Taxes to Finance Superfund

Salvatore Lazzari

Specialist in Public Finance
Economics Division

September 13, 1996

96-774

TABLE OF CONTENTS

THE FOUR EXPIRED SUPERFUND TAXES
    THE REFINERY CRUDE OIL AND IMPORTERS PETROLEUM PRODUCTS TAX
    THE CHEMICAL FEEDSTOCKS TAX
    THE IMPORTED CHEMICAL DERIVATIVES TAX
    SPECIAL ENVIRONMENTAL TAX ON CORPORATE ALTERNATIVE MINIMUM TAXABLE

CLINTON ADMINISTRATION PROPOSALS
    THE PROPOSALS OF 1994
    THE NEW ENVIRONMENTAL TAXES ON INSURANCE COMPANIES
    The Prospective Tax on Insurance
    The Retrospective Tax on Insurance
    THE ADMINISTRATION'S RECENT PROPOSALS

THE CONGRESS

REVENUES

TAXES TO FINANCE SUPERFUND

The Hazardous Substance Superfund was created in 1980 under the Comprehensive Environmental, Response, and Compensation Act, (CERCLA, P.L. 96-510). The Superfund is a trust fund administered by the Environmental Protection Agency and established for the purpose of financing the costs of cleaning up abandoned hazardous waste sites, which had been polluted by prior activities of chemical firms, oil firms, and other industrial and commercial enterprises.

Prior to the expiration of the taxes, the fund was financed primarily by three excise taxes on oil and chemicals and an environmental tax on corporate taxable income, which together generated about $1.5 billion annually for the Superfund. The revenue was allocated to the trust fund and used to pay for cleanup of hazardous waste sites and the administrative and legal expenses of the EPA. In addition, the Congress authorized the allocation of $250 million from general revenues to the fund. Other revenue sources include interest on unobligated balances of the fund, which have been substantial ($3 billion in FY1996), and cost recoveries from parties liable for the cleanups.

CERCLA expired on September 30,1985 and was reauthorized for 5 years under the Superfund Amendments and Reauthorization Act of 1986 (SARA, P.L. 99-499) beginning on January 1, 1987. The Revenue Reconciliation Act of 1990 (P.L. 101-508) extended the taxes for 4 more years, beginning on January 1, 1992, through December 31, 1995. The taxes expired on January 1, 1996 and they have not been reinstated.

THE FOUR EXPIRED SUPERFUND TAXES

THE REFINERY CRUDE OIL AND IMPORTERS PETROLEUM PRODUCTS TAX

An excise tax of 9.7¢ per barrel (0.23cents per gallon) was imposed on domestic refineries on the amount of crude oil they buy, and on importers on the amount of refined petroleum products they import into the United States for consumption, storage, or use [Internal Revenue Code (IRC) §4611-4612]. This tax, which was the single largest tax revenue source for the "Superfund" ($570 million in FY1992), was also imposed on domestic crude oil used or exported before it is received at a refinery.¹ This tax expired on January 1, 1996.

The petroleum excise tax for Superfund was first enacted under CERCLA at the rate of 0.79¢ per barrel (0.019¢ per gallon). Under SARA the tax was increased to 8.2¢ per barrel of domestic oil and 11.7¢ per barrel of imported oil. This tax differential was ruled to be in violation of GATT - the General Agreement on Tariffs and Trade - to which the United States is a signatory, and a 9.7¢ tax was imposed equally on domestic and imported oil as part of the Steel Trade Liberalization Program Implementation Act (P.L.101-221).

THE CHEMICAL FEEDSTOCKS TAX

The chemical feedstocks tax was an excise tax on forty-two listed chemicals that are inherently hazardous, may be used as inputs into the production of hazardous products, or may generate hazardous wastes when used (IRC § 4661-4662). The tax rates ranged from $0.22 per ton for potassium hydroxide to $4.87 per ton for ethylene and nine other chemicals. The chemical feedstocks tax is imposed mostly on inorganic chemicals (ammonia, chlorine, or mercury, etc.) and some metals (lead, nickel, chromium), but the taxation of petrochemicals (benzene, ethylene, methane, etc.) generates most of the revenues from the tax. The chemical feedstocks tax was imposed on the sale of a listed chemical by the manufacturer, producer, or importer.

