to each. The net
tax impact was computed as 48 percent of the
taxes paid.
4. ESTIMATED TAX BENEFITS ARE PROBABLY NOT
SUFFICIENT TO INFLUENCE PRODUCER RAW
MATERIAL CHOICES
Exhibit XXV, following this page, summarizes the impact
of the discriminatory taxes and tax benefits evaluated on the cost
of producing crude petroleum and natural gas for the period 1969-
1971. As indicated on the Exhibit, the percentage depletion allow-
ance accounts for most of the tax benefits obtained. The maximum
net reduction in the cost per barrel of crude petroleum computed
(weighted average basis) is $0. 318 after taxes for 1969, equal to
approximately 12 percent of the prevailing crude oil price. On a
pretax basis, the maximum computed net cost reduction would be
$0. 636 per barrel, equal to about 24 percent of the prevailing
crude oil price. For natural gas, the maximum computed tax
benefit is $0.011 per MCF after taxes for 1969, equal to about
6. 6 percent of the prevailing natural gas price. On a pretax
basis the benefit would be $0. 022 per MCF, equal to about 13. 2
percent of the prevailing price.
Exhibit XXVI summarizes the impacts of the computed tax
impacts on the cost of producing SBR rubber in 1971 using a crude
petroleum base. Note that the impact will vary depending on the
share of feedstock costs attributable to crude petroleum costs.
Estimates of the share of crude petroleum costs in feedstock
costs ranged from 30 percent to 70 percent. This wide range is
attributable mainly to differing methods of distributing costs of
petroleum fractions and transportation costs.
Assuming a 70 percent cost share, the impact of the taxes
and tax benefits on the cost of producing SBR rubber would be
0. 7 cents per pound, equal to 1. 4 percent of the prevailing price
per pound of SBR rubber.
-76-
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EXHIBIT XXV
IMPACT OF SELECTED TAXES AND
TAX BENEFITS ON THE COST OF PRODUCING
CRUDE OIL AND NATURAL GAS
DOLLARS & PERCENT OF PRICE (1)
US TAX TREATMENT
DEPLETION' - DOMESTIC _
FOREIGN CD
WEIGHTED AVERAGE
MINIMUM TAX RELATED TO DEPLETION*
DOMESTIC
TAXES PAID OR DEEMED PAID TO FOREIGN
GOVERNMENTS
EXPLORATION AND DEVELOPMENT
EXPENSES' - DOMESTIC
FOREIGN
WEIGHTED AVERAGE
STATE TAXES
Oil (PER BARRED
1971
t X
0273 81
0211 75108
0249 79 90
OC42) 112)
oi28 46 66
0017 S
0010 4 S
OQI4 4 5
OOS60071H17 271
1970
t %
0258 81
0199 80108
0231 79 86
(00351 111)
0102 41 55
0013 6
QOI3 5- 7
0017 S
1005300681 117 27)
1969
S %
0 301 97
0317 I35IB1
0305 101 11 8
NOT APPLICABLE
0072 31 41
0021 7
0013 6 7
0018 fr '
(00510 069) 17 22
NATURAL GAS (MCF)
1971
t X
0.015 8 1
N/A
N/A
(OOU2I (III
N/A
0.002 1 t
N/A
N/A
(00060008)1 34-44)
1970
1 K
0014 12
N/A
N/A
'0 0021 1 1 21
N/A
0002 1.2
N/A
N/A
(00060008)1 35 471
1969
S «
0.015 90
N/A
N/A
NOT APPLICABLE
N/A
0002 12
N/A
N/A
(0006-0 0071 (3 M 21
