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quite a variance. Is there any specific legislation that, regardless of its life, it could be written off in 5 years, if the taxpayer elected to?
Mr. EISNER. Yes; there is. There is that 5-year rapid writeoff. The problem is that having chosen, or elected the 5-year writeoff, the businessman cannot also take investment tax credit.
Mr. SMITH. He gets two-thirds of it, does he not? Instead of the full ?
Mr. EISNER. My understanding is that he gets none of it.
Mr. SMITH. If you do not take 7 years or more, you do not get the full credit. You get two-thirds.
Mr. EISNER. Now with the 10-percent investment tax credit, it becomes even tougher.
Mr. HUNGATE. What is the life of this equipment ? Could you give me a composite average, the top figure and low figure!
Mr. ALDRICH. Well, you would have to look at individuals generally, for water pollution control, such as your farmers and things like that. You are talking of lives of 20 to 30 years.
If you are talking air pollution equipment, on foundries, cement mills, the life of that equipment is somewhere in the 8- to 10-year period.
Mr. EISNER. Then the ADR, the asset depreciation range over which he can depreciate that equipment for the water pollution is around 10 years, I think-or 912.
Mr. HUNGATE. In these areas to which you refer, is there enough experience that you think those are reasonably accurate estimates of the life of the equipment?
Mr. ALDRICH. Every piece of equipment differs. A fabric filter, a cyclone separator
Mr. HUNGATE. I thought maybe with these laws, some of this equipment was really extremely new and there might not be formulas. But, most of it has been available, or used in somewhat we think is a comparable context ?
Mr. ALDRICH. In the area of pollution control, there are very few “new” developments that are so strikingly new you cannot judge the useful economical life. You can.
Mr. HUNGATE. Is the only thing he has to worry about the tightening up standards? Well, that is one of the things he has to worry about which would render the equipment, perhaps, obsolete.
Mr. ALDRICH. That is right.
Mrs. FENWICK. I wonder if you have any thoughts, or information, that might lead to the equipment being less expensive as it gets more and more sales, and so on?
In other words, will it drop? Or will inflation just simply overtake it?
Mr. ALDRICH. The interesting thing about that, Mrs. Fenwick-and we have talked in your State of New Jersey several times with Mr. Guardine about it, and have his support-indeed, by combining a number of small businesses into a single financing unit, we have been part of studies which show that, for instance, if you take three nonferrous smelters and bring common management into them, and common engi
neering—which are so fundamental to these particular industriesthat you can reduce the cost per unit by some 25 to 30 percent right a way, by just combining the technical skills to assist them."
And, as far as getting the actual equipment cost down, I think they are suffering from the same problems as everybody else. But, this combination tends to solve it.
Nrs. FENWICK. In Sweden they have done some remarkable things in the paper industry, which, of course, is one of their great sources of income. And there they do the pollution thing in three stages.
They have the prime paper and then right next to some of that, instead of having to dispose of some of the waste, that waste is used for second grade paper. And then, finally, for the kind of paper you can only use in stuffing. So they have cut down the costs enormously because the byproducts are made commercially salable.
And this has cut the cost in the paper industry in Sweden to a large extent, and I wondered if there is any effort in this country along those lines; in other words, somehow taking some of the waste products--I do not know about other industries, but the paper industry, for example, and encouraging them to use that method of cutting down on these costs. Because the cost of disposing of the waste, if you are only going to make prime paper, is terrible.
Mr. ALDRICH. Of course, technically, they are working in that direction. Interestingly enough, the IRS rules and regulations under section 103, do not nromote the idea of recycling.
Mrs. FENWICK. I know it. What can we do about that?
Mr. ALDRICH. Well, I do not know of what you can do about that, on the broad scale, but in section 103—in H.R. 78—well, this will be part of our report to you.
You might include the SBA Administrator's evaluation, not only to allow recycling, but to try to get the small businesses more oriented toward it.
Mrs. FENWICK. And freight rates do not reflect it, either?
