Clean Water Infrastructure
Design Issues and Funding Options for a Clean Water Trust Fund Gao ID: GAO-09-893T July 15, 2009Many of the wastewater systems that Americans rely on to protect public health and the environment are reaching the end of their useful lives. The Environmental Protection Agency (EPA) has estimated that a potential gap between future needs and current spending for wastewater infrastructure of $150 billion to $400 billion could occur over the next decade. Various approaches have been proposed to bridge this potential gap. One is to establish a clean water trust fund. This testimony summarizes findings of a May 2009 report (GAO-09-657), where GAO was asked to examine (1) stakeholders' views on the issues that would need to be addressed in designing and establishing a clean water trust fund and (2) potential options that could generate about $10 billion annually in revenue to support a clean water trust fund. GAO administered a questionnaire to 28 national organizations representing stakeholders from the wastewater and drinking water industries, state and local governments, engineers, and environmental groups and received 22 responses; reviewed proposals and industry papers; and used the most current data to estimate revenue on a range of products and activities. While the May report identified a number of funding options for policymakers to consider, GAO did not endorse any option and does not have a position on whether or not a trust fund should be established. GAO did not make any recommendations in its report.
Stakeholders identified three main issues that would need to be addressedin designing and establishing a clean water trust fund: how a trust fund should be administered and used; what type of financial assistance should be provided; and what activities should be eligible to receive funding from a trust fund. While a majority of stakeholders said that a trust fund should be administered through an EPA partnership with the states, they differed in their views on how a trust fund should be used. About one-third of stakeholders responded that a trust fund should be used only to fund the existing Clean Water State Revolving Fund (CWSRF), which is currently funded primarily through federal appropriations, while a few said it should support only a new and separate wastewater program. A few stakeholders supported using a trust fund to support both the CWSRF and a separate program, while others did not support the establishment of a trust fund. In addition, more than one-half of the stakeholders responded that financial assistance should be distributed using a combination of loans and grants to address the needs of different localities. Finally, although a variety of activities could be funded, most stakeholders identified capital projects as the primary activity that should receive funding from a clean water trust fund. GAO identified a number of options that could generate revenue for a clean water trust fund, but several obstacles will have to be overcome in implementing these options, and it may be difficult to generate $10 billion from any one option alone. Funding options include a variety of excise taxes. In addition, Congress could levy a tax on corporate income. An additional 0.1 percent corporate income tax could raise about $1.4 billion annually. Congress also could levy a water use tax. A tax of 0.01 cent per gallon could raise about $1.3 billion annually. Regardless of the options selected, certain implementation obstacles will have to be overcome. These obstacles include defining the products or activities to be taxed, establishing a collection and enforcement framework, and obtaining stakeholder support for a particular option or mix of options. Obtaining stakeholder support may be particularly challenging where the link between a funding option and the wastewater stream is not apparent.
GAO-09-893T, Clean Water Infrastructure: Design Issues and Funding Options for a Clean Water Trust Fund
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Testimony:
Before the Subcommittee on Water Resources and Environment, Committee
on Transportation and Infrastructure, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:00 p.m. EDT:
Wednesday, July 15, 2009:
Clean Water Infrastructure:
Design Issues and Funding Options for a Clean Water Trust Fund:
Statement of Anu K. Mittal, Director: Natural Resources and
Environment:
GAO-09-893T:
GAO Highlights:
Highlights of GAO-09-893T, a testimony before the Subcommittee on Water
Resources and Environment, Committee on Transportation and
Infrastructure, House of Representatives.
Why GAO Did This Study:
Many of the wastewater systems that Americans rely on to protect public
health and the environment are reaching the end of their useful lives.
The Environmental Protection Agency (EPA) has estimated that a
potential gap between future needs and current spending for wastewater
infrastructure of $150 billion to $400 billion could occur over the
next decade. Various approaches have been proposed to bridge this
potential gap. One is to establish a clean water trust fund.
This testimony summarizes findings of a May 2009 report (GAO-09-657),
where GAO was asked to examine (1) stakeholders‘ views on the issues
that would need to be addressed in designing and establishing a clean
water trust fund and (2) potential options that could generate about
$10 billion annually in revenue to support a clean water trust fund.
