The High Price of Bargain Rate Pollution Control
SHAPIRO, HARVEY D.
EASY MONEY FOR BIG BUSINESS The High Price of Bargain Rate Pollution Control BY HARVEY D. SHAPIRO City after city has witnessed ritualistic battles over the environment, with local industries...
...Furthermore, the pollution exemption is collectively depriving Federal, state and local governments of tax income at an annual rate expected to reach $640 million in 1980...
...Although the total dipped to $1.8 billion for 1976...
...The conventional wisdom used to be that the nation's antipollution costs would balloon in the early '70s as industries added abatement equipment to existing facilities, then would quickly decline to a small percentage of the annual investment in new plants...
...John Heimann, New York State Commissioner of Housing and Community Renewal, contends that it "is the most expensive subsidy we have in our tax system...
...a three-month record was set in the third quarter of last year when $700 million worth of new bonds was issued...
...Nonetheless, giant corporations remain the primary beneficiaries of the bond subsidy...
...Pollution-control financing is hindering the efforts of hard-pressed city governments to raise money in the marketplace, too...
...The Council on Environmental Quality, for instance, estimates that this country will have to lay out $121 billion over the next decade to fight industrial pollution...
...bonds that paid for pollution-abatement projects were excluded from the limits...
...Even viewed solely in environmental terms, pollution-control bonds are widely seen as having a deleterious effect...
...At the behest of the late Senator Everett M. Dirksen (R.-lll...
...One Treasury Department official told me "I'm sure the issue of tax exemptions on pollution financing will come before the House Ways and Means Committee this year, as it has a couple of times before...
...Former Treasury Secretary William Simon went further, telling the House Ways and Means Committee that he favored limiting the exemption to plants in operation before January 1, 1975...
...and former Vermont Governor Philip Hoff-concluded last fall that competition from antipollution issues had driven up the interest rate on other municipal bonds by 0.1-0.2 per cent...
...A House Ways and Means Committee staff member perhaps summed up the situation best: "When we talk about tax reform on the Hill, everyone wants to focus on oil and gas tax shelters and other tip-of-the-iceberg kinds of things-even though the tax exemption on pollution-control bonds involves big bucks and has a broad negative impact on municipal finance and the tax system in general...
...And a recent survey of 200 major companies by a prominent research organization found that 55 per cent paid for portions of their environmental cleanup costs through tax-exempt bonds-or, in the case of utilities and messy industries like steel, paper-making, and chemicals, as many as a dozen issues...
...This was underscored at a recent EPA conference in Chicago, where several companies explained how they increased efficiency while cutting pollution...
...Nonetheless, according to John E. Petersen, director of the Center for Policy Research of the National Governor's Conference, "last winter pollution control bonds were walking away with the market, while the traditional government borrower was not able to get financing on good terms...
...At times they do their thing with such zeal that local officials are persuaded to underwrite projects reaching beyond their own borders...
...According to a study prepared for the Twentieth Century Fund, in 1974 and 1975 pollution-control bonds represented nearly 8 per cent of all long-term municipal bond issues...
...Still, the overall demand for environmental bonds has remained high...
...Even if it were deemed desirable to mitigate pollution-control costs, more and more authorities consider tax-exempt financing an inefficient mechanism with dangerous side-effects...
...Yet as Train observes, "more basic changes in the process of an industry offer greater potential for cutting costs, conserving energy, and benefitting the environment...
...The position is shared by a number of groups representing state and local officials, such as the U.S...
...For the present approach, the specialists note, tends to be doubly-regressive: It permits big corporations to pay less for their pollution-control equipment than businesses without easy access to the bond market, and it offers a tax shelter largely to high-income individuals...
...Economists like Joseph Pechman of the Brookings Institution argue that direct subsidies, changes in depreciation procedures and other alternatives would be far better...
...Then the floodgates opened: Sales of pollution-control bonds climbed steadily from $93 million in 1971 to a record $2.3 billion in 1975...
