prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.

Report 1: T he term digital economy has fluid meaning in different policy contexts  Broadly speaking, this term can refer to any number of everyday economic activities that are connected over computers, mobile phones, or other internet-connected devices  In the realm of international tax policy, though, certain types of activities and markets have been singled out for selective taxation by some jurisdictions—primarily in Europe  Most of these digital economy business models operate in "two-sided markets" in which they provide services to individual users (sometimes at zero charge) and sell other services to businesses (e g , advertising to users)  Proponents of these "digital services taxes" (DSTs) justify them on a number of grounds, including the goal of having multinational corporations (MNCs) pay their "fair share" of taxes, taxing profits purportedly derived from consumers in their jurisdictions, or adapting traditional rules and systems of international taxation to account for new forms of "disruptive" business models that can be conducted virtually over the internet  U S  opposition to these unilateral taxes has been voiced by several government officials  Robert Stack, while Treasury Deputy Assistant Secretary for International Tax Affairs under President Obama, said that such efforts are primarily political efforts to target U S  corporations  More recently, Treasury Secretary Steven Mnuchin has issued multiple statements in opposition to unilateral taxation of digital economy businesses  Some Members of the tax-writing committees in Congress have also criticized these efforts  This report analyzes DST proposals from an economic and policy perspective as they have been introduced, discussed, and adapted in European countries  Some commentators and policymakers argue that MNCs in the digital economy are "undertaxed" or are not paying a "fair share" of taxes in their jurisdictions  Two issues that often underlie these sentiments are (1) the ability of digital economy MNCs to provide services without establishing a physical presence (or "permanent establishment") in the country in which their customers reside and (2) the ability of digital economy MNCs to shift their profits away from countries where they conduct real economy activity (e g , sales, development, production) toward low-tax jurisdictions where the MNCs are conducting little to no real economic activity  Even if a country is able to establish the right to tax an MNC's profits in the digital economy (via permanent establishment rules), the profits subject to tax in that jurisdiction could be reduced via transfer pricing rules  A commonly held principle across international tax law is that there must be a substantial enough connection between a country and a corporation's activities to establish "nexus" in that country, enabling the country the first right to tax the corporation's income or profits earned from sales in that country  Specific criteria for what constitutes a permanent establishment are written into bilateral tax treaties, but they often require a fixed, physical presence within the country  Once a right to tax has been created, a country can tax a portion of the MNC's cross-border profits that can be sourced to its jurisdiction  MNCs can earn income from local residents without creating a permanent establishment in that jurisdiction  Rules creating a permanent establishment based on physical nexus might not be triggered by digital activities over the internet because "the internet" is not physically located in any one country  The internet is a global network of computers  For example, Google can sell advertising space on its search results to a French business without creating a permanent establishment in France  The physical servers processing the payment and posting the advertisements do not have to be located in France  In response, different countries and intergovernmental organizations have tried or proposed modifying definitions and interpretations of permanent establishment rules to include "digital presence" criteria  These criteria include users, "clicks," or other digital activities with origins in the local jurisdiction  The " Select International Efforts to Tax the Digital Economy " section of this report discusses these proposals in more detail  Transfer pricing rules dictate how profits from transactions between related entities within the MNC should be divided among multiple countries for tax purposes  From the U S  perspective, transfer pricing rules are intended to prevent taxpayers from shifting income properly attributable to the United States to a related foreign company (and vice versa) through pricing that does not reflect an arm's-length result  In practice, though, the arm's-length standard can be difficult to administer on intra-company transactions within an MNC in which there is no market where independent parties bargain over price  Sophisticated transfer pricing strategies can result in an MNC's global profits being subject to a low effective tax rate across multiple tax jurisdictions  MNCs in the digital economy, in particular, can use transfer pricing strategies to reduce the effective tax rate imposed on their cross-border income, because their primary sources of income are often derived from intangible assets (e g , patents, algorithms, trademarks, and marketing licenses)  These assets are more challenging for "arm's-length" pricing because it is difficult to determine the value of a comparable sale of such unique technologies and services  Additionally, intangible assets can be sold to a corporate entity in a low-tax jurisdiction at relatively low cost as they do not require the relocation of corporate headquarters or physical factories, workforces, etc  The exact tax planning methods used by MNCs can vary, but generally they involve the parent (e g , located in the United States) selling the income-earning ownership rights to those intangible assets to a subsidiary corporation in a low-tax jurisdiction  Early on, a firm developing a potentially profitable intangible asset in a higher-tax jurisdiction might create a subsidiary in a low-tax jurisdiction and sell or assign the ownership rights to that subsidiary  Creation of this "shell corporation" is primarily a paper transaction for the purposes of holding ownership of the profit-generating intangible asset  One way that this could happen is through a cost-sharing agreement in which a U S  corporate owner of an existing intangible asset agrees to make the rights available to a foreign affiliate in exchange for other resources and funds to be applied toward the joint development of a new marketable product or service  Under a cost-sharing agreement, a foreign affiliate makes an initial buy-in payment for existing technology that, in theory, should reflect an "arm's-length" price that would be paid by an unrelated party  It then receives the income accruing to that asset  Subsequently, the foreign affiliate shares in the cost of continuing technological development  The cost-sharing payments made by the foreign affiliate to the U S  corporation are income to the U S  parent, and the foreign affiliate gains the right to use the advance in technology in a specified foreign market  This results in two outcomes  First, the MNC can use transfer pricing rules to maximize costs attributable to subsidiaries in higher-tax jurisdictions  Thus, the taxable income earned by the subsidiaries in higher-tax jurisdictions is reduced to as close to zero as possible  And second, taxable income realized by the shell corporation in the lower-tax jurisdiction is increased  For example, a U S  corporation establishes a subsidiary in Jersey, an island in the English Channel with a standard corporate tax rate of 0%  The subsidiary buys an existing mobile phone technology developed by its parent U S  corporation  The subsidiary has bought the right to earnings from marketing that technology in phones throughout Europe  The original cost-sharing payment to the parent would be subject to U S  tax  The agreement allows the Jersey subsidiary to use updated versions of that technology in the European market from research conducted in the United States  Although the intangible assets were originally developed and improved in the United States, earnings from the mobile phone sales in Europe flow to the Jersey subsidiary and are taxed at 0%  Concerns over the ability for MNCs to avoid corporate income taxes have led to much discussion within national governments and among developed countries in international economic settings  As some of these discussions have met impasse, for various reasons, some countries have unilaterally proposed or implemented policies to tax digital economy MNCs on specific grounds  This section of the report provides a brief historical overview of these recent discussions and select unilateral DST proposals in Europe  While efforts to tax the digital economy have not been limited to European countries, efforts to develop policy principles and justifications in support of these specific taxes on digital economy markets have primarily been driven by politicians and commentators in Europe, including the United Kingdom  This report will not provide a comprehensive account of each DST proposal or be updated to track the rapid pace of policy modifications and emerging proposals  In 2013, members of the Organization for Economic Cooperation and Development (OECD) and G-20 initiated the Base Erosion and Profit Shifting (BEPS) Project  The result of this multiyear effort is the 2015 BEPS Action Plan, which represents the consensus of the member countries that participated in the BEPS Project  Article 1 of the BEPS Action Plan analyzes the implications that the digital economy could have for modern tax systems, including taxes on corporate profits (i e , corporate income taxes), withholding taxes (e g , on royalties), and value-added taxes (VATs)  Article 1 acknowledges that "it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes" given the importance of digital platforms and business models in modern economies  In light of this finding, though, Article 1 discusses potential new tax principles to enable countries to tax the profits earned by firms in the digital economy  Specifically, Article 1 discusses expanding on the widely accepted principle that profits should be taxed "where value is created" to include the notion that value-creating activities include user interaction  For example, YouTube profits when users post their videos and create content on its channels and generates more revenue in advertisement sales based on increased viewer traffic  Additionally, Article 1 considers using "significant economic presence" rather than physical presence as the standard nexus for sourcing which jurisdiction has the right to tax  "Significant economic presence" could be measured by a corporation's revenues earned from customers in a country  The various DST proposals in Europe share many of the features of digital taxation options discussed in the OECD BEPS report  Following the release of the 2015 BEPS Action Plan, the OECD has continued work in this area with its Task Force on the Digital Economy  On March 16, 2018, the task force released an interim report reflecting three different perspectives by its members  One perspective is that user-value creation has led to a "misalignment between the location in which profits are taxed and the location in which value is created" in some digital economy business models  This user-created value argument, discussed more throughout this report, has been used by many proponents of DSTs  A second perspective is that the challenges of tax policy presented by the digital economy are not exclusive to specific business models and should be addressed within the existing international tax framework for business profits  A third perspective is generally satisfied with recent BEPS recommendations and the existing international tax system and does not see a need for significant reform  Despite divisions reflected in the interim report, the task force aims to create an international consensus on principles for taxing the digital economy with a goal of releasing a final report on conclusions and recommendations by 2020  In March 2018, the European Commission announced a digital tax package containing two proposals  The first proposal would expand the definition of permanent establishment to include cases where a company had significant economic activity through a "digital presence," thereby allowing EU members to tax profits that are generated in their jurisdiction even if a firm does not have a physical presence  Under the proposal, a digital platform would be deemed to have established a "virtual permanent establishment" in an EU member state if it (1) exceeds a threshold of €7 million in annual revenues in a member state, (2) has more than 100,000 users in a member state in a taxable year, or (3) has over 3,000 business contracts for digital services business users in a taxable year  Until that more systemic change in permanent establishment rules is adopted, the second proposal would impose an "interim tax" on certain revenue from digital activities: selling online advertising, online marketplaces (facilitating the buying and selling of goods and services between users), and sales of data generated from user-provided information  The interim DST would apply only to companies with total annual worldwide revenues of at least €750 million and EU revenues of at least €50 million  The European Commission estimated that a 3% tax rate would raise €5 billion annually for member states  Media reports indicate that the EU-wide proposals have stalled partly due to disagreement among member states with different economic interests and questions as to whether the proposals would be legal under EU law  In support of its digital tax proposals, the European Commission argues that existing tax rules do not account for how value is "created by users" in the digital economy: Today's international corporate tax rules are not fit for the realities of the modern global economy and do not capture business models that can make profit from digital services in a country without being physically present  Current tax rules also fail to recognise the new ways in which profits are created in the digital world, in particular the role that users play in generating value for digital companies  As a result, there is a disconnect—or 'mismatch'—between where value is created and where taxes are paid  In discussing "value creation in the digital economy," the European Commission states: In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge  For example, a user contributes to value creation by sharing his/her preferences (e g , liking a page) on a social media forum  This data will later be used and monetised for targeted advertising  The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example  This means that the user contribution to the profits is not taken into account when the company is taxed  Despite the policy pronouncements of the European Commission, member states of the EU disagree on both the long-term (changes to the permanent establishment rules to include digital presence factors) and interim (an EU-wide DST) proposed policies regarding the digital economy  On December 4, 2018, the economics and finance ministers of various EU member states met as part of the EU's Economic and Financial Affairs (Ecofin) Council  As part of its agenda, the Ecofin Council was scheduled to consider a vote on the EU's DST proposal  According to media reports, a vote was not formally considered, as it was apparent that multiple members held out in opposition against the DST  As of the publication date of this report, the issues are still under consideration by the Ecofin Council  Even if opponents to the broad, EU-wide DST proposed by the European Commission successfully block adoption of such a tax, this does not mean that individual members states are also barred from imposing their own national-level DSTs  Policy and political pressure for DSTs still exist within many EU member states  According to one media report, approximately 11 of the 28 EU member states were considering or had adopted DSTs before the Ecofin meeting  In April 2018, Spain announced that it would introduce a DST of 3% to the gross income derived from certain digital services  According to a preliminary text of the proposal, beginning in 2019, the tax will be imposed on certain digital services, including online advertising, online marketplaces, and data transfer service (i e , revenue from the sales of online user activities) determined from internet protocol (IP) addresses within Spain  The tax would apply only to companies with global revenues for the previous calendar year exceeding €750 million and €3 million in revenues earned in that current year from activities with users in Spain  On October 29, 2018, the Conservative Party introduced a DST as part of its 2018 budget proposal  Specifically, the tax would be levied at 2% on the applicable revenues of "certain digital businesses which derive value from their UK users " Revenue subject to tax include search engines, social media platforms, and online marketplaces derived from the participation of UK users  Users is defined broadly and can include interactions (e g , payments made or clicks) from UK participants on either side of a two-sided digital market  The tax would apply only to businesses whose revenues from covered business activities exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually  There would also be a safe harbor provision that exempts "loss-makers and reduces the effective rate of tax on businesses with very low profit margins " A "review clause" would be included in the DST to ensure that it is still required following further international tax reform discussions  The specifics of the DST are to be detailed in legislation to be considered by Parliament that is expected to be introduced in April 2020  The UK Treasury estimates that the DST will raise £400m by 2022-2023 and £440m by 2023-2024  According to the UK Treasury, the DST serves as "interim action" to "ensure that digital businesses pay tax that reflects the value they derive from UK users" until international corporate tax reform efforts determine a comprehensive method to tax income earned from these types of multinational corporate business models  On December 17, 2018, Bruno Le Maire, Finance Minister of France, announced that the government was going to impose a DST beginning on January 1, 2019  Le Maire said that the tax is estimated to raise around €500 million annually  Details on what activities would be covered and the rate of tax were not provided but may be addressed in legislative sessions  Le Maire's