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3.4.1 Tax Penalties and Tax Subsidies
It is in the area of elimination of tax penalties
for industries mining virgin metals that the measures
probably most effective in reducing substantial mar
ket distortions now exist. The effective tax rate
of mining industries is now about half that of in
dustries reclaiming raw materials. This subsidy,
operates to prevent the development of a thriving
secondary materials industry,
Elimination of percentage depletion allowance
The economic relationships based on the historical
this subsidy most probably would tend to permit a more
freely functioning natural resources market. The expected set of disruptions arising from a gradual, but short-term elimination of the subsidy would have the following effects:
. disruptions in the price and demand for virgin
raw materials and for reclaimed raw materials.
Demand for the latter will greatly increase;
demand for the former will stabilize.
shifts in labor from mining to processing or
manufacturing industries. This variable involves
a potentially trying amount of disruption in the daily pattern of people's lives.
. diversion of capital into reclaimed materials,
transportation and reprocessing facilities. This diversion should have a stimulating effect on the development of efficient separation, collection
and reprocessing systems.
disruption of the flow of capital into extractive
potential disruption in foreign trade balances.
Direct elimination of this subsidy is preferred to the
creation of new benefits for reclaimed materials par
allel to those now existing for virgin raw materials.
A layer of compensatory subsidy to the secondary
materials industry would compound the distortion of
market forces, complicate transactions and add to the
individual tax burden, Total elimination of the
subsidy would operate to maintain a position of
sale of domestic iron ore.
The same policy considerations as above apply to the elimination of capital gains treatment on the dispo
sition of domestic iron ore.
The effect of this pro
vision (Section 631(c) of the Internal Revenue Code)
is to consciously induce vertical organization in
certain mining and processing industries, and to provide a clear incentive to mine and use virgin raw
materials rather than reclaimed materials. The lower
effective tax rate on the mining and disposition of domestic iron ore results in higher after-tax profits
for a vertically organized industry, or in a lower
purchase price to an unrelated purchaser. Management
is thus forced to elect the use of virgin iron ore,
is that of a compensatory recycling tax deduction. Under the proposal, the manufacturer using recycled
raw materials would be entitled to a recycling tax
deduction (or corresponding tax credit) computed as
a percentage of the cost of the reclaimed raw material.
The percentage would vary as a function of the level
necessary to overcome the competitive advantage afforded corresponding virgin raw materials by exist
ing depletion allowances. The purchaser is thus presumably left in the identical financial situation as
he would be in,given a purchase of virgin raw materials.
This approach has been endorsed by the 1972 Report to
the President by the Citizen's Advisory Committee on Environmental Quality and various members of Congress
who have in the past introduced similar legislation in this (Griffiths, Pettis, Rostenkowski and Schneebeli).
For reasons stated above, this measure is considerably
less effective than a total elimination of Federal sub
sidy in the extraction of virgin materials. It would
grant an unwarranted subsidy to the raw materials in
dustry as a whole, virgin and reclaimed, and would ulti
mately act to complicate transactions, to distort the efficient and free distribution of resources, and to
increase the relative cost of raw materials,
This measure would permit a taxpayer an election to amortize a certified raw materials recycling facility
over a relatively short five year period, thus creating
an incentive to invest in such facilities and to improve
the underlying recycling technology. It has precedent
in a similar 5 year amortization provided by the 1969
Tax Reform Act for pollution control facilities (Sec
tion 169 of the Internal Revenue Code). It appears
to be a sound measure with limited impact, and one
which would be most effective if enacted in tandem
with an elimination of depletion allowances.
3.4.2 Transportation Penalties and Subsidies
As previously indicated, there exist wide disparities
in both the rail and ocean freight rates for reclaimed
and virgin materials. In combination with the tax sub
sidies discussed previously, these differential freight rates operate to prevent the development of an efficient
secondary raw materials market.
The provisions of an existing proposal, S.1122 sponsored by Cook, appear to be a reasonable resolution of freight
rate differentials. The measure directs both the Inter
state Commerce Commission and the Federal Maritime