TOTAL IMPACT
DOMESTIC
FOREIGN
0 252 0 261 t 0- 9 4
01120192 52 57
349 12 S 17 9
0.216 0 29S 96110
01740189 5559
314 126170
03070318 102123
02530271 82 88
402 171230
007 009 38 49
006-008 35 47
010 Oil 60- 66
CRUDE OIL
(PER BARREL)
NATURAL GAS
(PERHCF)
PRICE DATA
DOMESTIC FOREIGN AVERAGE
1972 3 39 2 00 2 90
1971 339 155 2 JO 277314
1970 3 IB 185250 270233
I9E9 3.09 1 75 2 35 2 59 3 02
1977 186
1971 182
1970 171
I9E9 167
iUUHU BUUl ALLLNftllAMILlUN INI
76-a
US IMPORTS 1 TO S PERCENT OF THE NATURAL GAS SUPPLY
PRIMARILY FROM CANADA
Note: Impacts are shown on an
after-tax basis
APPROXIMATELY (0% OF US PRODUCTION OF CRUDE OIL IS
COVERED IN THIS EXHIBIT
-------
EXHIBIT XXVI
IMPACT OF SELECTED TAXES AND TAX BENEFITS ON THE
COST OF PRODUCING SBR RUBBER - 1971
(cents per pound)
Percent of Feedstock Costs
Atti ibutab e to Ciude Oil
Cost i
SUR Synthetic
Rubber Price
pei- Pound
1071
Feedstock
Cost Per
Pound of
SBH
Tax Impact
Per Pound of
SBR
Tax Impact
of Sim
Price
After Tax Before Tax
After Tax Before Tax
70%
30",',,
23.6
23.6
1.88
.76
.17
.07
.34
.14
0.7
0.2
1.4
0.4
Note: Impacts are shown on an after-tax basis
76-b
-------
Exhibit XXVII, following this page, summarizes the impact
of the tax elements analyzed on the cost of producing selected
plastic resins in 1971 from petroleum based feedstocks. Again,
assuming a 70 percent share of crude petroleum costs in feed-
stock costs, the pretax net cost reduction attributable to the
taxes and tax benefits evaluated is equal to about 1 percent of
prevailing resin prices.
The tax impacts assuming use of natural gas based feed-
stocks or mixed based feedstocks are of the same order as those
discussed above.
Because of the significant technical barriers standing in the
way of increased secondary materials use in producing synthetic
rubber and plastics, it can be concluded on a qualitative basis
that the incremental cost of using such materials would be very
high. The magnitude of the tax benefits computed above, repre-
senting about one percent or less of rubber and resin prices
are not likely in themselves to be sufficient to cause producers
to consider substitution of reclaimed rubber or plastics for
virgin or raw materials.
-77-
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EXHIBIT XXVH
IMPACT OF SELECTED TAXES AND TAX BEN R KITS
ON THE COST OF PRODUCING SELECTED PLASTICS RKSINS - 1971
(cents per pound)
Plastic Rosins
High Density Polyethelene
Low Density Polyethelene
Polyvinyl Chloride
Pnlyslrene
Percent of Feedstock Costs
Allnb liable to Crude Oil
Costs
30?o
7 (To
30%
707.
30%
1971 Resin
Trice
13 4
13.4
12 8
12.8
13.2
13.8
13.8
Estimated Feedstock
Cost
Per Pound of Resin
.80
.40
.64
.26
.31
I.50
i. OU
.3!)
Tax [iipact
Per Pound ot Rc^m
After lax Before Tax
'I •" Impact
.07
.04
.06
.02
.03
14
.O'J
.04
0.14
0.08
0. 12
0.04
0.06
o. •>;:
o :.'.