GAO administered a questionnaire to 28 national organizations
representing stakeholders from the wastewater and drinking water
industries, state and local governments, engineers, and environmental
groups and received 22 responses; reviewed proposals and industry
papers; and used the most current data to estimate revenue on a range
of products and activities.
While the May report identified a number of funding options for
policymakers to consider, GAO did not endorse any option and does not
have a position on whether or not a trust fund should be established.
GAO did not make any recommendations in its report.
What GAO Found:
Stakeholders identified three main issues that would need to be
addressed in designing and establishing a clean water trust fund: how a
trust fund should be administered and used; what type of financial
assistance should be provided; and what activities should be eligible
to receive funding from a trust fund. While a majority of stakeholders
said that a trust fund should be administered through an EPA
partnership with the states, they differed in their views on how a
trust fund should be used. About one-third of stakeholders responded
that a trust fund should be used only to fund the existing Clean Water
State Revolving Fund (CWSRF), which is currently funded primarily
through federal appropriations, while a few said it should support only
a new and separate wastewater program. A few stakeholders supported
using a trust fund to support both the CWSRF and a separate program,
while others did not support the establishment of a trust fund. In
addition, more than one-half of the stakeholders responded that
financial assistance should be distributed using a combination of loans
and grants to address the needs of different localities. Finally,
although a variety of activities could be funded, most stakeholders
identified capital projects as the primary activity that should receive
funding from a clean water trust fund.
GAO identified a number of options that could generate revenue for a
clean water trust fund, but several obstacles will have to be overcome
in implementing these options, and it may be difficult to generate $10
billion from any one option alone. Funding options include a variety of
excise taxes as shown in the table below.
Table: Estimated Revenue from Excise Taxes on Products That May
Contribute to the Wastewater Stream (2009 dollars in millions):
Product group: Beverages;
Tax base: $95,551;
1% tax: $956;
5% tax: $4,778;
10% tax: $9,555;
Tax rate to generate $10 billion: 10.5%.
Product group: Fertilizers and pesticides;
Tax base: $26,088;
1% tax: $261;
5% tax: $1,304;
10% tax: $2,609;
Tax rate to generate $10 billion: 38.3%.
Product group: Flushable products, including soaps, detergents, cooking
oils, and toiletries;
Tax base: $63,241;
1% tax: $632;
5% tax: $3,162;
10% tax: $6,324;
Tax rate to generate $10 billion: 15.8%.
Product group: Pharmaceuticals;
Tax base: $156,069;
1% tax: $1,561;
5% tax: $7,803;
10% tax: $15,607;
Tax rate to generate $10 billion: 6.4%.
Product group: Water appliances and plumbing fixtures;
Tax base: $25,517;
1% tax: $255;
5% tax: $1,276;
10% tax: $2,552;
Tax rate to generate $10 billion: 39.2%.
Source: GAO analysis of Census data from the 2006 Annual Survey of
Manufactures and Foreign Trade Division.
[End of table]
In addition, Congress could levy a tax on corporate income. An
additional 0.1 percent corporate income tax could raise about $1.4
billion annually. Congress also could levy a water use tax. A tax of
0.01 cent per gallon could raise about $1.3 billion annually.
Regardless of the options selected, certain implementation obstacles
will have to be overcome. These obstacles include defining the products
or activities to be taxed, establishing a collection and enforcement
framework, and obtaining stakeholder support for a particular option or
mix of options. Obtaining stakeholder support may be particularly
challenging where the link between a funding option and the wastewater
stream is not apparent.
View [hyperlink, http://www.gao.gov/products/GAO-09-893T] or key
components. For more information, contact Anu Mittal at (202) 512-3841
or mittala@gao.gov.