There were several exemptions to the feedstocks tax. Methane or butane used as a fuel or in the manufacture of a motor fuel (gasoline, diesel, aviation fuel or jet fuel) were exempt. Specific chemicals used in the manufacture of fertilizer or animal feed -- ammonia, methane gas, nitric acid, and sulfuric acid --were exempt. Sulfuric acid produced as a byproduct of pollution control equipment was also tax exempt. Any otherwise taxable chemical was exempt if it was produced from coal. Certain substances were exempt if they were recovered as part of a recycling process. Finally, any otherwise taxable chemical that was organic and that was part of an intermediate hydrocarbon stream was not taxed.

The chemical feedstocks tax was created by the original CERCLA law of 1980 that created the Superfund. It had expired but was reimposed at the same rates (except for xylene) under the Superfund reauthorization of 1986. This tax expired on January 1, 1996.

THE IMPORTED CHEMICAL DERIVATIVES TAX

As a complement to the chemical feedstocks tax, the Superfund Amendments and Reauthorization Act of 1986 imposed an excise tax on imported chemical substances that are derived from (contain or use) any one or more of the 42 chemicals and metals subject to the feedstocks tax (IRC § 4671-4672). The tax rate is supposed to be the equivalent feedstocks tax on the amount of listed chemicals embodied in the derived substance if such an amount can be ascertained. The importer is required to obtain (and supply, if necessary) the information needed to determine the equivalent feedstocks tax. In the event that such an amount cannot be ascertained, the tax rate is 5% of the substance's sales price. Fifty derivatives or substances are listed in the tax code as subject to this tax. But many others have been added under the Treasury Secretary's discretionary authority to add derivative substances to the list. Substances may be added if at least 50% of the substance -- by weight or value of the feedstocks used to make the substance -- comprises one of the 42 listed chemicals taxed under IRC §4661-4662. The tax on imported chemical derivatives was added by the 1986 reauthorization act and was amended by the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647).

The 5¢ lapsed temporarily because revenues in the Trust Fund had exceeded $1 billion, the threshold for the tax, but was reimposed on July 1, 1994. The tax expired on December 31, 1994.

SPECIAL ENVIRONMENTAL TAX ON CORPORATE ALTERNATIVE MINIMUM TAXABLE INCOME

The last of the four taxes that has financed the Superfund is the special environmental tax on corporate alternative minimum taxable income. Prior to 1986, federal tax law required that corporations compute two income tax liabilities -- their regular corporate income tax, and their alternative minimum tax (AMT) liability -- and to pay whichever was greater. The Superfund Amendments and Reauthorization Act of 1986 (or SARA) added still another corporate income tax: the environmental corporate AMT, the revenues of which would go to the Superfund rather than the general fund as is the case for the corporate income tax and the regular corporate AMT. This special minimum environmental tax on the incomes of corporations is in addition to the corporate income tax and the regular alternative minimum tax on a corporation's tax preference items; it may have to be paid even if a corporation does not have a regular alternative minimum tax liability. The tax rate is 0.12% (0.0012, or $12 per $10,000) of the alternative minimum taxable income above $2,000,000 (IRC §59A).² The tax expired on January 1, 1996.

CLINTON ADMINISTRATION PROPOSALS

In anticipation of the expiration of the Superfund taxes at the end of 1995, federal policymakers attempted to reauthorize Superfund, and to specifically reinstate and extend the various taxes.³ The F19Y97 budget resolutions in both houses of Congress anticipate reauthorization, and continue appropriations to the Superfund.

The Clinton Administration has consistently supported reinstatement and extension of the four Superfund taxes.⁴ It has also proposed a variety of other taxes to provide additional funding to the Superfund program and EPA, as well as some tax incentives for environmental remediation.