announcement came the week after EU finance ministers did not reach agreement on an EU-wide DST at the December 2018 Ecofin meeting and shortly after President Emmanuel Macron announced billions of euros in tax cuts and spending in response to domestic social unrest  According to media coverage of the announcement, the decision to impose a DST seems to be motivated at least in part by a perceived unfairness in the amount of taxes paid by foreign corporations compared to domestic corporations  This section of the report first identifies the fundamentals of a corporate profits tax before addressing justifications that some have offered for DSTs  DSTs have been characterized as extensions of different types of tax regimes ranging from a tax on corporate profits in the digital economy to something more like a selective or excise tax on specific types of activities that is standalone from income tax regimes  Based policy analysis, though, DSTs resemble a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits  A tax on corporate profits taxes the return to investment in the corporate sector  Investment is giving up income for consumption today for the promises of higher returns, or earnings, in the future  Investment can be made in tangible assets, such as factories or equipment, or intangible assets, such as patents or trade secrets  The earnings eventually generated by the assets owned by corporations are taxed under the corporate profits tax  As discussed in the "Permanent Establishment" section of this report, domestic tax laws and international agreements provide the first right to tax income at its physical source—that is, where the asset is owned  The locations of a corporation's customers do not determine which country has a right to tax its income  For example, if a U S  firm manufactures goods in the United States and exports those goods to European countries, then those European countries do not have a right to tax the earnings of the U S  firm just because of its sale to European customers  Under some tax regimes, countries retain the right to impose a residual tax by taxing foreign-source income (i e , income earned from overseas) and allowing a foreign tax credit  But the right to impose that residual tax on income from foreign incorporated subsidiaries is based on a domestic corporation owning some minimum percentage of the foreign business entity (i e , a controlled foreign corporation, or CFC)  In the United States, income from foreign branches is taxed currently and eligible for a credit  For example, the United States could tax the income that a firm earned from overseas sales if that firm is owned in part or in full by a U S  parent in the year that the foreign-source income was earned (i e , "currently," or not subject to deferral)  However, most countries do not exercise this residual right to tax foreign-source income outside of income that can be easily shifted to low-tax countries  European Commission authorities appear to be characterizing their DST proposal as an extension of national-level corporate income taxes  In contrast, the UK has framed its DST as a gross receipts tax and specifically says that it is not an income tax  Regardless of these mixed characterizations, a policy analysis of DSTs indicate that they do not resemble a tax on corporate profits  First, as explained above, international tax rules do not provide countries a right to tax an MNC's cross-border income solely because their residents purchase goods or services provided by that firm  Rather, ownership of assets justifies a country to tax that MNC's profits  Second, DSTs, as they have been introduced thus far, are not structured as taxes on corporate profits  Corporate accounting profit is equal to total revenue minus total cost  Many corporate income tax systems tax corporate profits (along some policy spectrum of resident-based or worldwide-based rules)  In contrast, DSTs are structured as "turnover taxes" that apply to the revenue generated from taxable activities regardless of costs incurred to a firm  The first section of the Appendix provides an algebraic illustration to show that a DST may have different consequences for the after-tax accounting profits of a firm than an income tax levied at the same tax rate  Third, DSTs are economically equivalent to excise taxes on intermediate services in the supply chains of various markets  As explained in the "Economic Efficiency" section of this report, the economic incidence of a DST is likely to be borne by purchasers of taxable services (e g , companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions, depending on supply-and-demand conditions in each stage of the supply chain  It could be possible under specific market conditions (i e , in which firms subject to the statutory incidence of a DST earn supernormal economic profits or have monopoly power) that DSTs could reduce corporate profits of firms in the digital economy  Under this scenario, even though DSTs would not still be structured as a tax on profits (from a plain reading of the implementing law), they could have the economic effect of a tax on profits  For reasons discussed later in this report, though, it would be difficult to demonstrate that digital economy firms generate supernormal economic profits or are monopolies within the larger markets in which they operate  Proponents of DSTs argue that profits earned by MNCs in the digital economy are not adequately taxed on a worldwide basis, as many of these firms have reduced their effective tax rates through international tax planning strategies  As discussed earlier in the " Tax Issues Highlighted by the Digital Economy " section of this report, two prongs of these tax planning strategies include avoiding permanent establishments in higher-tax jurisdictions and using transfer pricing to shift profits to lower-tax jurisdictions  Other strategies that help MNCs, both inside the digital economy and outside, avoid income tax include debt and earnings stripping, avoiding withholding taxes, and contract manufacturing  Critics of basing DSTs on this position could make several arguments  First, revenues lost from profit shifting are lost revenues to the country with the right to tax the corporation that owns the asset, not the country that is home to the corporation's customers  Although many developed economies are concerned with ensuring that profits are taxed from their proper source under international tax laws, a country that imposes a DST on foreign MNCs' income (in which they have no right to tax) is not consistent with the rationale of recouping revenue lost from the profit-shifting practices of that country's firms  Second, tax strategies enabling MNCs to pay little to no tax have been used by a broad array of firms that rely on intangible assets for the majority of their profits, and these firms are not limited to industries in the "digital economy " For example, European Commission authorities recently opened investigations into tax benefits conferred by its members on McDonald's (over royalty payments made by franchisees for use of the company's brand) and Starbucks (over royalty payments for coffee roasting "know-how" and the price of its unroasted beans)  Thus, it can be argued that DSTs arbitrarily target firms within the digital economy for allegedly excessive profit shifting  Third, tax policies in a number of countries have recently changed or are scheduled to change in ways that will reduce incentives for profit shifting  These changes will most likely affect firms with the most aggressive profit-shifting strategies, including some digital economy firms  In the United States, a number of provisions enacted in P L  115-97 have reduced or will likely reduce economic incentives for U S  MNCs to engage in profit shifting and tax avoidance  In addition to reducing the top marginal corporate tax rate from 35% to 21% —and, thus, the potential tax savings from profit shifting— P L  115-97 contains several other policy changes discouraging profit shifting, such as "Thin capitalization" rules limiting the benefits to earnings and debt stripping, such as reducing the share deductions of interest from 50% to 30% of adjusted taxable income for businesses with gross receipts greater than $25 million and eliminating a safe harbor that exempted firms without high debt-to-equity ratios  A new tax on "global intangible low-taxed income" (GILTI), effectively imposing a 10 5% minimum tax rate on the intangible income of CFCs in years 2018-2025 and 13 125% after 2025  In other words, if U S  corporations are largely the center of concerns about digital economy MNCs not paying a "fair share" of their worldwide profits in tax, then GILTI provides a "floor" in the amount of tax owed by firms that previously sought out tax homes for their intangible assets in countries that imposed low or zero income tax  A "deemed repatriation" tax on accumulated post-1986 earnings at rates of 15 5% (if held in cash) and 8% (other, noncash assets), with applicable foreign tax credits similarly reduced  In other words, retained earnings of U S  MNCs that were held abroad (often in low-tax jurisdictions) are now subject to tax  U S  firms that invert are subject to a number of penalties, such as higher tax rates on the stock compensation of the inverting company's executives, a recapture of the deemed repatriation rate on post-1986 earnings (subjecting these earnings instead to 35% instead of 8% or 15 5%), and application of ordinary individual income tax rates instead of lower qualified dividend/long-term capital gains rates on certain dividends issued from the new foreign parent of the inverting U S  company  Some European countries have taken efforts to change policies that were characterized by some as enabling tax avoidance among digital economy MNCs  For example, Ireland is phasing out tax provisions by 2020 behind the "double Irish sandwich " Some digital economy firms reportedly used this tax planning strategy to reduce the effective rate of tax on their cross-border income (e g , advertising sales in Europe) and shift their profits to "tax havens" that impose no tax on corporate income  Furthermore, the Netherlands is considering imposing a withholding tax on royalty payments to low-tax jurisdictions by 2021  Although tax-minimizing international tax planning still exists, policy changes have reduced the benefits of using past strategies that raised concerns of MNCs routing income through a complicated series of international business entities for the primary purpose of reducing tax owed  Fourth, DST proposals are unlikely to affect profit-shifting behavior  As explained above, a tax on corporate profits, in a very general sense, taxes corporate income minus the costs of production  In contrast, DSTs are imposed on gross revenue derived from certain business activities (or "turnover") and do not take into account costs or net profits earned by the taxable firm  Thus, economic incentives for MNCs to shift profits remain unchanged by DSTs as they do not affect profit-maximizing decisions at the margins  As discussed in the " Select International Efforts to Tax the Digital Economy " section of this report, statements by the European Commission and United Kingdom claim that tax regimes are not adequately taxing the "value" created by user contributions and behavioral data that forms a key part of the business models of firms in the digital economy  The user-based value creation argument says that some digital platforms benefit from "network effects," in which the contributions of one user benefit other users and draw more users to utilize the platform  For example, a UK user creates a video on YouTube that is widely shared or promoted among other UK users  The increased user traffic benefits YouTube because more users are seeing advertisements that it has placed on its site  Thus, the video content creator has created "value" to YouTube by generating more advertising revenue to the platform  As another example, Yelp is a website and mobile application that allows users to provide restaurant and business reviews  Yelp generates revenue primarily from targeted advertising placed on its website  As more users provide higher-quality reviews, more users will rely on Yelp  Thus, the quality of user contributions creates "value" for Yelp's business model by increasing advertising revenue  Critics of this user-based "value-creation" argument could make various rebuttals  First, business models in the digital economy do not raise novel or "disruptive" challenges to income tax frameworks  In the digital economy, it is common for firms to operate in two-sided markets, where they sell or provide services to two sets of customers  For example, a social media company could use revenue earned from customers on one side of the market (advertising sales to businesses) to subsidize the free provision of services to customers on the other side of the market (individual platform users)  A company providing free health and athletic tracking services can charge lower prices for a wearable device if it can sell aggregated user data to another marketer  This method of earning income across two-sided markets, though, is not new  For example, the advent of radio and television broadcasting in the 1900s operated on the same business model, where individual users consumed free programming in exchange for listening or viewing advertisements from sponsors  Just because French households along the border with Italy listen to Italian advertisements on an Italian radio station does not give France the right to tax the Italian radio station's advertising revenues  By analogy, just because French households are able to view online advertisements placed by a U S  company on a U S -owned social media platform does not give France the right to tax the U S  social media firm's advertising revenue  Second, the "value created" in the digital economy is achieved by the innovations and assets of the companies themselves, not by the actions of a single user  The companies—not the customers—bear the risk associated with investments in innovative technologies and platforms  They hire the workers, conduct the research, and develop the software, algorithms, and patentable innovations  For example, a key capability of many digital economy platforms is the ability to aggregate large amounts of data points across millions (if not billions) of users and repurpose that information for targeted adverting or directly selling goods and services  The technology enabling the aggregation of the user data and identifying patterns in consumer behavior is what adds value for resale to potential advertisers or retailers  Third, user contributions can be viewed as inputs to digital economy business models  It can be argued that the value of a single user's data or input is worth little to no market value in isolation  This is why users are generally willing to let companies track and collect these data without charge  Even if digital business models that allow individual users to monetize and sell their individual data grow, any income earned by individual users would be subject to tax under existing tax systems  For example, property owners on Airbnb are subject to income taxes and other hospitality fees levied by their national and local governments  YouTube "influencers" that are sponsored by companies pay personal income tax on those earnings to their home countries  Fourth, user contributions can be viewed as a substitute for money exchanged by consumers for the provision of digital services  "Direct provision," in this context, has the same meaning as "sale of" digital services, except there is no money exchanged in the transaction (i e , bartering)  For example, take the market for data generated by user-provided information  Google users agree to have Google track their search queries in exchange for the free use of Google's search engine  Similarly, Facebook users agree to have their likes, posts, and network connections tracked and aggregated for sale to advertisers in exchange for the use of Facebook's social media platform at zero cost  These transactions, it is argued, maximize the economic welfare of both consumers and producers  Consumers benefit because the behavioral data of any one user has little to zero market value (as discussed above), but consumers do value the provision of digital goods and services  Producers of digital services benefit because they are able to generate revenue from repurposing aggregated user data in exchange for operating their digital platforms at little to no cost to users  As another example, Amazon's business model can be viewed like a catalog retail merchant that features the goods of different manufacturers  A catalog retail merchant earns income by selling space to manufacturers for the privilege of featuring their products in the merchant's catalog  The catalog merchant's customers place an order, and the goods—which are typically manufactured from outside of the jurisdiction where the customer is located—are then shipped to the customer  The customers did not "create value" in that business-to-business transaction via their subscription and purchases of the catalog  By analogy, just because a final consumer of goods sold via Amazon resides in the UK or France does not give those countries the right to tax Amazon's revenues  Fifth, the distinction that customers in the digital economy create value while customers in other industries do not could be viewed as arbitrary  Consumers engage in a countless array of activities that enhance a company's "value" in the course of everyday life  Customer reviews and referrals for services—everything from dog walkers to dry cleaners to dentists—have existed for years and can increase a business's revenues  However, consumers usually do not expect a share of those revenues, nor does the act of providing a review give the country in which that customer resides a right to tax the service provider's profits  Additionally, consumers promote certain brands and companies simply by using their goods or services  This sort of "free marketing" improves the reputation of the brand or firm but does not trigger tax liability based on the location of the consumer  The flow of users to one digital economy platform or another are similar in that mass consumer attraction drives revenue  What the digital economy has changed, though, is the speed and scope in which consumer actions can be relayed to others  Excise taxes are typically justified by economic principles or as revenue-raising measures  From an economic perspective, there are four common types of excise taxes: (1) sumptuary (or "sin") taxes, (2) regulatory or environmental taxes, (3) benefit-based taxes (or user charges), and (4) luxury taxes  The first two categories of excise taxes attempt to correct for a perceived "market