...Harvey D. Shapiro, a longtime Nl contributor, is a writer and consultant...
...While many senators and representatives have recognized the problems associated with present pollution-control financing, they may still feel the issue is too complicated to garner sustained public attention...
...This means the companies are able to borrow at the same rate as city governments-or about 2 per cent below the commercial rate they would normally have to pay, because the city bonds are tax-free...
...What is more surprising, the Public Finance Council of the Securities Industry Association-whose members underwrite and sell pollution-control bonds has come out against the exemption...
...it received $5 million through a bond issue floated in the name of the Allegheny County (Pa...
...Nevertheless, on the Federal level current pollution-control financing has been viewed with skepticism, almost from the outset...
...The Carter Administration, committed to tax reform, has presented its elaborate tax-revision package to Congress, where it is being examined...
...The first company to use the method was United States Steel...
...Don't hold your breath, though, in anticipation that the air will soon be cleared in this vital area of public policy...
...Like many observers, Simon had trouble understanding why industry should be subsidized for meeting a legal obligation...
...In most states, though, the bonds are readily issued by a county or municipal development board in order to please important local industries...
...We feel an obligation to pay some income taxes each year," an officer of one of New York City's largest banks told me with a touch of civic pride...
...This kind of financing is an outgrowth of the controversial tax-exempt industrial revenue bonds popularized in the '50s to help states and cities attract new commerce...
...Similarly, the J. R. Simplot Company of Caldwell, Idaho, having found a way to stop its massive discharges of nutrient-rich potato processing wastes into the Boise River by spraying them on pasture land, has doubled its annual forage productions and is now supporting 26,000 cattle...
...So the prospects, at the moment anyway, are that the public will have to go on paying the high price of bargain-rate pollution control...
...One of the attractions of these methods is that they can be financed at bargain rates-in particular by bonds;developing fundamental operational changes to curb pollution is expensive and does not qualify for any tax breaks...
...Russell E. Train, former administrator of the Environmental Protection Administration (EPA), has complained that "pollution control...
...In addition to the bonds sold to the public in the open market, incidentally, a large number are directly placed with big banks and other institutional investors...
...Investors recognize when an issue is backed by a big firm's credit, despite its being formally issued in the name of a municipality...
...Another former Treasury Department official put it this way: "It doesn't make any sense at all for new plants, and it no longer makes much sense to subsidize people who have dragged their feet in retro-fitting old plants...
...As it turns out, pollution-control spending has risen steadily, and most studies show no sign of it waning...
...Conference of Mayors...
...Indeed, some banks have so much tax-exempt income these days that they have had to quit favoring pollution control...
...The Twentieth Century Fund Task Force on the Municipal Bond Market-chaired by former Securities and Exchange Commission Chairman Ray Garrett Jr...
...In response, President Ford signed complicated legislation in June 1976 that authorized the Small Business Administration to guarantee leases secured by tax-free pollution control bonds issued on behalf of small businesses...
...EASY MONEY FOR BIG BUSINESS The High Price of Bargain Rate Pollution Control BY HARVEY D. SHAPIRO City after city has witnessed ritualistic battles over the environment, with local industries dragging their feet, going to court and threatening to close up shop before finally agreeing to spend the money needed to meet local pollution standards...
...The trouble is nobody has made this issue as politically sexy as picking on cattle-ranching deals for rich New Jersey dentists...
...Since 1971, in fact, the nation's major polluters have received more than $10 billion at bargain rates, thanks to a combination of Federal and state laws permitting local governments to issue tax-exempt bonds and turn the proceeds over to corporations to pay for pollution-control facilities...
...Shortly thereafter, the nation's growing concern about the environment led to a variety of new rules forcing corporations to clean up after themselves...
...They know, too, that buying an Exxon pollution-control bond, say, offers not only untaxed income but a better chance of timely repayment than a regular municipal note...
...The competition among localities soon turned the issues into a giveaway program for business, prompting Congress to sharply curtail their use in 1968...