[End of section]
Madam Chairwoman and Members of the Subcommittee:
We are pleased to be here today to discuss our recently issued report
on a clean water trust fund.[Footnote 1] More than 220 million people
in the United States are served by wastewater systems. These systems
are composed of a network of pipes, pumps, and treatment facilities
that collect and treat wastewater from homes, businesses, and
industries before it is discharged to surface waters. However, many of
these systems were constructed more than 50 years ago and are reaching
the end of their useful lives. Although federal, state, and local
governments invest billions of dollars annually in wastewater
infrastructure--about $40 billion in fiscal year 2006--the
Environmental Protection Agency (EPA) and others have estimated that
current spending levels may not be adequate to cover the costs of
maintaining and replacing pipes, treatment plants, and other parts of
this infrastructure. According to EPA's estimates, a potential gap of
about $150 billion to $400 billion between projected future
infrastructure needs and current levels of spending could occur over
the next decade.[Footnote 2] Without additional investment in the
nation's wastewater infrastructure, EPA and other groups have asserted
that the environmental and public health gains made under the Clean
Water Act[Footnote 3] during the last three decades could be at risk.
A variety of approaches have been proposed to help bridge a potential
gap between projected future infrastructure needs and current levels of
spending. For example, one approach would be to increase federal
funding for the Clean Water State Revolving Fund (CWSRF) program, which
is the largest source of federal assistance for wastewater
infrastructure.[Footnote 4] Under the CWSRF program, EPA provides
capitalization grants to the states, which in turn use these funds to
make loans to local communities or utilities for various water quality
projects. Still another approach that has been considered is to
establish a clean water trust fund. In general, federal trust funds
collect revenue and distribute funds that have been set aside for
specific purposes. A clean water trust fund would provide a dedicated
source of funding for wastewater infrastructure that would be similar
to some of the trust funds that Congress has established for other
infrastructure and environmental programs, such as highway
infrastructure construction and coastal wetlands restoration. Some of
the revenue for federal trust funds is generated through federal excise
taxes.[Footnote 5]
My testimony today summarizes the issues that we were requested to
examine for our May 2009 report: (1) stakeholders' views on the issues
that would need to be addressed in designing and establishing a clean
water trust fund and (2) potential options that Congress could consider
that could generate revenues of about $10 billion annually to support a
clean water trust fund. In conducting this work, we administered a
questionnaire to 28 national organizations representing the wastewater
and drinking water industries, state and local governments, engineers,
and environmental groups and received 22 responses; reviewed proposals
and industry papers; and interviewed federal, state, local, and
industry officials. To estimate the revenue that could be raised by
potential options, we used the most current data available to estimate
the value of products or activities that could be subject to a federal
tax and applied a range of tax rates--based on current or past taxation
policies--to these values. The estimates presented in our May report
are not official revenue estimates as would be prepared by the Joint
Committee on Taxation. Moreover, we do not endorse any option and do
not have a position on whether or not a clean water trust fund should
be established.
We conducted our work from June 2008 to May 2009 in accordance with all
sections of GAO's quality assurance framework that are relevant to our
objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions.
Stakeholders Identified Three Key Issues That Would Need to Be
Addressed in Designing and Establishing a Clean Water Trust Fund:
According to stakeholders we contacted, three main issues would need to
be addressed in designing and establishing a clean water trust fund:
how a trust fund should be administered and used, what type of
financial assistance should be provided, and what activities should be
eligible to receive funding from a trust fund.
Administration and use of a trust fund: Stakeholders told us that
designing a clean water trust fund would involve deciding what agency
or entity would administer the fund and whether the trust fund would be
used to fund the CWSRF program or a separate program. A majority of
stakeholders (15 of 20) responding to our questionnaire expressed the
view that a trust fund should be administered through an EPA-state
partnership like the current CWSRF program.[Footnote 6] However, the
stakeholders differed in their views on how a trust fund should be
used. About one-third of stakeholders (7 of 20) responded that a trust
fund should be used only to fund the existing CWSRF, which is currently
funded primarily through federal appropriations, while 3 stakeholders
said it should support only a new and separate wastewater program. In
addition, 5 of 20 stakeholders supported using a trust fund to support
both the CWSRF program and a separate program. These stakeholders said
that the CWSRF needed a dedicated source of funding but that the
flexibility of a new program could help to address some of the CWSRF's
limitations. Finally, 3 of 20 stakeholders were opposed to the creation
of a clean water trust fund.[Footnote 7]
Type of financial assistance: Another design issue that stakeholders
identified was specifying the type of assistance--grants or loans--that
a clean water trust fund would provide. Over one-half of the
stakeholders responding to our questionnaire (13 of 21) favored
distributing funding to wastewater infrastructure projects using a
combination of loans and grants. The remaining stakeholders favored
using either loans or grants or another form of distribution.