THE PROPOSALS OF 1994

Prior to December 31, 1995-- the expiration date of the four Superfund taxes -- there was some controversy regarding extending these and other expiring tax provisions centered around the bigger controversy of Superfund reauthorization. In 1994, the Clinton Administration proposed Superfund reauthorization legislation, H.R. 3800 and S. 1834, that would have extended the Superfund taxes for 5 years, through December 31, 2000, with the expiration dates for the chemical feedstocks tax and the imported chemical derivatives tax tied to the expiration of the 9.7¢ per gallon crude oil tax.⁵ In addition, the Administration's proposal would have created two new environmental taxes --which some called "fees" -- on property and casualty insurance companies, which are described next.

THE NEW ENVIRONMENTAL TAXES ON INSURANCE COMPANIES

Neither H.R. 3800 nor S. 1384 contained specific legislative language on the nature of the taxes -- referred to in the bills as "fees" or "assessments" -- to be imposed on insurance companies. Reports in popular tax publications speculated that the tax was to be an ad valorem tax on the commercial insurance premiums underwritten by insurance companies.

On May 20, 1994, the Clinton Administration announced the specific legislative language of its Superfund financing proposal. This contained two new insurance taxes: a prospective tax and: a retrospective tax. Money from these taxes would have gone into a new trust fund -- the environmental insurance resolution fund (or EIR fund)-- that would have been created.

The Prospective Tax on Insurance

The prospective tax would have been 0.34%, rising to 0.44% after two years, of the premiums of new commercial insurance policies, that is, the gross premiums written for contracts providing insurance of commercial coverage issued after the date of enactment of the legislation. The Treasury Secretary would have been provided the authority to adjust the tax rate so as to assure that it would generate $930 million in total aggregate revenues over the first 5 years of the tax.

The Retrospective Tax on Insurance

The retrospective tax would have been an excise tax on an insurance company's premiums above $50 million for commercial policies issued from 1971 to 1985. The tax rate would have been 0.2% for the first two years after date of enactment and 0.27% for the remaining 3 years after date of enactment. The tax base -- commercial policy premiums -- would be retroactively adjusted for inflation using 1985 as the base year. The legislation prescribed inflation adjustment factors of 1 for 1985 and 2.66 for 1971. The Treasury Secretary would have the authority to adjust tax rates to assure a total aggregate revenue from the retrospective tax that would equal $2.17 billion.

The two taxes on insurance companies appeared to neither contribute to economic efficiency (that is, correct for preexisting distortions in resource allocation), distributional equity, or macroeconomic stability, nor create economic disincentives to discourage the current generation of hazardous waste, nor create incentives for the recycling of such wastes. Economic theory applied to environmental problems generally suggests a tax on polluters the polluter pays principle. Applied to the problems of current hazardous waste generation and disposal, the theory suggests pollution taxes be based on the monetary value of the damages caused to the environment and the damages to individuals based on the adverse health effects on the affected parties. Applied to prior generation and disposal of hazardous waste, which is the problem that the Superfund is attempting to address, the theory suggests either: 1) make responsible parties pay for cleanup, and impose fines and penalties (in cases where the polluters can be found, and are economically viable); and 2) funding from general revenues or perhaps some type of general business tax, under the assumption that the hazardous waste problems were probably caused by businesses. But the purpose of these two taxes was to neither to clean up the environment, nor to correct for market failures and improve economic efficiency. Rather, it was to end the litigation between polluters and insurers over the applicability of insurance contracts to CERCLA liability.

The Administration's proposed tax was part of a compromise that attempted to lessen litigation and reduce the potential liabilities of the insurance companies under the Superfund program. Due largely to its liability system, the Superfund program engendered much litigation and relatively little actual clean up of hazardous waste sites. The Environmental Protection Agency may sue the alleged polluters to recover costs; the alleged polluters may sue each other, other polluters, and their insurance companies, arguing that their insurance policies covered the costs of the cleanup; insurance companies have initiated extensive litigation, arguing that they are not responsible under the terms of the insurance policies they sold; insurance companies may also sue reinsures. The insurance companies were engaged in much controversy and litigation with their clients over whether environmental insurance -- most of which was underwritten in the 1970s -- covered Superfund sites. As a result, only a small percentage of the nation's hazardous waste sites have been cleaned up under the Superfund program. After 16 years, cleanup has been completed at 353 sites, 27% of the 1329 listed. Thus, basically, the burdens from Superfund were so great for insurance companies that the new EIR fund was proposed to settle insurance claims related to the cleanup of wastes disposed before 1986, and end the litigation. The two insurance taxes were suggested as a price for the lessening (or removing) of this burden, while simultaneously generating more money for the Superfund. In addition, those paying the retrospective tax were a substantially different group of insurance companies than those currently engaged in underwriting environmental policies.