failure" in which the actions of individuals in the market have negative spillover effects to society  The third category is typically used to limit the burden of funding a government program that tends to benefit a relatively defined or narrow set of beneficiaries  The fourth category, largely repealed in the United States, uses specific taxes as a means to raise revenue in a more progressive manner  Based on these classifications of excise taxes, it appears that a DST primarily serves as a revenue raising measure  The use of digital platforms does not appear to create negative spillovers to society, creating the economic justification for use of excise taxes to raise the price of individual transactions as a means to reduce the burden on society  DSTs do not appear to be a benefit-based tax, as proponents have not called for dedicating the revenue to specific government programs that benefit digital economy MNCs subject to tax  DSTs also do not appear to be clearly a more progressive method of financing government activities compared to income taxes or broad-based consumption taxes (e g , value-added taxes) that are common in Europe  As discussed below in the " Vertical Equity (Progressivity) " section of this report, DSTs could be a regressive method of financing government spending in the countries that impose them  This section analyzes DST proposals under the standard tax evaluation criteria used by economists  These criteria are used to understand how a tax affects consumer demand and producer supply, whether a tax aligns with common notions of fairness, and administrative issues that could increase tax compliance costs for taxpayers or affect the ability of governments to collect revenue from a tax  Economic efficiency is typically defined as optimal production and distribution of resources in a market  Taxes typically impede, or distort, that optimal allocation of resources by raising the price of the taxed activity  Central to estimating the magnitude of these distortions is determining who bears the economic burden, or incidence, of the tax  The economic incidence of a tax can differ from the statutory incidence (i e , who is obligated by law to pay the tax) depending on conditions in the affected market  Once the economic incidence of a tax is established, the exact distortions to consumers and producers can be determined as well as any other economic activity that is typically discouraged by a tax  The statutory incidence of the DST is borne by firms that provide covered services  For example, under the Spanish DST, companies that sell online advertising services, provide platforms for online marketplaces and intermediation services, and data transfer services—all to users with IP addresses within Spain's jurisdiction—will be subject to the DST (providing that they meet the threshold requirements)  The economic incidence of such a tax could vary depending on the structure and characteristics of those individual markets, as explained in more technical detail in the Appendix   Under one scenario, digital economy firms providing services subject to the DST are perfectly competitive, and the economic burden is borne by the consumers of the digital services in the form of higher prices over the long term  For example, Spain levies its DST on firms that place digital advertisements, based on the revenue earned from showing advertisements on the search results and web pages of users with Spanish IP addresses  In a perfectly competitive market, firms providing digital advertisements earn zero economic profit in that they could not earn a higher rate of return via alternative investments  When faced with the DST, these advertising firms can either (a) exit the industry and pursue higher returns in other industries that are not subject to tax or (b) pass along the tax in the form of higher prices to businesses that purchase the advertising services  The firms purchasing digital advertising could be Spanish companies, but they could also be foreign firms purchasing advertisements that are ultimately targeted to Spanish users  In this case, the imposition of a DST in a competitive market will increase the price of taxable services and lead to a decline in the quantity demanded  The exact magnitude of these changes will depend on the responsiveness, or "elasticity," of the companies purchasing the internet advertising to changes in price  Assuming that companies purchasing the advertising services are also operating in a perfectly competitive market, they are faced with the same options as the firms that sell internet advertising: exit the industry or pass the tax along to consumers of their goods  Higher prices could result in lower consumer demand for the advertised product  The magnitude of this reduced demand depends on the responsiveness of consumer demand to changes in price (i e , the price elasticity of demand)  Thus, a DST imposed on intermediary services can have ripple effects downstream within markets  Under perfect competition, the economic incidence of an upstream DST is ultimately borne by the final consumers of those advertised products  Under an alternative scenario, sellers of digital services (e g , Google, Facebook, Amazon) could be monopolies, or a small number of firms could have "market power" (the ability to influence the price for their services prevailing in the market), and at least part of the tax is borne by these firms in the form of reduced economic profits  Firms can derive market power from a number of factors  For example, lack of competition could enable one firm to have a significant effect on the prevailing rate of digital advertising services  Also, the presence of complements and substitutes could affect market power  In contrast to firms in perfectly competitive markets, firms that have market power are able to earn positive economic profits, also known as "supernormal profits," because they are able to set a price above their marginal cost of production  Some have argued that digital economy firms are more likely to generate supernormal profits because the marginal cost of scaling production of their business model is relatively low, if not costless  For example, the marginal cost for Facebook to display an advertisement to a user is basically zero  Others argue that some firms generate supernormal profits because they are operating in an oligopoly or near-monopoly  For example, most search results are conducted through Google, and Facebook has the most users among social media platforms  These arguments, though, may not provide clear indication of supernormal profits  A variation of the first argument could have been made during the rise of the retail catalog industry, where the marginal cost of producing a single magazine and mailing it to a consumer was relatively small  However, the presence of competing catalog retailers should have driven the prices of firms down close to their marginal costs (which encompass more than just the cost of printing one additional catalog)  The second argument could be seen to misidentify the structure of "two-sided markets" in which many digital economy firms provide services to individual users as well as businesses  For example, Google provides search engine results to individual users (at no cost) and sells advertising space on those search results to businesses  Even if Google dominates the search engine market, it still competes against other firms, such as Facebook, for digital advertising  Digital economy firms also compete with nondigital economy methods of providing advertising services (e g , television, print, and radio), which could constrain their ability to set prices well above their marginal cost of production  When faced with the DST, a monopolist or firms with market power bear at least some of the tax in the form of lower profit  This analysis is explained in more detail in the Appendix   How much of the tax is passed along to companies buying the advertising placement (and their customers) depends on the elasticities of supply and demand in those markets  Like the analysis in the competitive market, consumers in the affected industries reduce their demand in response to higher prices  The ultimate implication of the analyses above is that DSTs introduce distortions in various markets by reducing the financial return to capital in digital economy industries or by raising the cost of goods and services intermediated through digital platforms  Investment in affected markets would be expected to decrease  An example of the former would shift investment out of digital economy firms (e g , as retailers purchase more print, television, or radio advertisement instead of internet advertisement or increased sales via brick-and-mortar or catalog outlets instead of digital), while an example of the latter would involve a reduction in demand of the final goods  The exact magnitude of these changes will vary based on the responsiveness of supply and demand in those various markets  Distortions can also arise in different ways depending on how a particular country's DST is applied to different firms  These issues are described more in the " Differential Treatment of Firms " section below  The principle of vertical equity generally implies that taxpayers with a greater ability to pay the tax should generally pay a greater share of their household income in taxes compared to households with a lesser ability  A tax is "progressive" if higher income households pay a greater share of their income in tax than lower-income households, whereas the opposite is true in a regressive tax system  If the economic incidence of DSTs resemble that of an excise tax rather than a tax on corporate profits, as discussed in the " Economic Efficiency " section, this finding also has an impact on the vertical equity analysis of DSTs  A review of the economic literature shows that the majority of the corporate income tax is borne by capital (i e , the corporation's shareholders) with the residual being borne by labor, or workers  Capital, here in the form of stock ownership, tends to be disproportionately concentrated in higher-income households  In contrast, excise taxes are commonly borne by consumers in the form of higher prices  Excise taxes are often regressive, as lower-income households bear a higher share of their pre-tax income on consuming goods and services than higher-income households  The exact equity effects of DSTs could vary based on different abilities for intermediate firms to pass the tax along to consumers, the nature of the goods and services that they sell, and the responsiveness of consumers in those relative markets  For example, assume that Facebook charges higher prices for advertising on the social media platform to companies, and companies are able to pass those higher advertising costs in full to their customers in the form of higher prices  If one of those companies sells luxury cars and another sells consumer household goods, the DST has more progressive effects in the former case and more regressive effects in the latter  In the aggregate, though, there is little reason to assume that final consumers of goods and services sold through taxable activities in digitized business models are disproportionately higher-income  Thus, it can be expected that a DST affecting a broad range of goods and services is more likely to be regressive than not, especially when compared to a tax on corporate profits  DSTs create unequal economic treatment between similarly situated firms inside and outside of the digital economy  Firms outside of the digital economy can earn just as much global or local revenue as firms taxed under DSTs without being subject to an additional layer of tax on their revenue  Firms outside or inside the digital economy can also engage in profit shifting and "aggressive" transfer pricing to reduce their taxes owed in a country  DSTs, as they have been presented thus far, also create inequalities for firms of similar size based on certain exemptions and thresholds  For example, each of the specific European DST proposals use different or multiple thresholds based on total cross-border profits, revenue generated from covered business activities, "clicks" or interaction based from local users, etc  While proponents of these DSTs with minimum thresholds might have other policy goals in mind (e g , exempting smaller businesses from potentially costly tax compliance burdens), the exact levels at which these thresholds are drawn among larger MNCs are arbitrary from a policy perspective  Critics of DSTs would argue that the thresholds are drawn to exclude domestic MNCs or to target the taxes to a narrow set of foreign MNCs  Regardless of their rationale, these thresholds create concerns of inequitable treatment between different sectors  In the situation where the tax is fully passed along to consumers, digital firms either charge a higher price (reducing demand) or exit the industry  Where the MNCs subject to the statutory incidence of the tax bear at least a portion of the economic incidence of the DST, then they face a lower return to business investment in that country compared to firms not subject to the DST  Additionally, the UK DST's proposed exemption or "safe harbor" for "low profit" firms could create another layer of equity concerns  If the exemption is based on low profits as calculated by UK tax rules, then firms that are not subject to the UK corporate income tax (because they do not have a permanent establishment in the UK) will not be eligible for the exemption  In other words, if a firm must be subject to the UK corporate income tax to be eligible for exemption then, by definition, the exemption is not available to foreign MNCs  MNCs with similar amounts of global revenue would be subject to different effective tax rates on their worldwide consolidated earnings (across all related entities) based on whether they were subject to UK income taxes or not  An alternative exemption being considered by the UK, based on global consolidated profits, could have some administrative issues, as discussed in the next section of this report  DSTs present several administrative challenges to both the public and private sectors  With regard to the public sector, lawmakers and revenue-collecting agencies will have to clarify exactly what types of activities are subject to tax and which parties bear the statutory burden of paying tax  These decisions affect the costs of administering the tax or the gross revenue collected by the tax  With regard to the private sector, the decisions made by lawmakers and agencies could affect the costs of complying with DST regimes  Technology could present administrative challenges to the implementation of DST proposal  First, some digital economy platforms allow users to opt out of having their data tracked or resold to third parties  Without this information a digital service provider may be able to fulfill a user's desire for privacy, but the absence of the information limits the provider's ability to apply proper taxes based on the customer's jurisdiction  "Do not track" or internet browser plugins that make it more difficult for companies to track users' activities could affect the measurement of data collected from local users  Second, users could reroute their internet traffic to servers outside of the country imposing the DST and mask their physical location  Virtual private network services (VPNs) allow users to access websites while making it appear that their IP addresses are from locations other than their actual locations  VPNs connect users to servers located in different parts of the world  Websites will see that a user's web traffic is originating from the VPN server, which could or could not be in the same jurisdiction as the user  Typically, VPNs are used for anonymity reasons or to bypass firewalls and website censors imposed in certain jurisdictions  VPNs are not sufficient to protecting a user's IP address, as other unmasking techniques (some requiring more effort) can be used  Still, users could use VPNs located outside of the taxing jurisdiction to reduce the flow of user activity attributed to IPs within the taxing jurisdiction, thereby reducing revenue collected from "local" user activity  Even if this does not completely eliminate the revenue base for a DST, VPN use still results in mismeasurement of the amount of revenue attributed to local users  Overall, lawmakers writing DSTs would likely need to consider specifying what level of enforcement would be sufficient for companies to make good faith efforts to source their revenues to local users  More due diligence required by companies to determine the source of their users or unmask user efforts designed to preserve their privacy will impose higher costs to the companies  A lower standard might require fewer resources from firms and be less intrusive on user privacy but reduce the amount of tax raised from local users  Thus, DSTs could present policy tradeoffs between individual privacy concerns and tax revenue collection  Two features of the UK's proposed DST create additional administrative challenges  An exemption based on low UK-source profits could also have unintended consequences for proponents of the DST in the form of reduced revenue  Some digital economy MNCs do have subsidiaries physically located in Europe  For example, these firms might have the purpose of providing customer service or call centers that speak the local language or market the company's lines of business  Generally, these types of business activities are low profit margin  If a digital economy MNC does have a permanent establishment in the UK that earns close to zero profits, thereby owing little to no income tax in the UK, does the tax situation of this local subsidiary justify an exemption for the entire MNC controlled group? If so, the MNC could still be technically generating millions of British pounds in revenue from sales to UK customers over the internet  In contrast, an MNC that does not have a UK subsidiary but also has millions in revenue from sales to UK customers would not be eligible for the low-profit exemption  The clear tax planning implication of such an interpretation of the low-profit exemption is that MNCs should establish a low-profit subsidiary in the UK as a means to claim the low-profit margin exemption  If allowed, then the UK DST would likely raise little to no revenue  Alternatively, the UK could base its low-profit exemption based on worldwide profits of the MNC  In the United States, corporations are required to report a number of tax-related calculations and information on their annual Securities and Exchange Commission filings for shareholders  Among these tax-related data are their effective tax rate and tax paid across all jurisdictions where the firm is subject to tax  However, the tax data reported under financial accounting