Eligible activities: Finally, stakeholders said that designing and
implementing a clean water trust fund would involve determining the
type of wastewater infrastructure activities that the fund would
support. Most stakeholders who responded to our questionnaire supported
using a trust fund for planning and designing wastewater projects (18
of 21) and for capital costs (19 of 21).
Various Options for Funding a Clean Water Trust Fund Could Generate a
Range of Revenues, but Each Option Poses Certain Obstacles:
Various funding options--including excise taxes on products that may
contribute to the wastewater stream, an additional tax on corporate
income, a water use tax, and an industrial discharge tax--could
generate a range of revenues for a clean water trust fund. However, it
may be difficult to raise $10 billion annually for a clean water trust
fund from any one of these options because of the small size of the tax
bases of many of these options. In addition, each funding option poses
various implementation challenges, including defining the products or
activities to be taxed, establishing a collection and enforcement
framework, and obtaining stakeholder support.
A Variety of Options Are Available That Could Generate a Range of
Revenue to Support a Trust Fund:
Excise taxes on products that may contribute to the wastewater stream
could be used to generate revenue for a clean water trust fund. These
products include beverages, fertilizers and pesticides, flushable
products, pharmaceuticals, and water appliances and plumbing fixtures.
While past proposals for funding a clean water trust fund have
identified these products as contributing to the wastewater stream,
limited research has been done on their specific impact on wastewater
infrastructure, according to EPA.[Footnote 8] Raising $10 billion from
a tax on any individual product group would require tax rates ranging
from a low of 6.4 percent for pharmaceuticals to a high of 39.2 percent
for water appliances and plumbing fixtures.[Footnote 9] Alternatively,
a lower tax rate could be levied on a number of these product groups
that would collectively generate about $10 billion. Table 1 shows the
tax bases for the product groups, along with the revenue that could be
generated from a range of tax rates.
Table 1: Estimated Revenue from Excise Taxes on Products That May
Contribute to the Wastewater Stream (2009 dollars in millions):
Product group: Beverages;
Tax base[A]: $95,551;
1% tax: $956;
5% tax: $4,778;
10% tax: $9,555;
Tax rate to generate $10 billion: 10.5%.
Product group: Fertilizers and pesticides;
Tax base[A]: $26,088;
1% tax: $261;
5% tax: $1,304;
10% tax: $2,609;
Tax rate to generate $10 billion: 38.3%.
Product group: Flushable products, including soaps, detergents, cooking
oils, and toiletries;
Tax base[A]: $63,241;
1% tax: $632;
5% tax: $3,162;
10% tax: $6,324;
Tax rate to generate $10 billion: 15.8%.
Product group: Pharmaceuticals;
Tax base[A]: $156,069;
1% tax: $1,561;
5% tax: $7,803;
10% tax: $15,607;
Tax rate to generate $10 billion: 6.4%.
Product group: Water appliances and plumbing fixtures;
Tax base[A]:
$25,517;
1% tax: $255;
5% tax: $1,276;
10% tax: $2,552;
Tax rate to generate $10 billion: 39.2%.
Source: GAO analysis of Census data from the 2006 Annual Survey of
Manufactures and Foreign Trade Division.
[A] The tax base includes the value of products manufactured
domestically as well as those imported, but excludes exports.
[End of table]
Alternatively, a per unit excise tax could be levied on these products.
For example, according to the Container Recycling Institute, about 215
billion bottled and canned beverages were sold in 2006.[Footnote 10]
Levying a 1-cent tax on these bottles and cans could yield about $2.2
billion, and raising $10 billion would require a tax of about 5 cents.
Other options that could generate revenue for a clean water trust fund
include the following:
Tax on Corporate Income: Another option that could be used to fund a
clean water trust fund is to levy an additional tax on the incomes of
corporations. This tax would be similar to the Corporate Environmental
Income Tax that was used to fund the Superfund program until 1995. An
additional 0.1 percent corporate income tax on the $1.4 trillion in
corporate taxable income could raise about $1.4 billion annually.