The Administration's financing proposal would have imposed the two new taxes on insurance companies in exchange for a significant reform of the liability scheme. While the liability of insurers and polluters would remain the same, it was intended that the Environmental Resolution Fund created by the proposal would end the extensive litigation by providing a formula for settling the disputes in a "fair" manner for all the parties. This was supposed to encourage the affected parties to settle, rather than to litigate, disputes.

THE ADMINISTRATION'S RECENT PROPOSALS

While the Clinton Administration has favored extending all of the Superfund taxes, only the environmental tax on corporate minimum taxable income was discussed in its FY1996 budget and in its mid-year review of its FY1996 budget, as part of the proposed middle-class tax cut that was not enacted.⁶ The Administration's F1997 budget also includes a proposal to extend the four Superfund taxes. The Administration proposes to reinstate the environmental tax on corporate income through January 1, 2007, and the three excise taxes through September 31, 2006.

More recently, in August 1996, the President unveiled a new environmental initiative -- a consolidation of proposals made earlier -- to expand Superfund cleanups and increase funding for the Environmental Protection Agency and other agencies responsible for cleanups (HUD, for example). Included in this initiative was not only reinstatement and extension of the Superfund excise taxes and the corporate environmental tax, which would help provide the funds needed for the increased spending, but a "Brownfields" proposal to provide tax code incentives for environmental remediation at commercial and industrial sites in urban and rural land areas that are polluted. Generally, developers have avoided these sites, which were abandoned for a number of different reasons, due to the threat of liability under the Superfund law.⁷ The President first proposed these incentives in his FY1997 budget⁸. Some speculate that the Clinton Administration would ask for a FY1997 supplemental appropriation bill to fund the August 1996 proposals; others believe that the President's proposals would be incorporated in the FY1998 and FY1999 appropriation bills.

THE CONGRESS

The 104th Congress has generally not been as eager to reinstate the prior Superfund taxes as the Clinton Administration has been, although some reinstatement efforts were attempted again as part of Superfund reauthorization, and additionally as part of budget reconciliation and the Republican tax cuts. In the fall of 1995, the Congress began to mark up a Superfund overhaul bill. The Senate version of the FY1996 budget reconciliation bill (S. 1357) included a provision to extend the Superfund taxes for 7 years.

Reluctance to reinstate the four Superfund taxes has generally existed in the key tax committee of the House (the Committee on Ways and Means) where, for constitutional reasons, a tax bill would have to originate. Representative Archer -- Chairman of the Ways and Means Committee -- has stated repeatedly that comprehensive reauthorization of the Superfund law, including fundamental reform of the retroactive liability provisions, would have to precede any attempt to reinstate and extend the Superfund taxes.⁹ The Chairman has also opposed reinstatement of Superfund taxes as part of reconciliation legislation.¹⁰

To some extent congressional reluctance to reinstate the Superfund taxes is due to the fact that the fund has unobligated balances, which some forecast to be sufficient for a few more years, given current spending rates. For example, EPA estimates that, as of FY1998, the fund will have a balance of about $2.6 billion. Also, there has been some controversy over attempts to use revenue from prior taxes for deficit reduction, rather than for the Superfund trust fund. For example, in the fall of 1995, the Senate Finance Committee was considering a plan to use revenue from the taxes to help pay for the $224 billion in tax cuts proposed by the Republicans and embodied in the Committee's reconciliation recommendations.