0.08
"•
i'r
->f
Hefnre lax
'. '.2
1.04
0.54
0 34
0.32
0.46
1.42
O.SO
Note: Impacts are shown on an after-tax basis
77-a
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APPENDIX A (1)
ALUMINUM MANUFACTURING
UTILIZING VIRGIN MATERIALS
CLAY AND SILICA
BAUXITE
MINES
BENEFICATEO
BAUXITE ORES
BAUXITE ORES ARE PROCESSED AT THE
MINES OR ARE ALSO SHIPPED FOR
PROCESSING ELSEWHERE
HAY ADD
ALLOYING
MATERIALS
©
2 TONS OF BAUXITE ORE FOR I TON OF ALUMINA
2 TONS OF COAL FOR 1 TON OF ALUMINA
1 TONS OF FUEL OIL FOR 1 TON OF ALUMINA
2 TONS OF SODA FOR I TON OF ALUMINA
OS TONS OF LIME FOR I TON OF ALUMINA
SOURCE ALUMIMUH. McGRAW-HILL. INC . 1969
2 TONS OF ALUMINA FOR I TON OF ALUMINUM
6 TONS OF BAKED CARBON FOR 1 TON OF ALUMINUM
03 TONS OF CRYOLITE FOR 1 TON OF ALUMINUM
04 TONS OF ALUMINUM FLUORIDE FOR 1 TON OF ALUMINUM
SOURCE ALUMINUM. McGRAW HILL.INC . 1969
S = SHIPPED
-------
APPENDIX A (2)
SECONDARY ALUMINUM MANUFACTURING
ALUMINUM DIE CASTING
SECONDARY ALUMINUM SOURCES
A NEW SCRAP 82%
~ APPROX 17% BORINGS AND TURNINGS
APPROX 51% CLIPPINGS AND FORCINGS
APPKOX 14% RESIDUES
B OLD SCRAP 18%
APPROX 11 5% OBSOLETE ALUMINUM BEARING PRODUCTS
APPROX 6 5% SWEATED PIG ALUMINUM
C BUNDLES WHERE POSSIBLE. ARE SHIPPED
~ ACCORDING TO ALLOY CONTENT
D BOTH PRIMARY AND SECONDARY SMELTERS
- PRODUCE PURE ELECTROLYTIC TYPE ALUMINUM.
BUT SUCH OUTPUT IS OF MINOR IMPORTANCE TO
THE SECONDARY INDUSTRY ALLOYS ARE ALMOST
ALWAYS ADDED IF NOT ALREADY PRESENT IN
ALUMINUM SCRAP IN CORRECT QUANTITIES
E 87% OF SECONDARY SMLLTCR OUTPUT GOES TO FOUNDRIES.
~ OVER 60% OF OUTPUT IS USED IN DIE CASTING APPLICATIONS
F OEALER/PROCCSSOnS PFIOCFSS APPROXIMATELY 70% OF
~ HE CYCltn ALUMINUM
o
uitrcrn
•lOUIICE US UUIILAUUI MINI j
-------
APPENDIX A (3)
SECONDARY ALUMINUM MANUFACTURING
ALUMINUM CAN RECYCLING
ALUMINUM CAN
RECLAMATION
CENTERS
ALUMINUM CAN
MANUFACTURING
PLANTS
USED ALUMINUM CANS
ALUMINUM
CAN MANU-
FACTURING
PROCESSES
FERROUS METALS
AND OTHER
FOREIGN
MATERIALS
IN 1971 APPROXIMATELY 12* OF ALL ALUMINUM CANS WERE
RECYCLED (770 MILLION CANS. OR 24.062 5 TONS OF ALUMINUM
32.000 CANS/PER TON
SOURCr Al UMINUM ASSOCIATION
-------
APPENDIX A (4)
NEWSPRINT MANUFACTURING UTILIZING
VIRGIN GROUNDWOOO PULP
A) - USUALLY BALSAM OR SPRUCE
S)- SHIPPLO
SOURCL ALVAOb r.'ARKET. EPA. 197]
MIDWEST RESEARCH INSTITUTE
MATERIAL REQUIREMENTS
1 CORD ROUNDWOOD (1 2 TONS)
PER TON OF NEWSPRINT
NOTE NEWSPRINT NORMALLY IS PRODUCED USING 75-80% GROUNDWOOD AND 20-25% SEMI-BLEACHED FIBER
HOWEVER ASSUMING THE ABOVE MATERIAL REQUIREMENTS PROVIDES SUFFICIENT ACCURACY FOR