Higher tax rates would be needed to generate a larger amount of
revenue. For example, a 0.5 percent tax could raise $6.9 billion and to
raise $10 billion from this option, an additional tax of about 0.7
percent would need to be levied.
Water Use Tax: Another option to fund a clean water trust fund is a tax
on water use. A tax of 0.01 cent per gallon on the 13.4 trillion
gallons of water delivered to domestic, commercial, and industrial
users from public supplies in 2000 could raise about $1.3 billion
annually, while a tax of about 0.1 cent per gallon could raise about
$13 billion annually. Alternatively, a flat charge could be added to
household wastewater bills, similar to Maryland, which charges
households $30 annually to help fund wastewater infrastructure in the
state. At a national level, imposing a flat charge of $30 annually on
the approximately 86 million households that receive wastewater service
could raise about $2.6 billion annually. Raising $10 billion from a
flat charge on households would require a charge of about $116 per
year, per household.[Footnote 11]
Industrial Discharge Tax: A final option we identified that could raise
revenue is an industrial discharge tax. However, it is unclear what
level of taxation could be levied to generate $10 billion from an
industrial discharge tax because of data limitations.
Each Funding Option Poses Certain Implementation Challenges:
Regardless of the options selected to provide revenue for a clean water
trust fund, certain implementation obstacles will have to be overcome.
These challenges include defining the products or activities to be
taxed, establishing a collection and enforcement framework, and
obtaining stakeholder support for a particular option or mix of
options. For example, implementing excise taxes on products that may
contribute to the wastewater stream would require the Internal Revenue
Service (IRS) to develop clear and precise definitions of the products
to be taxed, as authorized by Congress. In addition, any exemptions to
the excise tax would also need to be defined. According to IRS
officials, the administrative costs associated with designing and
implementing any new excise taxes could be substantial, and this
process could take more than 1 year to complete. In addition, once
taxable product(s) have been defined, the IRS would also need to modify
its excise tax collection and enforcement framework. Similar challenges
would be faced in implementing a corporate income tax, a water use tax,
or an industrial discharge tax.
Furthermore, obtaining stakeholder and industry support for these
funding options could pose additional challenges. While a majority of
stakeholders supported three of the eight funding options--excise taxes
on beverages, fertilizers and pesticides, and flushable products--some
stakeholders have not yet taken a position on these options, making it
difficult to gauge their level of support for these options. In
addition, because many stakeholders do not perceive a strong connection
between the products and activities that we identified as potential
funding options and wastewater infrastructure use, it may be difficult
to obtain widespread stakeholder support. Table 2 shows stakeholders'
views on the extent of the connection between wastewater infrastructure
use and the product groups or activities.
Table 2: Stakeholder Views on the Extent of the Connection between
Wastewater Infrastructure Use and Product Groups or Activities:
Product group or activity: Beverages;
Stakeholder responses:
Great extent or very great extent: 8;
Moderate extent: 4;
Little or no extent: 3;
Don't know/no opinion: 2;
Included multiple responses: 1;
Total: 18.
Product group or activity: Fertilizers and pesticides;
Stakeholder responses:
Great extent or very great extent: 12;
Moderate extent: 2;
Little or no extent: 1;
Don't know/no opinion: 2;
Included multiple responses: 1;
Total: 18.
Product group or activity: Flushable products;
Stakeholder responses:
Great extent or very great extent: 12;
Moderate extent: 3;
Little or no extent: 0;
Don't know/no opinion: 2;
Included multiple responses: 1;
Total: 18.
Product group or activity: Pharmaceuticals;
Stakeholder responses:
Great extent or very great extent: 6;
Moderate extent: 7;
Little or no extent: 2;
Don't know/no opinion: 3;
Included multiple responses: 0;
Total: 18.
Product group or activity: Water appliances and plumbing fixtures;
Stakeholder responses:
Great extent or very great extent: 5;
Moderate extent: 7;
Little or no extent: 3;
Don't know/no opinion: 2;
Included multiple responses: 1;
Total: 18.