rules typically varies from actual tax paid  This phenomenon is described as "book-tax differences " For example, different rules for depreciation are typically used for accounting purposes compared to actual tax policy in a jurisdiction (e g , if the lawmakers in that country decided to speed up cost recovery with the intent of increasing business investment)  Thus, an exemption based on financial disclosure forms may not accurately reflect taxable income  U S  corporations are allowed to claim a tax credit against U S  corporate income tax liability for income taxes paid to foreign jurisdictions  The rationale is to prevent double taxation of foreign-source income  DSTs are taxes on revenue earned from specific business activities and should not be eligible for U S  foreign tax credit treatment for several reasons  First, such taxes are not income taxes under common bilateral tax treaty language  Statements from some countries imposing DSTs, such as the UK, indicate that they do not intend DST payments to be creditable against taxes that an MNC might owe in its home country  Nor are DSTs "in lieu of income taxes," as the countries imposing DSTs do have a corporate income tax system  The Internal Revenue Service (IRS) could clarify that U S  bilateral income tax treaties do not provide for a foreign tax credit against U S  tax for U S  corporations that make DST payments to foreign jurisdictions  If the IRS does not do so, then Congress could enact legislation denying a U S  foreign tax credit for such payments  Denying a foreign tax credit could increase the total taxes paid by U S  MNCs in jurisdictions around the world, but allowing DST payments to be creditable would effectively force the U S  Treasury (and U S  taxpayers) to subsidize tax rates imposed by foreign jurisdictions  Policymakers who sympathize with the premise that MNCs in the digital economy are unfairly able to shift profits to low-tax jurisdictions could still disagree with the unilateral response of foreign countries to impose DSTs  The tax on GILTI serves as an alternative policy tool intended to impose higher effective tax rates on U S  firms in the digital economy  For example, in the 115 th Congress, the No Tax Break for Outsourcing Act ( H R  5108 ; S  2459 ) would have increased the GILTI tax rate to 21% and eliminated the deduction for the return on tangible assets derived by domestic corporations from serving foreign markets in computing GILTI tax liability, among other provisions  As discussed, above, DSTs have the same economic effects as an excise tax  It is not controversial for countries to levy excise taxes on imported as well as domestically consumed goods or services  Such taxes are considered to not distort trade  However, some DST proponents have not explicitly labeled them as "excise taxes," making it unclear how these taxes should be viewed in terms of international agreements  Regardless of the label attached to them, some commentators argued that DSTs violate restrictions on tariffs under the rules of the World Trade Organization  For example, some scholars argue that the high-revenue thresholds for taxation and the exclusion of certain revenues earned by European firms effectively discriminate against the digital exports of U S  firms  Many proponents of DSTs argue that they are "interim measures" until the international community adopts broader reforms in international tax rules  As mentioned in the discussion of the European Commission's DST proposal, the commission prefers changes, both inside and outside of the EU, in the permanent establishment rules to incorporate some measure of "digital presence " This goal aligns with the EU's goal of a consolidated tax base among its members and formulary apportionment of corporate tax revenue based on a set of factors (e g , sales, assets, employment), which would result in a shift away from tax allocation based on assets  The form and rationale of DSTs appear to better comport with a formulary apportionment tax being pursued in the EU than a traditional national corporate income tax  The inability for consensus to impose a DST at the European Commission level could lead more individual member states to unilaterally impose their own DSTs  Even if the United States objects to unilateral DSTs, these sovereign countries are generally able to impose their own tax systems (within the boundaries of any other international agreements, such as EU membership)  Congress could consider creating "carrots" or "sticks" affecting the policy choices of DST proponents  Tax policy and legal scholars have debated the merits of "potential compromises" that would not require fundamental rewrites of international tax rules  Some of these options would rely on the executive branch for day-to-day negotiations at a bilateral or multilateral level (e g , at the OECD)  Any modification to existing or new tax treaties, though, would require Senate approval  Congress could also direct the executive branch to impose incentives (and disincentives) that would affect key sectors of the EU economy  An evaluation of these emerging ideas and concepts is, however, beyond the scope of this report  DSTs Are Not Structured as Taxes on Profits Corporate profit is generally defined as: (1) π=TR-TC Where π is profit, TR is total revenue, and TC is total cost  This is before taxes  After tax corporate profit, π t , for a firm after imposition of a percentage tax ( t ) on corporate profit, is defined as: 2 πt=(1-t)(TR-TC) In contrast, a DST ( dst ) is levied as a percent of total, gross revenue yielding an after tax profit, π dst , of: 3 πdst=(1-dst)TR-TC Algebraically, equations (2) and (3) are not equivalent  To further illustrate, the following amounts can be substituted: TR = $1,000, TC = $500, and t = 0 03 (or a 3% tax rate)  Using these parameters, πt based on a 3% profit tax would be: 4 πt=(1-0 03)($1,000-$500) 5 πt=$485 Using these parameters, πdst based on a 3% DST revenue tax would be: 6 πdst=(1-0 03)$1,000-$500 7 πdst=$470 As shown above, after-tax profit for a corporation subject to a 3% income tax rate (equation 5) is greater than after-tax profit for a corporation subject to a 3% DST (equation 7) in lieu of an income tax  The two taxes are not the same  Effects of a DST on Supply-Demand Conditions in Digital Markets To analyze the economic effects of a DST, the different markets in which digital economy firms operate must be conceptualized  In a general sense, the consumers or buyers in these markets are those that pay money to the supplier or seller for the provision of a service  Many firms in digital economies operate in "two-sided markets" in which they provide services to two different consumers: individual users and businesses  While both sides of these markets could be relevant for calculating DST liability, the markets for the latter group of services are the starting point for analyzing the economic effects of a DST, because these business-to-business transactions are where the statutory incidence of a DST is typically first imposed  For example, in the market for internet advertisements, a clothing company could be the consumer and Google or Facebook could be the seller or supplier  In the market for marketplace sales, a vendor could be the consumer and Amazon could be the seller or supplier  In the market for user data sales, a data transfer firm could be the consumer and Facebook, Google, or Fitbit could the supplier  From an economic perspective, there are two extremes of market structure: perfect competition and monopoly  Most market structures lie somewhere in between  Monopolies rarely exist, and they are typically regulated  For reasons explained below, there are specific reasons why monopolies are likely not to exist in the markets in which DSTs apply  However, firms could have market power if there are barriers to entry  The following analyses examine how a DST would apply, over the long run, in the two extremes of market structure for a digital economy firm facing a downward sloping demand curve  Analysis of a DST in a Competitive Market In perfect competition, firms face a downward-sloping demand curve, and the supply curve is perfectly elastic (horizontal) as increases in output are achieved by new firms entering the industry over the long run  Each firm earns no economic profit, meaning that the opportunity cost of investing in alternative ventures is zero, and each is a price taker in the market (i e , an individual firm cannot influence the price prevailing in the market)  In this scenario, when the government imposes an excise tax, firms must ultimately pass on the cost of the tax to their consumers or exit the market  The market for services provided by firms in the digital economy could be depicted as "perfectly competitive " Under this scenario, many firms are willing to provide a relatively similar service  These markets can be outlined more narrowly to encompass only activities by other digital economy firms (e g , internet advertising, marketplace sales, data transfer), or they can be outlined more broadly (e g , consumer advertising, retail outlets, consumer marketing research)  In other words, although users typically associate Facebook as primarily a social network and Google as primarily a search engine, both firms may operate and compete in the same market for internet advertising  Additionally, both firms compete in the larger market for consumer advertising alongside television, print, and radio advertisers  If a clothing seller is deciding where to spend his advertising budget, that seller can purchase advertising placements on Facebook, Google, etc  (not to mention television, print, and radio)  Similarly, a data transfer company looking to purchase and analyze user data then selling marketing services for another good or service not only has the choice to purchase data from Facebook, Google, etc ; it can also collect data from other companies that collect data and surveys on consumer preferences  Figure A-1 and Figure A-2 illustrate the long-run effects of a DST in a perfect competition scenario with demand curves of different slopes  The demand curves are downward-sloping because consumers demand less of the taxed service as price increases  The different slopes represent scenarios where consumer demand is more responsive, or elastic, to changes in price ( Figure A-1 ) and less responsive, or inelastic ( Figure A-2 )  The supply curves in both figures are flat, or "infinitely elastic" because suppliers, in the aggregate, are able to adjust their capacity to meet whatever level of consumer demand prevails in the market  In both figures, the initial equilibrium (E), before the tax, between the prevailing market price (P) and quantity (Q) is denoted by an asterisk superscript (*)  After the tax is applied, the change in equilibrium between price and quantity is denoted by a subscript ( t )  In both figures, the tax is also passed forward to consumers in the form of higher prices  Firms reduce output or some firms exit the market because participants earn zero economic profit  If the DST rate is 3%, for example, then suppliers in a competitive market are assumed to increase price by 3% minus any tax savings (i e , deductions for excise tax payments from any income tax owed to the jurisdiction imposing the DST)  In Figure A-1 , imposition of a DST causes prices to rise and quantity demanded to fall in the market  The magnitude of the change in quantity is roughly similar to the change in price in the illustration below, but in a market with relatively elastic demand, the change in quantity can exceed the change in price  One cause for this phenomenon is the availability of near-substitutes  For example, if television advertisement is equally as effective as internet advertising, then a tax increasing prices of the latter will lead to a larger decline in demand as more companies purchase advertisements on television instead of the internet  In Figure A-2 , imposition of a DST also causes prices to rise and quantity demanded to fall in the market  With a relatively inelastic demand curve, though, the magnitude of the change in price exceeds the change in quantity  This could be caused, for example, by a lack of substitutes (e g , a strong preference for internet advertising or lack of alternative outlets to online marketplaces to sell goods and services)  In this case, the change in price is greater than the change in quantity demanded  Many of the services subject to a DST are intermediate inputs to the final sales of other goods and services  This means that the method of analyzing the effects of the DST would be replicated for each stage in the supply chain  For example, if a DST increases the price of advertising a clothing company's products over the internet, then that clothing company will likely increase the cost of the clothing that it charges its customers (the retail consumer in the country levying the tax)  The exact magnitude of the effects will vary depending on elasticities of supply and demand in that downstream market for retail clothing sales  In a perfectly competitive retail clothing market, though, it is anticipated that prices will increase and quantity demanded will decrease  In addition to effects on price and quantity prevailing within a market, DSTs can also have "welfare effects " Under this method of analysis, economists consider changes to consumer surplus, producer surplus, and deadweight loss  Consumer surplus is the total benefit of value of a good or service that consumers receive beyond what they actually pay in the market  It is depicted on a supply-demand graph as the area below the demand curve and above the price  Producer surplus is the benefit to producers from selling a good or service at a price higher than their marginal cost of producing one additional unit  It is depicted on a supply-demand graph as the area above the supply curve and below the price  Deadweight loss is an inefficiency in the market that is typically introduced by government intervention, such as a tax, that results in a loss in economic activity and potential losses to consumer or producer surpluses  In a supply-demand graph of a competitive market, like the ones above, deadweight loss is depicted as the center triangle created after the imposition of a tax  Welfare analyses of the DSTs depicted in Figure A-1 and Figure A-2 indicate that they reduce consumer surplus, have no effect on producer surplus, and create deadweight loss inefficiencies  Before the imposition of a DST, consumer welfare is measured as the areas a + b + c in both figures  This area indicates that consumers are receiving benefits from consuming goods or services subject to DSTs in excess of the price they actually pay for them  This could be in part because social media platforms, shopping on online marketplaces, or using search engines are free to consumers  After the imposition of a DST, though, consumer welfare is reduced to the area a   As producers increase the cost of goods and services subject to a DST, consumer welfare decreases due to higher costs  The area b becomes revenue collected by the government and the area c becomes deadweight loss in economic activity discouraged by the DST  There is no effect on producer surplus, because it does not exist in a perfectly competitive market  In a perfectly competitive market, producers are price takers and earn no economic profit  The main differences in Figure A-1 and Figure A-2 are due to the slope of the demand curve  The relatively inelastic demand in Figure A-2 leads to greater reductions in consumer welfare, more tax revenue collected, and smaller deadweight losses  This is because a relatively inelastic demand curve indicates that consumers are less responsive to changes in price  If consumers are unable to substitute away from goods or services subject to DSTs toward nontaxed activities, then they pay higher prices for taxed activities, and the government collects more revenue  Analysis of a DST in a Monopoly Market Some argue that major firms in the digital economy have "monopoly power " Proponents of this assertion could point out that Facebook is the largest social media platform or that Google is the predominant search engine  Others may say that digital economy platforms create network effects that prevent competition  For example, Facebook is able to maintain its status as the most popular social media platform because the value of interacting on a network with billions of users exceeds a new platform with only a few users  Similarly, Amazon might be characterized as a monopoly because many customers shop and provide reviews on its website, so a vendor looking for exposure to the largest customer base will choose to pay for the service of listing its products on that site compared to a smaller internet marketplace  These views may be seen, by others, as misguided because they are viewing the opposite side of the two-sided markets in the digital economy or defining the "market" too narrowly  As explained in the perfect competition analysis, above, Google and Facebook can be viewed as competitors in the market for selling digital advertising space or data transfer services even if they have some degree of market power on the other side of the market (e g , search engines and social networks)  Additionally, digital economy firms also compete against "non-digital" competitors  For example, in the larger markets for consumer product advertising, internet companies compete with advertising via television, print, and radio  Whether firms have supernormal profits or economic rents in an industry is often difficult to determine  In general, the presence of high accounting profits (total revenue minus total costs) is not indicative of whether a firm has profits in an economic sense  Economic profits take into consideration the opportunity costs of investing in a different income-producing activity  There is typically a risk-free portion of the return to any investment  For example, in the corporate sector this could be the average rate of return of the stock market  However, riskier investments generally require a higher potential return in order to attract capital (also known as the "risk premium")  The point of this distinction is that high accounting profits can be an indication of a higher risk premium  For the sake of argument, Figure A-3 illustrates the effects of a DST in a hypothetical monopoly market where there is one producer  An example of this phenomenon in the digital economy could be a single firm that sells internet advertising, marketplace sales, or data transfers to a potential buyer  Figure A-3 illustrates a monopoly market before the imposition of a tax  In a monopoly market, the seller still faces a downward-sloping demand curve  However, the monopolist does not have a supply curve because it does not accept the price prevailing in the market (like individual sellers in a competitive market)  Instead, it sets price (P M ) and output (Q M ) at the intersection of marginal revenue (MR) and marginal cost (MC) to arrive at a profit-maximizing equilibrium (E M ) along the demand curve  The upward-sloping MC represents the fact that the monopolist firm faces increasing marginal costs as it increases the quantity supplied in the market  The monopolist also has an upward-sloping average total cost (ATC) curve, which includes the upward-sloping function of the MC curve plus added fixed costs of production  Unlike producers in the competitive markets in Figure A-1 and Figure A-2 , the monopolist in Figure A-3 earns economic profits, or rents  Economic profit per unit sold is the difference between the price charged by the monopolist (P M ) and the ATC curve, or the distance bc   That average profit per unit times the total number of units sold ( dc ) equals the total economic profit earned by the monopolist, as shown in the gray shaded box ( abcd )  The effects of a DST on a monopoly market are illustrated in Figure A-4   A DST shifts the demand curve in as consumers of taxed services respond to higher after-tax prices  As a result of the reduced demand, the marginal revenue earned by the monopolist declines, and the MR curve shifts from MR M to MR t   The equilibrium in the market shifts from E M to E t   Quantity decreases from Q M to Q t   The price faced by the consumer in the market increases from P M to P t   The price received by the monopolist, though, decreases from P M to P Mt   The economic profit earned by the monopolist under the new post-tax demand and MR t curves is represented by the gray shaded box ( fghi )  The revenue collected by the government is represented by the dashed-line area just above the monopolist's profit  Changes to deadweight loss is not illustrated on Figure A-4 , but they can be explained in qualitative terms  The presence of a monopoly market creates deadweight loss relative to a competitive market because P M is set higher than the price where supply and demand intersect in the competitive market (e g , in Figure A-1 and Figure A-2 )  When a tax is introduced on top of the distortions caused by the monopolist, the size of the deadweight loss in the market is further increased 