THIS ANALYSIS
-------
PROCESSORIOEALER PAPERMILL
APPENDIX A (5)
NEWSPRINT MANUFACTURING
UTILIZING SECONDARY MATERIALS
OLD NEWS
PAPER STOCK
PAPER STOCK
PULP FIBERS
90% RECYCLED NEWSPRINT
MATERIAL REQUIREMENTS 1 19TONS
OF PAPERSTOCK FOR 1 TON OF NEWSPRINT
SOURCE CHEMICAL PROCESS INDUSTRIES. McGRAW HILL. 1971
SOURCE REPORTS TO COUNCIL ON ENVIRONMENTAL QUALITY
MIDWEST RESEARCH INSTITUTE. 1971
[Si- SHIPPED
-------
APPENDIX A (6)
INTEGRATED KRAFT PAPER
MANUFACTURING UTILIZING
VIRGIN MATERIALS
ADDITIVES
- "WHITE LIQUOR"
(SODIUM SULFIDE
AND CAUSTIC SODA)
O
F THICKENED
KRAFT
SCREENING \ __ PULP
ILTERINGANO
THICKENING
ADDITIVES
- BLEACHES
- FILLERS
- SIZERS
- COLORING
- OTHER PULPS
- WET STRENGTH RESINS
PAPER
MAKING
MACHINERY
SPENT
COOKING
LIQUOR
"BLACK LIQUOR-
KRAFT PAPER
MATERIAL REQUIREMENTS PER
TON OR KRAFT
1 6 CORDS (2 TONS) ROUNDWOOD
25 TONS LIME
125 TONS SODA ASH
— I LIQUOR IS USED AGAIN AS
I COOKING AGENT
SOURCE CHCUICAL PROCESS INDUSTRIES. McGRAW HILL. 1971. p 637
SALVAGE MARKETS. U S EPA. 1972
8 • SHIPPED
6V PRODUCT EXTRACTS ARE IMPORTANT
FACTOR IN ECONOMICS OF VIRGIN
PULP PRODUCTION
-------
APPENDIX A (7)
RECYCLED PAPER STOCK/PAPERBOARD
MANUFACTURING UTILIZING
SECONDARY MATERIALS
ADDITIVES
- WATER
SORTING
AND DECONTA-
MINATING TO
SPECIFICATION
PAPERBOARD '
MAKING
CYLINDER
BOARD
MACHINE
FOLDING /->.
BOXBOARD (C j
PAPERBOARD. V-X
"COMBINATION BOARD"
PAPERBOARD
BOXING
MATERIALS
PAPER8OARO
FORMING
PROCESS
CONVERTER
OLD CORRUGATED. MIXED PAPERS AND HIGH-GRADE
"OE INKING" STOCK ONLY HIGH-GRADE "OE INKING"
STOCK CAN BE USED FOR RECYCLED PAPER PRODUCTS
UP TO 50% RESIDUALS IS USUAL EXPERIENCE
RESIDUALS INCLUDE CONTAMINANTS. CLAYS. SOMETIMES
INKS
MATERIAL REQUIREMENTS
1 34 TONS OF PAPER STOCK
FOR FOLDING BOXBOARD
PROOUCTS
"=-
SOURCE MRI. COMBINATION 1472
S - SHIPPED
-------
APPENDIX A (8)
STEEL PRODUCTION
USING VIRGIN AND
SECONDARY MATERIAL
CHEMICAL BY-PRODUCTS
COKE OVEN GAS (HEAT SOURCE)
STEEIMAKING
FURNACES
(OPEN-HEARTH. BASIC
OXYGEN AND
ELECTRIC)
CRUSHING.
SCREENING
HIGH GRADE
IRON BEARING
UATERIALS
(AGGLOMERATE)
B IRON-ORE \
ENEFICIATING )
PLANTS /
STEEL
USERS
ENERATO
MOLTEN STEEL
©
INGOTS
MATERIAL REQUIREMENTS
MATERIAL REQUIREMENTS PER
TON OR PRIMARY RAW STEEL
IRON ORE
COAL
LIMESTONE
SCRAP
HP
060
018
04S
OPEN HEARTH-29 5% OF 1971 PRODUCTION
BASIC OXYGEN - S3 IK OF 1971 PRODUCTION
ELECTRIC - 174KOF 1971 PRODUCTION
SOURCE MINERAL YEARBOOK. (IS. BUREAU OF MINES. 1971
S • SHIPPED
-------
APPENDIX A (9)
GLASS MANUFACTURING UTILIZING
VIRGIN AND SECONDARY MATERIALS
SODA ASH.