REVENUES

Tables 1 and 2 show actual and projected revenues from the different types of Superfund taxes. Table 1 shows actual receipts since 1989. Table 2 shows estimated revenue effects from extension of the Superfund excise taxes, under the proposal in the Clinton Administration's FY1997 budget, as estimated by the Joint Committee on Taxation. Projections for 1997 reflect the different effective dates for the taxes: the budget assumed that the corporate AMT tax would go into effect retroactively, beginning on December 31, 1995; the excise taxes would go into effect on the date of enactment of the budget.

TABLE 1. Actual Receipts from the Various Superfund Taxes, 1989-1996

Notes:    a/ Estimated;

b/ 1989-1992 calendar years based on corporate income tax return data; 1994-96 fiscal years based on budget data.

c/ Totals for 1989-93 are not shown separately because the excise taxes are in fiscal years, while the corporate AMT is reported in calendar years.

Sources: IRS Report of Excise Taxes, Various Issues; Budget of the U.S. FY1997. p.884, and Corporate Statistics of Income.

TABLE 2. Revenue Projections From Reinstating Superfund Taxes ($millions)

Source: U.S. Congress. Joint Committee on Taxation Staff Description of Revenue Provisions in President Clinton's FY1997 Budget Proposal, Issued March 27, 1996. Joint Committee on Taxation, 104th Congress. U.S. Govt. Print. Off. p.163.

REFERENCES

¹The 9.7¢ per barrel petroleum tax is the larger part of a 14.7¢ petroleum tax that includes a 5¢ per barrel tax that, prior to its expiration, financed the Oil Spill Liability Trust Fund, and which is also imposed on domestic petroleum and imported petroleum products. In fact, the two taxes were combined for purposes of assessment and collection by the Internal Revenue Service.

² The regular corporate AMT equals 20% of the alternative minimum taxable income (AMTI) above $40,000, and allows for a variety of deductions and tax credits. The AMTI is essentially a corporation's regular tax liability increased by the total of selected tax preferences it claims against its regular corporate income tax. These computations are very complex. See: U.S. Library of Congress. Congressional Research Service. The Corporate Minimum Tax: Rationale, Effects, and Issues. CRS Report 89-213 E, by David L. Brumbaugh. Washington, March24, 1989.

³ The major reauthorization bills are H.R. 2500 and S. 1285. See: U.S. Library of Congress. Congressional Research Service. Environmental Protection Agency: FY1997 Budget. CRS Issue Brief 96028, by Martin Lee. (Updated regularly)

⁴ The Clinton Administration has also supported reinstatement and extension of the Se per barrel oil tax for the Oil Spill Liability Trust fund. See its FY1996 and FY1997 budget proposals.

⁵ Under the law prior to January 1, 1996, there was a provision for the taxes to terminate if either 1) the unobligated balance in the Superfund at any time exceeded $3.5 billion, or 2) the Treasury Department estimated that total tax revenues since the inception of the four taxes for the Superfund exceeded $11.97 billion. Under this proposal, if the unobligated balance on December 31, 1998, exceeded $3.5 billion and it was projected to remain above $3.5 billion on December 31, 1999, then no tax would be imposed in 1999. If a tax was imposed during 1999 but the unobligated balance was more than $3.5 billion on December 31, 1999, and it was projected to remain above $3.5 billion on December 31, 2000, then no tax would have been imposed in the year 2000.

⁶ Executive Office of the President. Office of Management and Budget. Budget of the U.S. Government, FY1996: Analytical Perspectives. p.27.

⁷ U.S. Library of Congress. Congressional Research Service. Brownfields Program: Cleaning Up Urban Industrial sites. CR5 Report 95AM, April 3, 1995, by Mark Reisch.

⁸ Executive Office of the President. Office of Management and Budget. Budget of the U.S. Government, FY1997: Analytical Perspectives p.38.

⁹ Retroactive liability is that part of the Superfund law that holds parties liable for cleaning up hazardous waste sites polluted prior to 1980, the date that Superfund was created.

^l0 In November 1995, Congressional Quarterly quoted Representative Archer as stating:

I think it's awful policy. Whatever we do in terms of extending the revenue stream should be done in conjunction with Superfund.

See: Freedman, Allan. GOP Sweetens Superfund Bill for Small Business. Congressional Quarterly, Weekly Report, November 4, 1995. pp.3370-3371.