...Industrial Development Authority in April 1971...
...One agency, in Northampton County, Pennsylvania, issued $30 million in bonds to be used by Bethlehem Steel to clean up coke ovens not only in Northampton, but also 200 miles away in Johnstown and other plants...
...Our view," said one former sub-Cabinet official at the Treasury Department, "is that the tax exemption ought to be reconsidered by Congress, and we've expressed doubts about it, although we have stopped short of out-and-out opposition to it...
...On a $10 million, 20-year bond issue, a firm saves some $3.8 million in interest costs...
...Politicking by businessmen and investment bankers has been successful in every state except Idaho and Washington, where tax-exempt pollution-control financing is not allowed...
...The sums involved are now often sizeable: Last year, Shell Oil obtained $60 million through bonds issued by the Gulf Coast Waste Disposal Authority of Texas, and the Ohio Power Company picked up $50 million from bonds sold in the name of Marshall County, West Virginia...
...One West Coast corporate treasurer explains, "Its very simple...
...Critics also point out that corporations aren't given tax breaks to make their factories fireproof or to put railings on stairways or to meet local building codes, and see no reason why they should receive special aid to make their operations cleaner...
...You approach the county and say, 'Hey, we've got a plant here, we employ X number of people, we pay taxes, you know we've got this Federal law and state law that permits us to do this kind of financing, and won't you be nice guys and help us out?' And 99 per cent of the time that's it...
...In any event, the tax-exempt bond method of financing the huge effort is sure to remain popular with business, and its promotion has already thrust many companies into local politics...
...For Federal law requires a state legislature to pass enabling legislation before any bonds can be issued by municipalities or the special authorities they sometimes set up for this purpose...
...The original notion had been to keep marginal old factories open and save jobs by lowering their costs of complying with the emerging pollution regulations, not to help pay for installing controls in new plants...
...At 3M, the 19 projects in the firm's "Pollution Prevention Pays" program came up with new techniques that eliminate 73,000 tons of air pollution, 500 million gallons of polluted waste water, and 2,800 tons of sludge annually-and save the company $11 million...
...Among other reasons, the figure is that high because many corporations have moved slowly in making necessary changes, and the "retro-fitting" of control devices to functioning plants has in some industries produced very limited success...
...For a long time small businessmen complained because such financial arrangements helped only big concerns whose names were well known in the bond market...
...In Maine, where each bond issue requires the approval of the voters in a municipality, paper company executives and their bankers have been found slogging through the backwoods, drumming up support for their bonds...
...That translated into "an additional borrowing cost of $30 million to $60 million on long-term state and local borrowers...
...To compensate for that shortfall, of course, many who do not own the privileged bonds must pay higher taxes...
...In fact, its only strong supporters are corporate treasurers, who seem mesmerized by the opportunity to borrow money at bargain rates and are hard pressed to explain why constructive change would not be an across-the-board benefit...
...to the surprise of many, so has the supply...
...generally has been confined to traditional add-on devices-the end-of-the-pipe or top-of-the-[smoke-]stack technologies...
...But in many cases, even as environmentalists smugly assume they have really put it to the paper mill or steel plant, average taxpayers end up heavily subsidizing much of the industry's pollution-control spending...
...Since many local governments were eager to hold down the costs of compliance in order to keep factories open and people working, they readily agreed to sell tax-exempt bonds that would help local industries purchase pollution-control equipment...
...the guys say, 'Sure, we're good neighbors,' and they do their thing...
...But the real question is, what priority will it receive when Congress begins the process of horse-trading and log-rolling that invariably envelops tax-reform bills...
...The course of events has moved the Municipal Finance Officers Association to recommend that Congress withdraw the tax exemption on pollution-control bonds...
...In sum, the environment, the cities, the taxpayers, the very companies that may be short-term gainers-all are losers in the end under the existing system of pollution-control financing...
Vol. 60 • October 1977 • No. 21