Mr. ALDRICH. No; but you will find in the dairy industry where recycling of the manure is very practical today and you get down to costs, capital costs of $100 and operating costs of zero dollars, for recycling of manure, and back into feed; that this type of thing should be promoted and this concept pushed forward.
Mrs. FENWICK. How could we do that, usefully? Would you include suggestions along those lines in your memo?
Mr. ALDRICH. I would be more than happy to.
Mrs. FENWICK. Because I do not think there is anything more useful we could do.
Mr. ALDRICH. I would be pleased to.
Mr. EISNER. Our problems stem from the IRS has not embraced Mr. Bergland's suggestion that the whole problem of environmental finance be viewed broadly.
Instead, they very narrowly say we are going to stand between the issuance of tax exempt bonds, or Federal subsidy, to business for cleaning up. And the issue
Mrs. FENWICK. We had this problem in New Jersey when this bill was put through, and I remembered, in working up the bill, the IRS was lenient, provided that none of this equipment would add in any way to production.
It was required that it should not contribute, in any sense, to an increase in production; that it was simply to be directed to air and water pollution control.
Now has that changed ?
Mr. EISNER [continuing]. The less equipment that can be financed and so the less dollar amount of these bonds.
Mrs. FENWICK. If they were going to use any of this recycled stuff. Mr. EISNER. Now there is a separate section for solid waste financing, with a very special definition of what is something which is "waste." But, we are now talking about the business financing of pollution equipment, and there, if you are getting a useful byproduct, then you have got to allocate.
In other words, if your byproduct is one-third of the cost, if the cost of that which gets you the byproduct is one-third of the total cost of the pollution equipment, why then you can only finance two-thirds.
Mrs. FENWICK. I see. That is interesting.
Mr. BERGLAND. Mr. Chairman, I would like to compliment these gentlemen. They are as knowledgeable a pair as I have ever seen in my life in Congress as witnesses before any committee. I am impressed by the depth of the research and knowledge in this whole area.
Mr. CONTE. You took the words out of my mouth. I already told that to the chairman.
Mr. SMITH. The whole committee is very appreciative of what you have done. Our staff will be in touch with you because this is the kind of problem that we must have to do something about, and we want to do it as soon as possible and we want to do it the right way.
We do not want, after we have done it, to find out we have left two or three problems unsolved. On behalf of the whole committee, I want to say we very much appreciate your coming and we will continue to lean on you for further information.
Mr. ALDRICH. Thank you very much.
PREPARED STATEMENT OF ROBERT HART ALDRICH, L. F. ROTHSCHILD & Co. I would like to introduce Mr. Neil A. Eisner also of L. F. Rothschild & Co., who will participate in our presentation today on H.R. 78. We plan to be brief this morning in order to allow time for questions.
The last time I appeared before your committee, as a participant in the Bank of America's testimony, a number of questions were asked by your committee as to the capital cost of pollution control equipment per employee or per unit of production for various industries and for various size segments within an industry. We are preparing a report on this subject for your staff, the highlights of which we would like to review today.
Referring to earlier testimony today, as an example of per-unit costs, the capital cost of a modern manure recycling facility is approximately $200 per cow, based upon using a centralized facility servicing in excess of 10,000 head. There is a potential for the farmer to get a positive financial yield on this investment by recycling the recovered waste. We have been involved in an imaginative and economic solution to this problem. H.R. 78, we believe, is a most useful financing
tool which would enable individual dairy and feedlot operators to take full advantage of centralized processing facilities.
Total all business.
Referring back to the industrial sector, the first chart presents a summary and modification of data contained in the Annual McGraw-Hill Survey of Pollution Control Expenditures released on May 16, 1975.
The first column of table I presents the total capital requirements for all business to meet environmental legislation is $34.09 billion. A substantial portion of this, $11.35 billion, are for one segment—the electric utilities.