Report 2: From its headwaters in Colorado and Wyoming to its terminus in the Gulf of California, the Colorado River Basin covers more than 246,000 square miles  The river runs through seven U S  states (Wyoming, Colorado, Utah, New Mexico, Arizona, Nevada, and California) and Mexico  Pursuant to federal law, the Bureau of Reclamation (Reclamation, part of the Department of the Interior [DOI]) plays a prominent role in the management of the basin's waters  In the Lower Basin (i e , Arizona, Nevada, and California), Reclamation also serves as water master on behalf of the Secretary of the Interior, a role that elevates the status of the federal government in basin water management  The federal role in the management of Colorado River water is magnified by the multiple federally owned and operated water storage and conveyance facilities in the basin, which provide low-cost water and hydropower supplies to water users  Colorado River water is used primarily for agricultural irrigation and municipal and industrial (M&I) purposes  The river's flow and stored water also are important for power production, fish and wildlife, and recreation, among other uses  A majority (70%) of basin water supplies are used to irrigate 5 5 million acres of land; basin waters also provide M&I water supplies to nearly 40 million people  Much of the area that depends on the river for water supplies is outside of the drainage area for the Colorado River Basin  Storage and conveyance facilities on the Colorado River provide trans-basin diversions that serve areas such as Cheyenne, WY; multiple cities in Colorado's Front Range (e g , Fort Collins, Denver, Boulder, and Colorado Springs, CO); Provo, UT; Albuquerque and Santa Fe, NM; and Los Angeles, San Diego, and the Imperial Valley in Southern California ( Figure 1 )  Colorado River hydropower facilities can provide up to 42 gigawatts of electrical power per year  The river also provides habitat for a wide range of species, including several federally endangered species  It flows through 7 national wildlife refuges and 11 National Park Service (NPS) units; these and other areas of the river support important recreational opportunities  Precipitation and runoff in the basin are highly variable  Water conditions on the river depend largely on snowmelt in the basin's northern areas  Observed data (1906-2018) show that natural flows in the Colorado River Basin in the 20 th century averaged about 14 8 million acre-feet (MAF) annually  Flows have dipped significantly during the current drought, which dates to 2000; natural flows from 2000 to 2018 averaged approximately 12 4 MAF per year   In 2018, Reclamation estimated that the 19-year period from 2000 to 2018 was the driest period in more than 100 years of record keeping  The dry conditions are consistent with prior droughts in the basin that were identified through tree ring studies; some of these droughts lasted for decades  Climate change impacts, including warmer temperatures and altered precipitation patterns, may further increase the likelihood of prolonged drought in the basin  Pursuant to the multiple compacts, federal laws, court decisions and decrees, contracts, and regulatory guidelines governing Colorado River operations (collectively known as the Law of the River ), Congress and the federal government play a prominent role in the management of the Colorado River  Specifically, Congress funds and oversees Reclamation's management of Colorado River Basin facilities, including facility operations and programs to protect and restore endangered species  Congress has also approved and continues to actively consider Indian water rights settlements involving Colorado River waters, and development of new and expanded water storage in the basin  In addition, Congress has approved funding to mitigate drought and stretch basin water supplies and has considered new authorities for Reclamation to combat drought and enter into agreements with states and Colorado River contractors  This report provides background on management of the Colorado River, including a discussion of trends and agreements since 2000  It also discusses the congressional role in the management of basin waters  In the latter part of the 19 th century, interested parties in the Colorado River Basin began to recognize that local interests alone could not solve the challenges associated with development of the Colorado River  Plans conceived by parties in California's Imperial Valley to divert water from the mainstream of the Colorado River were thwarted because these proposals were subject to the sovereignty of both the United States and Mexico  The river also presented engineering challenges, such as deep canyons and erratic water flows, and economic hurdles that prevented local or state groups from building the necessary storage facilities and canals to provide an adequate water supply  Because local or state groups could not resolve these "national problems," Congress considered ideas to control the Colorado River and resolve potential conflicts between the states  Thus, in an effort to resolve these conflicts and prevent litigation, Congress gave its consent for the states and Reclamation to enter into an agreement to apportion Colorado River water supplies in 1921  The below sections discuss the resulting agreement, the Colorado River Compact, and other documents and agreements that form the basis of the Law of the River, which governs Colorado River operations  The Colorado River Compact of 1922, negotiated by the seven basin states and the federal government, was signed by all but one basin state (Arizona)  Under the compact, the states established a framework to apportion the water supplies between the Upper Basin and the Lower Basin, with the dividing line between the two basins at Lee Ferry, AZ, near the Utah border  Each basin was apportioned 7 5 MAF annually for beneficial consumptive use, and the Lower Basin was given the right to increase its beneficial consumptive use by an additional 1 MAF annually  The agreement also required Upper Basin states to deliver to the Lower Basin a total of 75 MAF over each 10-year period, thus allowing for averaging over time to make up for low-flow years  The compact did not address inter- or intrastate allocations of water (which it left to future agreements and legislation), nor did it address water to be made available to Mexico, the river's natural terminus; this matter was addressed in subsequent international agreements  The compact was not to become binding until it had been approved by the legislatures of each of the signatory states and by Congress  Congress approved and modified the Colorado River Compact in the Boulder Canyon Project Act (BCPA) of 1928  The act ratified the 1922 compact, authorized the construction of a federal facility to impound water in the Lower Basin (Boulder Dam, later renamed Hoover Dam) and related facilities to deliver water in Southern California (e g , the All-American Canal, which delivers Colorado River water to California's Imperial Valley), and apportioned the Lower Basin's 7 5 MAF per year among the three Lower Basin states  It provided 4 4 MAF per year to California, 2 8 MAF to Arizona, and 300,000 acre-feet (AF) to Nevada, with the states to divide any surplus waters among them  It also directed the Secretary of the Interior to serve as the sole contracting authority for Colorado River water use in the Lower Basin and authorized several storage projects for study in the Upper Basin  Congress's approval of the compact in the BCPA was conditioned on a number of factors, including ratification by California and five other states (thereby allowing the compact to become effective without Arizona's concurrence), and California agreeing by act of its legislature to limit its water use to 4 4 MAF per year and not more than half of any surplus waters  California met this requirement by passing the California Limitation Act of March 4, 1929  Arizona did not ratify the Colorado River Compact until 1944, at which time the state began to pursue a federal project to bring Colorado River water to its primary population centers in Phoenix and Tucson  California opposed the project, arguing that under the doctrine of prior appropriation, California's historical use of the river trumped Arizona's rights to the Arizona allotment  California also argued that Colorado River apportionments under the BCPA included water developed on Colorado River tributaries, whereas Arizona claimed, among other things, that these apportionments included the river's mainstream waters only  In 1952, Arizona filed suit in the U S  Supreme Court to settle the issue  Eleven years later, in the 1963 Arizona v  California decision, the Supreme Court ruled in favor of Arizona, finding that Congress had intended to apportion the mainstream of the Colorado River and that California and Arizona each would receive one-half of surplus flows  The same Supreme Court decision held that Section 5 of the BCPA controlled the apportionment of waters among Lower Basin States, and that the BCPA (and not the law of prior appropriation) controlled the apportionment of water among Lower Basin states  The ruling was notable for its directive to forgo traditional Reclamation deference to state law under the Reclamation Act of 1902, and formed the basis for the Secretary of the Interior's unique role as water master for the Lower Basin  The decision also held that Native American reservations on the Colorado River were entitled to priority under the BCPA  Later decrees by the Supreme Court in 1964 and 1979 supplemented the 1963 decision  Following the Arizona v  California decision, Congress eventually authorized Arizona's conveyance project for Colorado River water, the Central Arizona Project (CAP), in the Colorado River Basin Project Act of 1968 (CRBPA)  As a condition for California's support of the project, Arizona agreed that, in the event of shortage conditions, California's 4 4 MAF has priority over CAP water supplies  In 1944, the United States signed a water treaty with Mexico (1944 U S -Mexico Water Treaty) to guide how the two countries share the waters of the Colorado River and the Rio Grande  The treaty established water allocations for the two countries and created a governance framework (the International Boundary and Water Commission) to resolve disputes arising from the treaty's execution  The treaty requires the United States to provide Mexico with 1 5 MAF of water annually, plus an additional 200,000 AF when a surplus is declared  During drought, the United States may reduce deliveries to Mexico in similar proportion to reductions of U S  consumptive uses  The treaty has been supplemented by additional agreements between the United States and Mexico, known as m inutes   Projects originally authorized for study in the Upper Basin under BCPA were not allowed to move forward until the Upper Basin states determined their individual water allocations, which they did under the Upper Colorado River Basin Compact of 1948  The Upper Basin Compact established Colorado (where the largest share of runoff to the river originates) as the largest entitlement holder in the Upper Basin, with rights to 51 75% of any Upper Basin flows after Colorado River Compact obligations to the Lower Basin have been met  Other states also received percentage-based allocations, including Wyoming (14%), New Mexico (11 25%), and Utah (23%)  Arizona was allocated 50,000 AF in addition to its Lower Basin apportionment, in recognition of the small portion of the state in the Upper Basin  Basin allocations by state following approval of the Upper Basin Compact (i e , the allocations that generally guide current water deliveries) are shown below in Figure 2   The Upper Basin Compact also established the Upper Colorado River Commission, which coordinates operations and positions among Upper Basin states  Subsequent federal legislation paved the way for development of Upper Basin allocations  The Colorado River Storage Project (CRSP) Act of 1956 authorized storage reservoirs and dams in the Upper Basin, including the Glen Canyon, Flaming Gorge, Navajo, and Curecanti Dams  The act also established the Upper Colorado River Basin Fund, which receives revenues collected in connection with the projects, to be made available for defraying the project's costs of operation, maintenance, and emergency expenditures  In addition to the aforementioned authorization of CAP in Arizona, the 1968 CRBPA amended CRSP to authorize several additional Upper Basin projects (e g , the Animas La Plata and Central Utah projects) as CRSP participating projects  It also directed that the Secretary of the Interior propose operational criteria for Colorado River Storage Project units (including the releases of water from Lake Powell) that prioritize (1) Treaty Obligations to Mexico, (2) the Colorado River Compact requirement for the Upper Basin to deliver 75 MAF to Lower Basin states over any 10-year period, and (3) carryover storage to meet these needs  The CRBPA also established the Upper Colorado River Basin Fund and the Lower Colorado River Basin Development Fund, both of which were authorized to utilize revenues from power generation from relevant Upper and Lower Basin facilities to fund certain expenses in the sub-basins  Due to the basin's large water storage projects, basin water users are able to store as much as 60 MAF, or about four times the Colorado River's annual flows  Thus, storage and operations in the basin receive considerable attention, particularly at the basin's two largest dams and their storage reservoirs: Glen Canyon Dam/Lake Powell in the Upper Basin (26 2 MAF of storage capacity) and Hoover Dam/Lake Mead in the Lower Basin (26 1 MAF)  The status of these projects is of interest to basin stakeholders and observers and is monitored closely by Reclamation  Glen Canyon Dam, completed in 1963, provides the linchpin for Upper Basin storage and regulates flows from the Upper Basin to the Lower Basin, pursuant to the Colorado River Compact  It also generates approximately 5 billion kilowatt hours (KWh) of electricity per year, which the Western Area Power Administration (WAPA) supplies to 5 8 million customers in Upper Basin States  Other significant storage in the Upper Basin includes the initial "units" of the CRSP: the Aspinall Unit in Colorado (including Blue Mesa, Crystal, and Morrow Point dams on the Gunnison River, with combined storage capacity of more than 1 MAF), the Flaming Gorge Unit in Utah (including Flaming Gorge Dam on the Green River, with a capacity of 3 78 MAF), and the Navajo Unit in New Mexico (including Navajo Dam on the San Juan River, with a capacity of 1 MAF)  The Upper Basin is also home to 16 "participating" projects which are authorized to use water for irrigation, municipal and industrial uses, and other purposes  In the Lower Basin, Hoover Dam, completed in 1936, provides the majority of the Lower Basin's storage and generates about 4 2 billion KWh of electricity per year for customers in California, Arizona, and Nevada  Also important for Lower Basin Operations are Davis Dam/Lake Mohave, which regulates flows to Mexico under the 1944 Treaty, and Parker Dam/Lake Havasu, which impounds water for diversion into the Colorado River Aqueduct (thereby allowing for deliveries to urban areas in southern California) and CAP (allowing for diversion to users in Arizona)  Further downstream on the Arizona/California border, Imperial Dam (a diversion dam) diverts Colorado River water to the All-American Canal for use in California's Imperial and Coachella Valleys  Reclamation monitors Colorado River reservoir levels and projects them 24 months into the future in monthly studies (called 24-month studies )  The studies take into account forecasted hydrology, reservoir operations, and diversion and consumptive use schedules to model a single scenario of reservoir conditions  The studies inform operating decisions by Reclamation looking one to two years into the future  They express water storage conditions at Lake Mead and Lake Powell in terms of elevation, as feet above mean sea level (ft)  In addition to the 24-month studies, the CRBPA requires the Secretary to transmit to Congress and the governors of the basin states, by January 1 of each year, a report describing the actual operation for the preceding water year and the projected operation for the coming year  This report is commonly referred to as the annual operating plan (AOP)  The AOP's projected January 1 water conditions for the upcoming calendar