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3.4.1 Tax Penalties and Tax Subsidies

It is in the area of elimination of tax penalties
against reclaimed raw materials and tax subsidies

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,
in tandem with the freight differentials listed above,

operates to prevent the development of a thriving

secondary materials industry,


Elimination of percentage depletion allowance
for minerals

The economic relationships based on the historical
tax subsidy awarded extractors of minerals are extra-
ordinarily complex and the perennial debate on their
proposed elimination or retention is quite fierce.
However, the graduated but effective elimination of

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
equitable competition between the raw materials
market and other sectors of the economy.
b. Elimination of capital gains treatment on the

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,

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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,

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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

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