The second column, average capital requirements per employee, is our estimate of the cost per employee for meeting existing air and water pollution laws. You can note that it varies significantly by type of industry. This column represents an average cost across the industry. Our studies, as we reported earlier, clearly indicates that the capital cost per employee for the small business sector is significantly higher than average, and much higher than large business.
The last column is an indicator of the impact of pollution control costs on capital expansion. This column shows the percent of the industry's total 1975 capital expenditures that were devoted strictly to nonproductive pollution control facilities. These are averages and the capital cost percentages for the small business sector would be significantly higher—to the point, in actuality, that they inhibit the profitable growth of small business and negatively impact their cash flow and profitability.
The cost of meeting pollution laws are more costly for some industries than others. For example, the paper industry, Mr. Conte is doubtless aware, has been spending a large share of their total new capital dollars on pollution control equipment. They have consistently spent in excess of 20 percent for the last 3 years.
In 1975, all business plans to spend $8.4 billion on pollution control equipment, up from $6.9 billion in 1974 and $5.7 billion in 1973. Despite the level of expenditures, the total future requirements for new pollution control facilities continues to rise as industry is faced with new legislative regulations—coupled with increased costs of process equipment.
There have been multiple studies on the cost to industry of meeting environmental regulations, but like the McGraw-Hill study, the studies generally have been limited to average or typical plants. Economic impact studies also have been restricted to studies on broad industry classifications or typical, but average corporations.
Very little data has been gathered on other variables affecting cost such as: 1. Size of the facility. 2. Age of the plant. 3. Past environmental practices. 4. Access to municipal treatment plants.
As has been indicated earlier, the typical small industrial facility has much higher per employee cost than its larger competitors.
Our studies have shown that small businesses in these particular industries are subject to excessive per unit costs :
1. Gray iron foundries. 2. Metal platers. 3. Leather tanners. 4. Nonferrous metals. 5. Mining. 6. Paper mills. 7. Specialty chemicals. 8. Asphalt and cement producers. 9. Plastics, rubber. 10. Agricultural processing.
In table II we have listed some typical per-employee costs for sinall businesses:
Pollution control capital costs Industry
per employee for small business Paper
$8,000 Nonferrous metal.
14, 000 Leather
J, 000 Metal platers-
4, 000 Cement
14, 000 Speciality chemicals.
10, 000 Agricultural processing---
6, 000 In many instances, the small businessman must invest up to 40 to 50 percent of the total net worth of his company in nonprofitable pollution control equipment.
If the small businessman is forced to finance these facilities, using his normal financing mechanism with short term, relative high interest rate loans the carrying costs for this equipment becomes an excessive drain on his cash flow and potential profitability. At best, it restricts his ability to compete within his own market and to maintain his competitive positions.
At worst, the small businessman is forced out of business due to lack of profitability or inability to compete. I'nfortunately, in today's economic climate, a large number of small businesses are being forced out of business creating a significant shift in our economic balance between large and small businesses.
Mr. Eisner ill discuss how H.R. 78 can be utilized to assist the small business sector.
[Mr. Eisner's prepared statement follows:]
PREPARED STATEMENT OF NEIL A. EISNER, L. F. ROTHSCHILD & Co.
Small business, as well as large business, pollutes the environment, yet the (apital available for the procurement and installation of pollution control facilities by small business is virtually nonexistent. This is particularly serious since, as we have seen, the cost of cleaning up and meeting pollution standards is much higher per unit output of product for the small business. Such facilities are required for the operation of all business by increasingly stringent Federal and State laws. Unfortunately, these facilities do not, in and of themselves. result in increased production capacity or greater efficiency, particularly for small businesses. Therefore, if a small business seeks to acquire such facilities through debt financing, it must make repayments from the same revenue base available to it prior to the acquisition; as often as not such existing funds are barely adequate to support the company. In such situations lenders are generally reluctant to loan money, except at prohibitive rates, because of the poor credit posture of the small business.
The most advantageous pollution control financing possible is the issuance of tax-exempt industrial revenue bonds by a public body, the proceeds of which