year establish a baseline for future annual operations  Since the adoption of guidelines by Reclamation and basin states in 2007 (see below section, " 2007 Interim Guidelines "), operations of the Hoover and Glen Canyon Dams have been tied to specific pool elevations at Lake Mead and Lake Powell  For Lake Mead, the first level of shortage (1 st Tier Shortage Condition), under which Arizona and Nevada's allocations would be decreased, would be triggered if Lake Mead falls below 1,075 ft  For Lake Powell, releases under tiered operations are based on storage levels in both Lake Powell and Lake Mead (specific delivery curtailments based on lake levels similar to Lake Mead have not been adopted)  As of January 2019, Reclamation predicted that Lake Mead's 2019 elevation would remain above 1,075 ft (approximately 9 6 MAF of storage) and that Lake Powell would remain at its prior year level (i e , the Upper Elevation Balancing Tier) during 2019  However, Reclamation also projected that there was a 69% chance of a 1 st Tier Shortage Condition at Lake Mead beginning in January 2020  Reclamation predicted a small (3%) chance of Lake Powell dropping to 3,490 feet, or minimum power pool (i e , a level beyond which hydropower could not be generated) by 2020; the chance of this occurring by 2022 was greater (15%)  Improved hydrology for 2019 may decrease the likelihood of shortage in the immediate future  Construction of most of the Colorado River's water supply infrastructure predated major federal environmental protection statutes, such as the National Environmental Policy Act (NEPA; 42 U S C  §§4321 et seq  ) and the Endangered Species Act (ESA; 87 Stat  884, 16 U S C  §§1531-1544)  Thus, many of the environmental impacts associated with the development of basin resources were not originally taken into account  Over time, multiple efforts have been initiated to mitigate these effects  Some of the highest-profile efforts have been associated with water quality (in particular, salinity control) and the effects of facility operations on endangered species  Salinity and water quality are long-standing issues in the Colorado River Basin  Parts of the Upper Basin are covered by salt-bearing shale (which increases salt content in water inflows), and salinity content increases as the river flows downstream due to both natural leaching and return flows from agricultural irrigation  The 1944 U S -Mexico Water Treaty did not set water quality or salinity standards in the Colorado River Basin  However, after years of dispute between the United States and Mexico regarding the salinity of the water reaching Mexico's border, the two countries reached an agreement on August 30, 1973, with the signing of Minute 242 of the International Boundary and Water Commission  The agreement guarantees Mexico that the average salinity of its treaty deliveries will be no more than 115 parts per million higher than the salt content of the water diverted to the All-American Canal at Imperial Dam in Southern California  To control the salinity of Colorado River water in accordance with this agreement, Congress passed the Colorado River Basin Salinity Control Act of 1974 ( P L  93-320 ), which authorized desalting and salinity control facilities to improve Colorado River water quality  The most prominent of these facilities is the Yuma Desalting Plant, which was largely completed in 1992 but has never operated at capacity  In 1974, the seven basin states also established water quality standards for salinity through the Colorado River Basin Salinity Control Forum  Congress enacted the ESA in 1973  As basin species became listed in accordance with the act, federal agencies and nonfederal stakeholders consulted with the U S  Fish and Wildlife Service (FWS) to address the conservation of the listed species  As a result of these consultations, several major programs have been developed to protect and restore fish species on the Colorado River and its tributaries  Summaries of some of the key programs are below  The Upper Colorado Endangered Fish Recovery Program was established in 1988 to assist in the recovery of four species of endangered fish in the Upper Colorado River Basin  Congress authorized this program in P L  106-392   The program is implemented through several stakeholders under a cooperative agreement signed by the governors of Colorado, Utah, and Wyoming; DOI; and the Administrator of WAPA  The recovery goals of the program are to reduce threats to species and improve their status so they are eventually delisted from the ESA  Some of the actions taken in the past include providing adequate instream flows for fish and their habitat, restoring habitat, reducing nonnative fish, augmenting fish populations with stocked fish, and conducting research and monitoring  Reclamation is the lead federal agency for the program and provides the majority of federal funds for implementation  It is also funded through a portion of Upper Basin hydropower revenues from WAPA; FWS; the states of Colorado, Wyoming, and Utah; and water users, among others  The San Juan River Basin Recovery Implementation Program was established in 1992 to assist in the recovery of ESA-listed fish species on the San Juan River, the Colorado's largest tributary  The program is concerned with the recovery of the Razorback sucker ( Xyrauchen texanus ) and Colorado pikeminnow ( Ptychocheilus Lucius )  Congress authorized this program in P L  106-392 with the aim to protect the genetic integrity and population of listed species, conserve and restore habitat (including water quality), reduce nonnative species, and monitor species  The Recovery Program is coordinated by FWS  Reclamation is responsible for operating the Animas-La Plata Project and Navajo Dam on the San Juan River in a way that reduces effects on the fish populations  The program is funded by a portion of revenues from power generation, Reclamation, participating states, and the Bureau of Indian Affairs  Recovery efforts for listed fish are coordinated with the Upper Colorado River Program discussed above  The Glen Canyon Dam Adaptive Management Program was established in 1997 in response to a directive from Congress under the Grand Canyon Protection Act of 1992 ( P L  102-575 ) to operate Glen Canyon Dam "in such a manner as to protect, mitigate adverse impacts to, and improve the values for which Grand Canyon National Park and Glen Canyon National Recreation Area were established " This program uses experiments to determine how water flows affect natural resources south of the dam  Reclamation is in charge of modifying flows for experiments, and the U S  Geological Survey conducts monitoring and other studies to evaluate the effects of the flows  The results are expected to better inform managers how to provide water deliveries and conserve species  The majority of program funding comes from hydropower revenues generated at Glen Canyon Dam  The MSCP is a multistakeholder initiative to conserve 27 species (8 listed under ESA) along the Lower Colorado River while maintaining water and power supplies for farmers, tribes, industries, and urban residents  The MSCP began in 2005 and is planned to last for at least 50 years  The MSCP was created through consultation under ESA  To achieve compliance under ESA, federal entities involved in managing water supplies in the Lower Colorado River met with resource agencies from Arizona, California, and Nevada; Native American Tribes; environmental groups; and recreation interests to develop a program to conserve species along a portion of the Colorado River  A biological opinion (BiOp) issued by the FWS in 1997 served as a basis for the program  Modifications to the 1997 BiOp were made in 2002, and in 2005, the BiOp was renewed for 50 years  Nonfederal entities received an incidental take permit under Section 10(a) of the ESA for their activities in 2005 and shortly thereafter implemented a habitat conservation plan  The objective of the MSCP is to create habitat for listed species, augment the populations of species listed under ESA, maintain current and future water diversions and power production, and abide by the incidental take authorizations for listed species under the ESA  The estimated total cost of the program over its lifetime is approximately $626 million in 2003 dollars ($882 million in 2018 dollars) and is to be split evenly between Reclamation (50%) and the states of California, Nevada, and Arizona (who collectively fund the remaining 50%)  The management and implementation of the MSCP is the responsibility of Reclamation, in consultation with a steering committee of stakeholders  Twenty-two federally recognized tribes in the Colorado River Basin have quantified water diversion rights that have been confirmed by court decree or final settlement  These tribes collectively possess rights to 2 9 MAF per year of Colorado River water  However, as of 2015, these tribes typically were using just over half of their quantified rights  Additionally, 13 other basin tribes have reserved water rights claims that have yet to be resolved  Increased water use by tribes with existing water rights, and/or future settlement of claims and additional consumptive use of basin waters by other tribes, is likely to exacerbate the competition for basin water resources  The potential for increased use of tribal water rights (which, once ratified, are counted toward state-specific allocations where the tribal reservation is located) has been studied in recent years  In 2014, Reclamation, working with a group of 10 tribes with significant reserved water rights claims on the Colorado River, initiated a study known as the 10 Tribes Study   The study, published in 2018, estimated that, cumulatively, the 10 tribes could have reserved water rights (including unresolved claims) to divert nearly 2 8 MAF per year  Of these water rights, approximately 2 MAF per year were decreed and an additional 785,273 AF (mostly in the Upper Basin) remained unresolved  The report estimated that, overall, the 10 tribes are diverting (i e , making use of) almost 1 5 MAF of their 2 8 MAF in resolved and unresolved claims  Table 1 shows these figures at the basin and sub-basin levels  According to the study, the majority of unresolved claims in the Upper Basin are associated with the Ute Tribe in Utah (370,370 AF per year), the Navajo Nation in Utah (314,926 AF), and the Navajo Nation in the Upper Basin in Arizona (77,049 AF)  When the Colorado River Compact was originally approved, it was assumed based on the historical record that average annual flows on the river were 16 4 MAF per year  According to Reclamation data, from 1906 to 2018, observed natural flows on the river at Lee Ferry, AZ—the common point of measurement for observed basin flows—averaged 14 8 MAF annually  Natural flows from 2000 to 2018 (i e , during the ongoing drought) averaged considerably less than that—12 4 MAF annually  While natural flows have trended down, consumptive use in the basin has grown and has regularly exceeded natural flows since 2000  From 1971 to 2015, average total consumptive use grew from 13 MAF to over 15 MAF annually  Combined, the two trends have caused a significant drawdown of basin storage levels ( Figure 3 )  From 2009 to 2015, the largest consumptive water use occurred in the Lower Basin (7 5 MAF per year), while Upper Basin consumptive use averaged about 3 8 MAF annually  Use of Treaty water by Mexico (1 5 MAF per year) and evaporative loss from reservoirs (approximately 2 MAF per year) in both basins also factored significantly into total basin consumptive use  Notably, consumptive use in the Lower Basin, combined with mandatory releases to Mexico, regularly exceeds the mandatory 8 23 MAF per year that must be released from the Upper Basin to the Lower Basin and Mexico pursuant to Reclamation requirements  This imbalance between Lower Basin inflows and use, known as the structural deficit , causes additional stress on basin storage  The current drought in the basin has included some of the lowest flows on record  According to Reclamation, the 19-year period from 2000 to 2018 was the driest period in more than 100 years of record keeping  Observers have pointed out that flows in some recent years have been lower than would be expected given the amount of precipitation that has occurred, and have noted that warmer temperatures appear to be a significant contributor to these diminished flows  Based on these and other observations, some have argued that Colorado River flows are unlikely to return to 20 th century averages, and that future water supply risk is high  A 2012 study by Reclamation projected a long-term imbalance in supply and demand in the Colorado River Basin  In the study, Reclamation noted that the basin had thus far avoided serious impacts on water supplies due to the significant storage within the system, coupled with the fact that some Upper Basin states have yet to fully develop the use of their allocations  However, Reclamation projected that in the coming half century, flows would decrease by an average of 9% at Lee Ferry and drought would increase in frequency and duration  At the same time, Reclamation projected that demand for basin water supplies would increase, with annual consumptive use projected to rise from 15 MAF to 18 1-20 4 MAF by 2050, depending on population growth  A range of 64%-76% of the growth in demand was expected to come from increased M&I demand  Reclamation's 2012 study also posited several potential ways to alleviate future shortages in the basin, such as alternative water supplies, demand management, drought action plans, water banking, and water transfer/markets  Some of these options already are being pursued  In particular, some states have become increasingly active in banking unused Colorado River surface water supplies, including through groundwater banks or storage of unused surface waters in Lake Mead (see below section, " 2007 Interim Guidelines ")  Drought conditions throughout the basin have raised concerns about potential negative impacts on water supplies  Concerns center on uncertainty that might result if the Secretary of the Interior were to determine that a shortage condition exists in the Lower Basin, and that related curtailments were warranted  Some in Upper Basin States are also concerned about the potential for a c ompact call of Lower Basin states on Upper Basin states  Drought and other uncertainties related to water rights priorities (e g , potential tribal water rights claims) spurred the development of several efforts that generally attempted to relieve pressure on basin water supplies, stabilize storage levels, and provide assurances of available water supplies  Some of the most prominent developments since the year 2000 (i e , the beginning of the current drought) are discussed below  Prior to the 2003 QSA, California had been using approximately 5 2 MAF of Colorado River on average each year (with most of its excess water use attributed to urban areas)  Under the QSA, an agreement between several California water districts and DOI, California agreed to reduce its use to the required 4 4 MAF under the Law of the River  It sought to accomplish this aim by quantifying Colorado River entitlement levels of several water contractors; authorizing efforts to conserve additional water supplies (e g , the lining of the All-American Canal); and providing for several large-scale, long-term agriculture-to-urban water transfers  The QSA also committed the state to a path for restoration and mitigation related to the Salton Sea, a water body in Southern California that was historically sustained by Colorado River irrigation runoff from the Imperial and Coachella Valleys  A related agreement between Reclamation and the Lower Basin states, the Inadvertent Overrun and Payback Policy (IOPP), went into effect concurrently with the QSA in 2004  IOPP is an administrative mechanism that provides an accounting of inadvertent overruns in consumptive use compared to the annual entitlements of water users in the Lower Basin  These overruns must be "paid back" in the calendar year following the overruns, and the paybacks must be made only from "extraordinary conservation measures" above and beyond normal consumptive use  The 2004 Arizona Water Settlements Act ( P L  108-451 , AWSA) significantly altered the allocation of CAP water in Arizona and set the stage for some of the cutbacks in the state that are currently under discussion  It ratified three water rights settlements (one in each title) between the federal government and the State of Arizona, the Gila River Indian Community (GRIC), and the Tohono O'odham Nation, respectively  For the state and its CAP water users, the settlement resolved a final repayment cost for CAP by reducing the water users' reimbursable repayment obligation from about $2 3 billion to $1 65 billion  Additionally, Arizona agreed to new tribal and non-tribal allocations of CAP water so that approximately half of CAP's annual allotment would be available to Indian tribes in Arizona, at a higher priority than most other uses  The tribal communities were authorized to lease the water so long as the water remains within the state via the state's water banking authority  The act also authorized funds to cover the cost of infrastructure required to deliver the water to the Indian communities, much of it derived from power receipts accruing to the Lower Colorado River Basin Development Fund  Another significant development in the basin was the 2007 adoption of the Colorado River Interim Guidelines for Lower Basin Shortages and the Coordinated Operations for Lake Powell and Lake Mead (2007 Interim Guidelines)  Development of the agreement began in 2005, when, in response to drought in the Southwest and the decline in basin water storage (and a record low point in Lake Powell of 33% active capacity), the Secretary of the Interior instructed Reclamation to develop coordinated strategies for Colorado River reservoir operations during drought or shortages  The resulting guidelines included criteria for releases from Lakes Mead and Powell determined by "trigger levels" in both reservoirs, as well as a schedule of Lower Basin curtailments at different operational tiers ( Table 2 )  Under the guidelines, Arizona and Nevada, which have junior rights to California, would face reduced allocations if Lake Mead elevations dropped below 1,075 ft  At the time, it was thought that the 2007 Guidelines would significantly reduce the risk of Lake Mead falling to 1,025 feet  The guidelines are considered "interim" because they were scheduled to expire in 20 years (i e , at the end of 2026)  The 2007 agreement also included for the first time a mechanism by which parties in the Lower Basin were able to store conserved water in Lake Mead, known as Intentionally Created Surplus (ICS)  Reclamation accounts