FELDSPAR
LIMESTONE
COHTAIHERS '
CRUSHERS
CULLET
RECYCLED GLASS
(SMALL PERCENTAGE)
1.299 LBS OF SILICA FOR 1 TON OF GLASS
126 LBS OF SODA ASH FOR 1 TON OF GLASS
157 LBS OF FELDSPAR FOR I TON OF GLASS
358 LBS OF LIMESTONE FOR 1 TON OF GLASS
AFTER PROCESSING. CONTENT IS
I.4GO LBS OF SILICA IN I TON OF GLASS
276 LBS OF SODA ASH IN 1 TON OF GLASS
26 LBS OF FELDSPAR IN 1 TON OF GLASS
704 LBS OF LIMESTONE IN I TON OF GLASS
11 CULLET MAKES UP 10 I5SS
OF AVERAGE BATCH THAT GOES
INTO MELTING FURNACE
-OURCE GLASS INDUSTRY
-------
APPENDIX B(l)
SOURCES OF BAUXITE, ALUMINA AND ALUMINUM
FOB THE U.S. MARKET
mm comma
•MEtf CONVERTED
TOAiawmm
SROAOIWUSTMAI
MO COMHNKR MMET
ARKANSAS
nnmooucnm-
MAMMA MO
GEORGIA
HIIPRODUCTION •
mm TQM
ununton
IM9OTUC
ifnuj.iwoim»
AUHMUA
nvLiwow
tajHTOU
ARRAMSM
TCKAS
AOSTIAUA
MIITNCAnLWA
•fWVOIK
TEXAS
CHICAGO.
lunton
nnv«.swnv
OftAUUTt*
miax*
wu
UHJMTOBI
UIUMTOM
OVMAH t* mm. «x osn. or TW WTIMOO
-------
AfTENDIXB(2)
SOURCES OF TIMBER FOR THE U. S. MARKET
DOMESTIC PRODUCTION OF WOOD PULP - 197(
NEW ENGLAND MID-ATLANTIC E. NO. CENTRAL W.NQ. CENTRAL SO. ATLANTIC E. SO. CENTRAL W. SO. CENTRAL
MOUNTAIN AND'
PACIFIC
47.743.000
2.796.000
TONS
1.461.000
TONS
3280.000
TONS
OBO.OOO
TONS
14.981.000
TONS
7.880.000
TONS
7.299.000
TONS
9J037.000
TONS
IMPORTED WOOD PULP AND OTHER FIBROUS MATERIALS
CANADA
OTHERS
- 153.053 TONS
- 138.34STONS
© PRINCIPAL PRODUCERS
• TIMBER IS CONVERTED TO WOOD PULP
FROM WHICH PAPER IS MADE
SOURCE: MONTHLY STATISTICAL SUMMARIES
AMERICAN PAPER INSTITUTE
-------
APPENDIX B<3)
SOURCES OF IRON/STEEL FOR THE U. S. MARKET
MAJOR
SOURCES
WHERE CONVERTED TO
MOLTEN PIC IRON
WHERE CONVERTED
TO MOLTEN STEEL
BROAD INDUSTRIAL
AND CONSUMER
MARKETS
IMPORTED
IRON ORE
1110 US
IUPORTS
10.299 TONS
VENEZUELA
1910 Uj
IMPORTS
4376 TONS-
CANADA
1910 US
IMPORTS
1.6)7 TONS'
DOMESTIC
IRON ORE
19)0 U S
PRODUCTION •
95 893 TONS
COAL
1970 U4
PRODUCTION •
612 661
LIMESTONE
1970 (IS
PRODUCTION •
19.14? TONS
MINNESOTA
1970
PRODUCTION •
SO 170 TONS
PENNSYLVANIA
1910
PRODUCTION •
90 220 TONS
NEST VIRGINIA
19)0
PRODUCTION •
144 072 TONS
KENTUCKY
1910
PRODUCTION'
125 305 TONS
ILLINOIS
1970
PRODUCTION •
65 119 TOM
OHIO
19)0
PRODUCTION •
MSI TONS
PENNSYLVANIA
1910 PRODUCTION
1 Ml TONS
MISSOURI
NOT AVAILAILE
(THOUSANDS OF
SHORT TONS)
PENNSYLVANIA
1911
IBJI9
OHIO
1971
13 719
INDIANA
1971
12.740
ILLINOIS
1971
6.466
ALABAMA
1971
U62
1971
PENNSYLVANIA
27.65S
1971
OHIO
20.064
1971
INDIANA
17 JO 7
1971
ILLINOIS
10.07
1971
MICHIGAN
9.069
CHICAGO
NEW YORK
TOTAL 1971 U.S PRODUCTION
•1.332
TOTAL 1971 US PRODUCTION
120.441
•EXCLUDE! IMPORTS USED FOR MAKING AGGLOMERATES
IOURCC.