Product group or activity: Additional tax on corporate income;
Stakeholder responses:
Great extent or very great extent: 4;
Moderate extent: 0;
Little or no extent: 11;
Don't know/no opinion: 3;
Included multiple responses: 0;
Total: 18.
Product group or activity: Water use tax;
Stakeholder responses:
Great extent or very great extent: 5;
Moderate extent: 6;
Little or no extent: 1;
Don't know/no opinion: 2;
Included multiple responses: 1;
Total: 15.
Product group or activity: Industrial discharge tax;
Stakeholder responses:
Great extent or very great extent: 11;
Moderate extent: 2;
Little or no extent: 3;
Don't know/no opinion: 2;
Included multiple responses: 0;
Total: 18.
Source: GAO analysis of stakeholder responses.
Note: Not all stakeholders responded to each question, so the total
number of responses varied. In addition, one stakeholder provided
multiple responses.
[End of table]
In addition, industry groups were consistently opposed to a tax on
their specific product groups to support a clean water trust fund. In
their view, their products did not contribute significantly to the
deterioration of wastewater infrastructure and, therefore, should not
be taxed.
In conclusion, Madam Chairwoman, while the funding gap for clean water
infrastructure is significant, there is no easy solution to address
this gap. Of the many options that we have identified, each poses its
own set of implementation challenges, and, ultimately, overcoming the
resistance of industry, taxpayers, and others to these funding options
may be difficult.
This concludes my prepared statement. I would be happy to respond to
any questions that you or members of the Subcommittee may have at this
time.
GAO Contact and Staff Acknowledgments:
For further information about this statement, please contact me at
(202) 512-3841 or mittala@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this statement. Sherry McDonald, Assistant Director; Janice
Ceperich; and Scott Heacock also made key contributions to this
statement.
[End of section]
Footnotes:
[1] GAO, Clean Water Infrastructure: A Variety of Issues Need to Be
Considered When Designing a Clean Water Trust Fund, [hyperlink,
http://www.gao.gov/products/GAO-09-657] (Washington, D.C.: May 29,
2009).
[2] EPA, The Clean Water and Drinking Water Infrastructure Gap Analysis
(Washington, D.C.: September 2002). In the report, EPA noted that this
gap is not inevitable and could be addressed, in part, if wastewater
utilities raised the rates they charge consumers. EPA estimates a
potential gap for drinking water infrastructure as well.
[3] The Federal Water Pollution Control Act Amendments of 1972, Pub. L.
No. 92-500, § 2, 86 Stat. 816 (commonly referred to as the Clean Water
Act).
[4] About $689 million was appropriated in both fiscal years 2008 and
2009 for the CWSRF program, and an additional $4 billion was
appropriated by the American Recovery and Reinvestment Act of 2009,
Pub. L. No. 111-5, div. A, title VII, 123 Stat. 115, 169.
[5] An excise tax is a tax levied on the manufacture, sale, or
consumption of various commodities.
[6] Twenty-two stakeholders responded to our questionnaire; however,
because not all stakeholders responded to each question, the total
number of responses varied for each question.
[7] Two stakeholders responded to the questionnaire but did not provide
a specific position regarding how a trust fund should be used.
[8] A 1996 study by EPA provided information on using some of these
products to provide funding for wastewater infrastructure. The study
noted the following: "Currently, little empirical data exist by which
to document the volume and toxicity of most potential fee targets. This
limitation, which research might address over time, results in a
significant selection bias when products are selected for their link to
water pollution." EPA, Alternative Funding Study: Water Quality Fees
and Debt Financing Issues (June 1996).
[9] If any of the products in these product groups were excluded or
exempted from an excise tax, the tax base would decline and higher tax
rates would be needed to raise similar amounts of money. For example,
if the excise tax on beverages did not include alcoholic beverages, the
tax base for this product group would decline by over 50 percent to
about $44 billion, and the tax rate required to raise $10 billion would
increase to about 25 percent.
[10] Container Recycling Institute, Wasting and Recycling Trends:
Conclusions from CRI's 2008 Beverage Market Data Analysis (Glastonbury,
Conn.: December 2008).
[11] A flat charge could also be applied to industrial and commercial
users, but data are not available on the number of these system users.
[End of section]
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