for this water annually, and the users storing the water may access the surplus in future years, in accordance with the Law of the River  From 2013 to 2017, the portion of Lake Mead water in storage that was classified as ICS ranged from a low of 711,864 AF in 2015 to a high of 1 261 MAF in 2017 ( Figure 4 )  In 2014, Reclamation and several major basin water supply agencies (Central Arizona Water Conservation District, Southern Nevada Water Authority, Metropolitan Water District of Southern California, and Denver Water) executed a memorandum of understanding to provide funding for voluntary conservation projects and reductions of water use  These activities had the goal of developing new system water , to be applied toward storage in Lake Mead, by the end of 2019  Congress formally authorized federal participation in these efforts in the Energy and Water Development and Related Agencies Appropriations Act, 2015 ( P L  113-235 , Division D ), with an initial sunset date for the authority at the end of FY2018  The Energy and Water Development and Related Agencies Appropriations Act, 2019 ( P L  115-244 , Division A ) extended the authority through the end of FY2022, with the stipulation that Upper Basin agreements could not proceed without the participation of the Upper Basin states through the Upper Colorado River Commission  As of mid-2018, Reclamation estimated that the program had resulted in a total of 194,000 AF of system water conserved  These savings were carried out through 64 projects conserving 47,000 AF in the Upper Basin and 11 projects conserving 147,000 AF in the Lower Basin  In 2017, the United States and Mexico signed Minute 323, which extended and replaced elements of a previous agreement, Minute 319, signed in 2012  Minute 323 included, among other things, options for Mexico to hold water in reserve in U S  reservoirs for emergencies and water conservation efforts, as well as U S  commitments for flows to support the ecological health of the Colorado River Delta  It also extended initial Mexican cutback commitments made under Minute 319 (which were similar in structure to the 2007 cutbacks negotiated for Lower Basin states) and established a Binational Water Scarcity Contingency Plan that included additional cutbacks that would be triggered if drought contingency plans (DCPs) are approved by U S  basin states (see following section, " 2019 Drought Contingency Plans ")  Ongoing drought conditions and the potential for water supply shortages prompted discussions and negotiations focused on how to conserve additional basin water supplies  After several years of negotiations, on March 19, 2019, Reclamation and the Colorado River Basin states finalized DCPs for both the Upper Basin and the Lower Basin  These plans required final authorization by Congress to be implemented  Following House and Senate hearings on the DCPs in early April, on April 16, 2019, Congress authorized the DCP agreements in the Colorado River Drought Contingency Plan Authorization Act ( P L  116-14 )  Each of the basin-level DCPs is discussed below in more detail  The Upper Basin DCP aims to protect against Lake Powell reaching critically low elevations; it also authorizes storage of conserved water in the Upper Basin that could help establish the foundation for a water use reduction effort (i e , a "Demand Management Program") that may be developed in the future  Under the Upper Basin DCP, the Upper Basin states agree to operate system units to keep the surface of Lake Powell above 3,525 ft, which is 35 ft above the minimum elevation needed to run the dam's hydroelectric plant  Other large Upper Basin reservoirs (e g , Navajo Reservoir, Blue Mesa Reservoir, and Flaming Gorge Reservoir) would be operated to protect the targeted Lake Powell elevation, potentially through drawdown of their own storage  If established by the states, an Upper Basin DCP Demand Management Program would likely entail willing seller/buyer agreements allowing for temporary paid reductions in water use that would provide for more storage volume in Lake Powell  Reclamation and other observers have stated their belief that these efforts will significantly decrease the risk of Lake Powell's elevation falling below 3,490 ft, an elevation at which significantly reduced hydropower generation is possible  The Lower Basin DCP is designed to require Arizona, California, and Nevada to curtail use and thereby contribute additional water to Lake Mead storage at predetermined "trigger" elevations, while also creating additional flexibility to incentivize voluntary conservation of water to be stored in Lake Mead, thereby increasing lake levels  Under the DCP, Nevada and Arizona (which were already set to have their supplies curtailed beginning at 1,075 ft under the 2007 Interim Guidelines) are to contribute additional supplies to maintain higher lake levels (i e , beyond previous commitments)  The reductions of supply would reach their maximums when reservoir levels drop below 1,045 ft  At the same time, the Lower Basin DCP would, for the first time, include commitments for delivery cutbacks by California  These cutbacks would begin with 200,000 AF (4 5%) in reductions at Lake Mead elevations of 1,040-1,045 ft, and would increase to as much as 350,000 AF (7 9%) at elevations of 1,025 ft or lower  The curtailments in the Lower Basin DCP are in addition to those agreed to under the 2007 Interim Guidelines and under Minute 323 with Mexico  Specific and cumulative reductions are shown in Table 2   In addition to the state-level reductions, under the Lower Basin DCP, Reclamation also would agree to pursue efforts to add 100,000 AF or more of system water within the basin  Some of the largest and most controversial reductions under the Lower Basin DCP would occur in Arizona, where pursuant to previous changes under the 2004 AWSA, a large group of agricultural users would face major cutbacks to their CAP water supplies  Reclamation has noted that the Lower Basin DCP significantly decreases the chance of Lake Mead elevations falling below 1,020 ft, which would be a critically low level  Some parties have pointed out that although the DCP is unlikely to prevent a shortage from being declared at 1,075 ft, it would slow the rate at which the lake recedes thereafter  Combined with the commitments from Mexico, total planned cutbacks under shortage scenarios (i e , all commitments to date, combined) would reduce Lower Basin consumptive use by 241,000 AF to 1 375 MAF per year, depending on Lake Mead's elevation  Although the DCPs and the related negotiations were widely praised, some expressed concerns related to the implementation of the DCPs as they relate to federal and state environmental laws  Most Colorado River contractors supported the agreements, but one major basin contractor, Imperial Irrigation District (IID, a major holder of Colorado River water rights in Southern California), did not approve the DCPs  IID has argued that the DCPs will further degrade the Salton Sea, a shrinking and ecologically degraded water body in southern California that relies on drainage flows from lands irrigated using Colorado River water  Following enactment of the DCPs, IID filed suit in state court alleging that state approval of the DCPs violated the California Environmental Quality Act  Others have questioned whether federal implementation of the DCPs without a new or supplemental Environmental Impact Statement might violate federal law, such as NEPA  The principal role of Congress as it relates to storage facilities on the Colorado River is funding and oversight of facility operations, construction, and programs to protect and restore endangered species (e g , Glen Canyon Dam Adaptive Management Program and the Upper Colorado River Endangered Fish Program)  In the Upper Basin, Colorado River facilities include the 17 active participating units in the Colorado River Storage Projects, as well as the Navajo-Gallup Water Supply Project  In the Lower Basin, major facilities include the Salt River Project and Theodore Roosevelt Dam, Hoover Dam and All-American Canal, Yuma and Gila Projects, Parker-Davis Project, Central Arizona Project, and Robert B  Griffith Project (now Southern Nevada Water System)  Congressional appropriations in support of Colorado River projects and programs typically account for a portion of overall project budgets  For example, the Lower Colorado Region's FY2017 operating budget was $517 million; $119 8 million of this total was provided by discretionary appropriations, and the remainder of funding came from power revenues (which are made available without further appropriation) and nonfederal partners  In recent years, Congress has also authorized and appropriated funding that has targeted the Colorado River Basin in general (i e , the Pilot System Conservation Plan)  Congress may choose to extend or amend these and other authorities specific to the basin  While discretionary appropriations for the Colorado River are of regular interest to Congress, Congress may also be asked to weigh in on Colorado River funding that is not subject to regular appropriations  For instance, in the coming years, the Lower Colorado River Basin Development Fund is projected to face a decrease in revenues and may thus have less funding available for congressionally established funding priorities for the Development Fund  Congress has previously approved Indian water rights settlements associated with more than 2 MAF of tribal diversion rights on the Colorado River  Only a portion of this water has been developed  Congress likely will face the decision of whether to fund development of previously authorized infrastructure associated with Indian water rights settlements in the Colorado River Basin  For example, the ongoing Navajo-Gallup Water Supply Project is being built to serve the Jicarilla Apache Nation, the Navajo Nation, and the City of Gallup, New Mexico  Congress may also be asked to consider new settlements that may result in tribal rights to more Colorado River water  For example, in the 116 th Congress, H R  244 would authorize the Navajo Nation Water Settlement in Utah  In addition to development of new tribal water supplies, some states in the Upper Basin have indicated their intent to further develop their Colorado River water entitlements  For example, in the 115 th Congress, Section 4310 of America's Water Infrastructure Act ( P L  115-270 ) authorized the Secretary of the Interior to enter into an agreement with the State of Wyoming whereby the state would fund a project to add erosion control to Fontenelle Reservoir in the Upper Basin  The project would allow the state to potentially utilize an additional 80,000 acre-feet of water storage on the Green River, a tributary of the Colorado River  Congress may remain interested in implementation of the DCPs, including their success or failure at stemming further Colorado River cutbacks and the extent to which the plans comply with federal environmental laws such as NEPA  Similarly, Congress may be interested in the overall hydrologic status of the Colorado River Basin, as well as future efforts to plan for increased demand in the basin and stretch limited basin water supplies 

ground_truth: Several countries, primarily in Europe, and the European Commission have proposed or adopted taxes on revenue earned by multinational corporations (MNCs) in certain "digital economy" sectors from activities linked to the user-based activity of their residents. These proposals have generally been labeled as "digital services taxes" (DSTs). For example, beginning in 2019, Spain is imposing a DST of 3% on online advertising, online marketplaces, and data transfer service (i.e., revenue from sales of user activities) within Spain. Only firms with €750 million in worldwide revenue and €3 million in revenues with users in Spain are to be subject to the tax. In 2020, the UK plans to implement a 3% DST that would apply only to businesses whose revenues exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually. The UK labels its DST as an "interim" solution until international tax rules are modified to allow countries to tax the profits of foreign MNCs if they have a substantial enough "digital presence" based on local users. The member states of the European Commission are also actively considering such a rule. These policies are being considered and enacted against a backdrop of ongoing, multilateral negotiations among members and nonmembers of the Organization for Economic Cooperation and Development (OECD). These negotiations, prompted by discussions of the digital economy, could result in significant changes for the international tax system. Proponents of DSTs argue that digital firms are "undertaxed." This sentiment is driven in part by some high-profile tech companies that reduced the taxes they paid by assigning ownership of their income-producing intangible assets (e.g., patents, marketing, and trade secrets) to affiliate corporations in low-tax jurisdictions. Proponents of DSTs also argue that the countries imposing tax should be entitled to a share of profits earned by digital MNCs because of the "value" to these business models made by participation of their residents through their content, reviews, purchases, and other contributions. Critics of DSTs argue that the taxes target income or profits that would not otherwise be subject to taxation under generally accepted income tax principles. U.S. critics, in particular, see DSTs as an attempt to target U.S. tech companies, especially as minimum thresholds are high enough that only the largest digital MNCs (such as Google, Facebook, and Amazon) will be subject to these specific taxes. DSTs are structured as a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits. A tax on corporate profits taxes the return to investment in the corporate sector. Corporate profit is equal to total revenue minus total cost. In contrast, DSTs are "turnover taxes" that apply to the revenue generated from taxable activities regardless of costs incurred by a firm. Additionally, international tax rules do not allow countries to tax an MNC's cross-border income solely because their residents purchase goods or services provided by that firm. Rather, ownership of assets justifies a country to be allocated a share of that MNC's profits to tax. Under these rules and their underlying principles, the fact that a country's residents purchase digital services from an MNC is not a justification to tax the MNC's profits. DSTs are likely to have the economic effect of an excise tax on intermediate services. The economic incidence of a DST is likely to be borne by purchasers of taxable services (e.g., companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions. As a result, economic theory and the general body of empirical research on excise taxes predict that DSTs are likely to increase prices in affected markets, decrease quantity supplied, and reduce investment in these sectors. Compared to a corporate profits tax—which, on balance, tends to be borne by higher-income shareholders—DSTs are expected to be more regressive forms of raising revenue, as they affect a broad range of consumer goods and services. Certain design features of DSTs could also create inequitable treatment between firms and increase administrative complexity. For example, minimum revenue thresholds could be set such that primarily large, foreign (and primarily U.S.) corporations are subject to tax. Requirements to identify the location of users could also introduce significant costs on businesses. This report traces the emergence of DSTs from multilateral tax negotiations in recent years, addresses various purported policy justifications of DSTs, provides an economic analysis of their effects, and raises several issues for Congress.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: CAPTA, originally enacted in 1974, provides formula grants to states to improve child protective service systems  ACF administers the CAPTA state grant program and provides guidance and oversight to states  In fiscal year 2017, Congress provided about $25 million for the program  As part of the CAPTA state grant program, states are required to submit to the Secretary of HHS plans outlining how they intend to use CAPTA funds to improve their child protective service systems, among other things  State plans remain in effect for the duration of states’ participation in the grant program; if modifications are needed, these must be submitted  In addition to state plans, states are required to submit to HHS an annual data report providing information on agency decisions made in response to referrals of child abuse and neglect, as well as preventive services provided to families, among other things  CAPTA requires state governors to provide a series of assurances in their state plans  Since 2003, governors have had to provide an assurance that states have in effect and are enforcing a state law or program that includes policies and procedures to address the needs of infants affected by prenatal substance abuse or displaying withdrawal symptoms at birth  Under states’ policies and procedures, health care providers are required to notify CPS of such infants  Governors must also assure that a plan of safe care is developed for these infants  Although CAPTA does not define “plans of safe care,” for the purposes of this report we define them as plans to ensure the safety and well-being of infants who are born substance-affected  The Comprehensive Addiction and Recovery Act of 2016 (CARA) amended certain provisions of CAPTA that relate to substance-affected infants (see table 1)  In addition to provisions related to substance-affected infants, CAPTA also requires governors to provide an assurance to the Secretary of HHS that they have provisions or procedures for certain individuals to report known and suspected instances of child abuse and neglect, which are generally referred to as mandated reporter laws  All states have statutes identifying persons who are required to report suspected child maltreatment to an appropriate agency, such as child protective services, a law enforcement agency, or a state’s toll-free child abuse reporting hotline, according to a 2016 HHS report  Mandatory reporters often include social workers; teachers, principals, and other school personnel; physicians, nurses, and other health care workers; and counselors, therapists, and other mental health professionals  The circumstances under which a mandatory reporter must make a report vary from state to state, according to HHS  Typically, a report must be made when the reporter, in his or her official capacity, suspects or has reason to believe that a child has been abused or neglected  State laws require mandatory reporters to report the facts and circumstances that led them to suspect that a child has been abused or