IIUMWOITEEL.U.S OEPT OF INTERIOR
MINERALS YEARBOOK. US OEPT OF INTERIOR. 1970
-------
APPENDIX B (4)
CRUDE PETROLEUM AND
REFINING PRODUCTION - 1972
(MILLIONS OF BARRELS)
DOMESTIC
CRUDE PRODUCTION
TOTAL:
TEXAS
LA.
CAL.
OK LA.
WYO.
N.MEX.
ALASKA
KANS.
MISS.
OTHER
3.459
1.302
896
347
207
141
110
74
74
61
247
FOREIGN CRUDE
REFINERY
INPUT
3.474
i
807
NATURAL GAS
LIQUIDS
313
TOTAL OUTPUT
4.593
GASOLINE
2.316
DISTILLATE
FUEL OIL
962
RESIDUAL
FUEL OIL
293
JET FUEL
310
PETROCHEMICAL
FEEDSTOCKS
124
OTHER
PRODUCTS
730
SHORTAGE
(142)
IMPORTED
REFINED
PRODUCTS
819
(FOR 1971)
-------
NATURAL GAS PRODUCTION
AND DISPOSITION - 1971
(BILLIONS OF CUBIC FEET)
TOTAL
PRODUCTION
22,493
TEXAS
8.551
LOUISIANA
8.082
OKLAHOMA
1.684
NEW MEXICO
1.168
KANSAS
885
CALIFORNIA
613
WYOMING
380
OTHER STATES
1.130
IMPORTS
935
WITHDRAWN
FROM STORAGE
1.508
DOMESTIC
CONSUMPTION
TOTAL:
RES.
COMML
IND.
22.677
4,972
2,173
15.532
EXPORTS
80
STORED
1.839
LOST IN
TRANSMISSION
339
f/
-------
APPENDIX C (1)
COMBUSTIBLE WASTE AS AN
ALTERNATIVE TO FOSSIL FUELS
This Appendix discusses the impact of tax benefits applicable
to fossil fuels (petroleum, natural gas and coal) on their cost relative
to the cost of combustible solid waste used as a fuel. It has been
prepared as a supplement to the basic report contained in this volume
at the request of the Office of Solid Waste Management.
1. FOSSIL FUEL COSTS
Exhibit C-I, following this page, shows estimated 1973 fossil
fuel costs per million BTU's delivered to users. It should be noted
that actual fuel costs can vary greatly, depending primarily on origin
and sulphur content.
The price of coal is sensitive to sulphur content
as well as to the cost of mining with strip mined
coal, the least expensive. Costs to users can
vary from $0. 20 per million BTU's for accessible
high sulphur coal to more than $0. 75 per million
BTU's (mid-year 1973 prices) for low sulphur coal.
The price of No. 6 fuel oil, as indicated on the
Exhibit, is subject to wide variation depending
on sulphur content and location of sale. As an
example. No. 6 fuel oil in mid-197 3 was selling
in Chicago for up to $5. 88 per BBL and in
Oklahoma for $2. 60 per BBL.
Because of the fuel price variability discussed above, it is
apparent that any truly valid evaluation of the relative advantages
of using combustible solid waste as an alternative to fossil fuels
must be made on a case-by-case basis.
-------
EXHIBIT C-I
FOSSIL FUEL PRICES
PER MILLION BTU's (1973)
Natural Gas
Bituminous Coal
& Lignite
Fuel Oil (No. 8~
National Average)
Units
MCF
TON
BBL
Price
$ 0.509
BTU's
Per Unit
1,040,000
12.24** 22,000,000
4.26*** 5,800,000
Price
per
Million
BTU
$0.489*
0.556
0.734
* Estimated average rates charged to industrial users for 1973,
Source: "Analysis of the American Petroleum Institute - Foster
Associates Study of the Impact of Deregulation on Natural Gas
Prices" Congressional Research Service, 1973.
Note: Data on price per million BTU's for 1972 adjusted by +9%
to reflect estimated 1973 prices.
** Source: Unpublished manuscript by Leonard W. Westerstrom
of the Bureau of Mines. Estimated 1973 bituminous coal price
of $8. 16 per ton adjusted by +50% to reflect transportation costs
to user.
*** Source: Federal Power Commission
(Da
-------
APPENDIX C (2)
2. EXPECTED FOSSIL FUEL COST INCREASES
As is well known, the price of fossil fuels is increasing and is
expected to continue to increase for the foreseeable future.
Crude oil prices are expected to increase to $7. 00 -
$8. 00 per BBL in 1974. Assuming that the price of
No. 6 fuel oil (N. Y. Contract) averages out at $0. 75
per BBL above that of crude oil, costs to users
could increase to as much as $1.51 per million
BTU's.
If the well head price of natural gas is deregulated,
then substantial gas price increases could occur,
depending on the manner in which deregulation is
applied and producer success in renegotiating
prices on long term contracts.
Coal prices, especially for low sulphur coal, may
also be expected to increase as the fuel shortage
continues.
Increases in the price of fossil fuels will, of course, tend to
make combustible solid waste a more attractive alternative fuel
source.
3. THE COST OF COMBUSTIBLE WASTE AS A FUEL
High and low estimates of the fuel costs of combustible solid
waste are contained in Exhibit C-II, following this page. The esti-
mates shown are based upon data contained in "Energy Recovery
from Waste", published by the Environmental Protection Agency
in 1973.
The variability in cost is a function of economies of scale and
transportation cost differentials. The costs shown, at $0. 48 to $1. 39
per million BTU's, do not include the capital or operating costs for
combustion equipment adapted to burning combustible solid waste.
-------
EXHIBIT C-H
ESTIMATED COSTS OF COMBUSTIBLE
WASTE USED AS A FUEL
Low High
Cost Cost
Capital Costs $0.80 $ 1.80
Operating Cost 3.50 6.00
Transportation Cost 0.50 6.00
Total Cost Per Ton $4.80 $13. 90
Cost per million BTU @
10 million BTU/Ton $0.48 $1.39
(2)a
-------
APPENDIX C (3)
4. THE IMPACT OF TAX INCENTIVES ON FUEL COSTS
Exhibit C-III, following this page shows the incremental cost
per BTU for fossil fuels if the applicable tax benefits detailed in the
body of this report were repealed. The incremental cost shown is
equal to the highest computed total tax benefit for each fuel converted
to dollars per BTU on a pre-tax basis. Price increases required to
recover income lost if the tax benefits were repealed would range
from about 4% for natural gas to 15% for oil.
To develop any conclusions regarding the degree to which such
an increase in fossil fuel costs would stimulate use of combustible
waste, the relative cost of burning each type of fuel must be con-
sidered. Evaluation of such costs (equipment and operating costs)
is beyond the scope of this effort. Given, however, that the cost
of fossil fuels falls within the range of combustible waste costs, it
may be stated that tax treatment equalization as summarized on
Exhibit C-III could cause some marginal increase in the use of com-
bustible waste over the long term.
Of much greater significance to the future of combustible waste,
however, is the very rapid increase in the cost of fossil fuels, as
well as their limited availability. Both high costs and lack of supply
may provide a significant stimulus to increased combustible waste
usage.
-------
EXHIBIT C-III
THE IMPACT OF TAX BENEFITS
ON FOSSIL FUEL COSTS
($ per million BTU's)
Natural Gas
Coal
Fuel Oil
Price
$0.489
0.556
0.734
Incremental
Costs if Tax
Benefits
Repealed
$0.020
0.046
0.111
New
Price
$0.509
0.602
0.845
(3);
ya!078
------- |