neglected; they do not have the burden of providing proof that abuse or neglect has occurred  CPS, a division within state and local social services, is generally the agency that conducts an initial assessment or investigation of reports of child abuse and neglect  It also offers services to families and children where maltreatment has occurred or is likely to occur  Typically, when CPS agencies receive a notification about suspected child abuse, including a substance-affected infant, social workers review the referral to determine if it should be accepted for investigation  During an investigation, social workers determine, among other things, the nature, extent, and cause of abuse or neglect, and identify the person responsible for the maltreatment  An investigation may include the following: a visit to the hospital and/or infant’s home; observation of the infant; risk and safety assessments; evaluation of the home environment; background checks, including criminal record checks of adults that reside with the family; as well as mental health evaluations  If social workers determine that there is enough evidence to suggest that an infant is at risk for harm or neglect, or that abuse or neglect occurred, the case is substantiated  Once a case is substantiated, CPS develops a case plan with the family outlining objectives and tasks for the family  Among other things, CPS may refer the family to services in the community, such as early intervention services, parenting classes, and substance abuse treatment  Generally, CPS attempts to strengthen the family and alleviate the problems which led to maltreatment  If the case is not substantiated, but there is genuine concern about the child’s situation and the family may benefit from services in the community, the case may be closed and/or the family may be referred for voluntary services (see figure 1)  Prenatal maternal opioid use has increased considerably in recent years  This increase has contributed to a significant rise in the rate of NAS  According to a recent study, the rate of NAS has increased from 1 2 per 1,000 hospital births in 2000 to 5 8 per 1,000 hospital births in 2012, reaching a total of 21,732 infants diagnosed with NAS  NAS occurs with considerable variability  According to a recent HHS report, various studies indicate that anywhere from 55 to 94 percent of infants exposed to opioids in-utero exhibit some degree of symptoms  Typically, infants with NAS develop symptoms within 72 hours of birth, but may develop symptoms within the first 2 weeks of life, including after hospital discharge  For the purpose of this report, infants exposed to opioids ingested by mothers in utero are considered substance-exposed, and those born negatively affected by exposure or experiencing withdrawal symptoms are considered substance-affected  According to experts, NAS is considered an expected and treatable result of women’s prenatal opioid use  Opioid exposure during pregnancy may occur for the following reasons: Women receiving pain medication with a prescription under the care of a physician  Medications can include fentanyl and oxycodone  Women under the care of a physician and undergoing treatment for an opioid use disorder with medications, such as methadone or buprenorphine  This type of treatment is generally referred to as medication-assisted treatment (MAT)  Women misusing opioid pain medications with or without a prescription (such as using without a prescription, using a different dosage than prescribed, or continuing to use a drug when no longer needed for pain)  Women using or abusing illicit opioid, such as heroin  In response to our survey, 42 states reported that state policies and procedures require health care providers to notify CPS about substance- affected infants  Some states reported that they explicitly require health care providers to notify CPS of substance-affected infants  For example, Wisconsin reported that under its state law if tests indicate that infants have controlled substances or controlled substance analogs in their bodily fluids, the health care provider shall report the occurrence of that condition to CPS  Others reported that the requirement is met by their states’ mandated reporter law—whereby people in certain positions, including health care providers, are required to notify CPS about substance-affected infants, similar to the manner in which other mandatory reporters, like school teachers, day care personnel, and social workers are required to report other instances of child abuse and neglect  For example, Kentucky statute requires that “any person who knows or has reasonable cause to believe that a child is dependent, neglected, or abused shall immediately” make a report to the police or CPS  The statutory definition for an abused or neglected child in Kentucky includes situations where a child’s health or welfare is harmed or threatened with harm because of parental incapacity due to alcohol and other drug abuse  Of the 42 states that require health care providers to notify CPS of substance-affected infants, 21 reported that notification is required for infants affected by both illegal and legal use of opioids  For example, in Massachusetts health care providers are required to notify CPS orally and, in writing within 48 hours, about substance-affected infants physically dependent on drugs, even if the drugs were legally obtained and the mother is under the care of a prescribing medical professional  Sixteen of the 42 states reported that health care providers are required to notify CPS of infants affected only by the illegal use of opioids, and five of the 42 states reported that they did not know if health care providers were required to notify CPS of infants affected by the illegal and legal use of opioids  The other eight states reported that although they did not have policies and procedures that require health care providers to notify CPS about substance-affected infants, they have laws or policies that encourage notification  Specifically, in written responses to our survey: Two states reported that under their state mandated reporter laws health care providers are encouraged, but not required, to notify CPS about substance-affected infants  Four states reported that they are working to amend their states’ policies and procedures to require that health care providers refer substance-affected infants to CPS  Another state reported that it encourages the notification from health care providers, but has not sought legislation to require health care providers to report substance-affected infants to CPS because of concerns that any laws that criminalize prenatal substance use would further deter substance-using pregnant women from seeking prenatal care  The state’s law requires all hospital personnel who suspect abuse and neglect or observe conditions that are likely to result in abuse or neglect to notify CPS  One state reported that all persons, including health care providers, are required to report child abuse and neglect, but reporting depends on whether a hospital’s policy indicates substance abuse is child abuse or neglect  Further, the state CPS director reported collaboration with the health care community on reporting substance exposed infants to its child abuse hotline  Although one state reported in our survey that it does not require or encourage health care providers to notify CPS about substance-affected infants, in an interview, state officials explained that its policy requires that health care providers notify CPS if, through an assessment, they conclude that infants are at risk for abuse and neglect  Under the state’s law, health care providers in each county are required to assess the needs of mothers and substance-affected infants using a protocol established by county health departments, CPS agencies, and hospitals  State officials told us that under the state’s law, the birth of a substance- affected infant is not in and of itself a sufficient basis for reporting child abuse or neglect  In addition to having policies and procedures regarding the reporting of substance-affected infants, in written responses to our survey some states reported providing training and guidance to support the efforts of health care providers to notify CPS about these infants  Three states reported that they offer mandatory reporter training to inform health care providers that they are obligated to notify CPS about substance-affected infants  Another state reported that its Department of Human Services developed a guide for mandated reporters that discusses what needs to be reported and where to make reports  Also, one state reported that it sent a formal letter to its state hospital association about how to report substance-affected infants to CPS  This state also sent a memo to its CPS county directors instructing them to contact their local health care providers on the importance of reporting substance-affected infants to CPS and the process for doing so  In addition, during our Massachusetts site visit, officials shared with us a memo that was sent to mandated reporters, community partners, and other stakeholders that offered guidance on when to file a report about substance-exposed infants  Further, local CPS staff at one Massachusetts field office told us that upon request they provide mandated reporter training to health care providers  Despite these policies, procedures, and guidance, in written responses to our survey, a few states reported concerns about requiring health care providers to notify CPS about substance-affected infants and the definition of substance-affected  All of the hospitals that we visited have policies consistent with their state’s law that require that health care providers, primarily hospital social workers, to notify CPS about substance-affected infants  However, one state reported that some medical personnel have been reluctant to report some infants that are positive for illegal and legal substances due to fears of mothers being arrested  Another state reported that stakeholders are concerned that having to notify CPS about substance-affected infants will have a chilling effect on the willingness of pregnant women who use substances to be honest with providers and seek the help and support they need and deserve  According to one state, there is often an inherent resistance to contacting CPS in these cases as health care providers tend to view child welfare involvement as punitive rather than a potential resource for the family  In addition, three states reported in written responses to our survey challenges understanding how to define terms, such as substance- affected, under CAPTA  For example, the Pennsylvania CPS director expressed concerns during our site visit, suggesting that CAPTA raises many unanswered questions, such as (1) if “affected by substances” means at-risk of being or physically affected by substances, (2) what policies relating to substance-affected infants should look like and include, and (3) whether “affected by substances” should include women who are under the care of health care or treatment providers and taking their medications as prescribed  A Kentucky public health official told us that a drug test, or whether the infant is affected by legal or illegal substances, should not be the sole factor in determining CPS’ involvement with a family  Rather, a holistic view of the family, whether the substance prohibits the mother’s ability to care for her child, and any risk factors present that places the infant at risk should also be considered  According to officials, an infant that is exposed to substances, but has not been affected by the substance, can still be at risk for child abuse and neglect  In response to our survey, 46 states reported that they have policies and procedures for deciding which notifications about substance-affected infants are accepted for investigation  Seventeen of those states reported that all notifications of substance-affected infants are accepted for investigation, regardless of the circumstances  The remaining 29 states reported that they apply specific criteria to determine if children who present as substance-affected are accepted for investigation by CPS  Several states reported in written responses to our survey that they base their criteria for accepting notifications on the infant’s safety  For these states, drug exposure does not by itself indicate that an infant’s safety is at risk  For example, one state explained that in determining a child’s safety risk, staff evaluate a number of factors including the history of the family; the family’s presentation at the birthing hospital (appearance of chaotic behavior, suspected intoxication of adults, lack of appropriate concern or bonding with the infant); the presentation of the infant’s physical condition; the results of any testing of parent or child (blood, urine, etc ); discrepancies identified in the parent’s representation of their substance use or substance use treatment; and any other concerns noted by the reporting source  Other states reported that their criteria for accepting notifications for investigation are based on the degree or type of drug exposure in question  For example, one state reported that its policy directs CPS agencies to accept notifications for investigation when a parent has used illegal substances or non-medical use of prescribed medication during the last trimester of pregnancy  Another state reported that it will accept notifications for investigation if the infant is born with a positive toxicology or is experiencing drug withdrawal, or if the mother tests positive for substances  A few states reported using both risk to the safety of infants as well as degree or type of drug as their criteria for accepting notifications  For example, one state reported that it considers factors, such as the type of drug, the parent’s ability to care for the child, addiction history, and the parent’s readiness and preparation to care for the infant  In follow-up correspondences with states that reported that they do not have policies and procedures to decide whether to accept for investigation notices about substance-affected infants, one state reported that decisions are made on a case-by-case basis  A few states reported that after receiving notifications about substance- affected infants, CPS agencies may decide to opt out of investigating some families, referred to as “screening out” families  For example, in Massachusetts, CPS can “screen out” referrals of mothers if the only substance affecting the infants was used by the mothers as prescribed by their physician  In these instances, when CPS in Massachusetts is notified by the hospital about an infant, the screener gathers information from the caller and consults with a supervisor to determine whether the referral should be accepted for investigation or screened out  If the mother is on methadone, for example, but is involved with services and is in a treatment plan, CPS verifies with medical or other qualified providers that the mother used the drug as part of substance abuse or medical treatment as authorized  Additionally, CPS confirms that there are no other concerns of child abuse and/or neglect  If CPS officials in Massachusetts are unable to collect all the information that they need to screen out families, for example when a mother does not sign a release allowing CPS officials to speak with her health care providers, notifications about substance-affected infants are accepted for investigation  In response to our survey, 49 states reported that their CPS agency has policies to develop a plan to ensure the safety and well-being of substance-affected infants who meet the state’s criteria for investigation  Two states reported that CPS staff are not required to develop such a plan, even if a notification is accepted for an investigation or an assessment  For purposes of this report, we are defining a plan of safe care as a plan to ensure the safety and well-being of the infant  States’ approaches to identifying children and families who will receive a plan of safe care generally fall into two categories: 38 states reported that CPS is required to develop a plan of safe care for all notifications of substance-affected infants that are accepted for investigation, including those that are not substantiated  11 states reported that CPS staff are required to develop a plan of safe care only in those instances where an investigation substantiates the notification or uncovers an unmet need or present or emerging danger  For example, local Pennsylvania CPS officials told us that they only develop plans when there is a safety threat or other concern about the infant  Most states reported that after a notification of a substance-affected infant is accepted for investigation, CPS always conducts a needs assessment for the infant and caregivers  For example, one local CPS office that we visited told us that social workers assess risk to and safety of infants, their function (development, age appropriate behavior, etc ), and environment  In addition, workers assess the caregiver’s ability to parent and employment status, as well as housing  The assessments conducted as part of the investigation inform the development of plans of safe care, as well as decisions about the removal of infants from the home  Among the 49 states that reported that plans of safe care are developed for all or some substance-affected infants, 47 reported that these plans either always or sometimes address infants’ safety needs  Plans also address other needs, such as infants’ immediate medical and longer-term developmental needs, as well as caregiver’s substance use treatment needs  See figure 2 for the number of states whose plans of safe care address various issues facing the infant and parent  In written responses to our survey and during our site visits, officials reported that plans of safe care and referrals for services included in the plans are individualized based on the infant and family’s needs  For example, Massachusetts state CPS officials told us that plans of safe care are developed for each family based on the information that staff collect from the safety, risk, and family assessments, as well as information collected from individuals who may have knowledge that would inform the family assessments, such as medical and treatment providers, and family members  Kentucky state CPS officials told us that the local organizations and service providers that they collaborate with to develop the plan of safe care also vary based on the family’s needs  For example, Kentucky will only collaborate with substance use treatment providers to develop the plan of safe care when families have substance use disorders  Similarly, during our site visits, officials from two states told us that the decision to place an infant in foster care is based on the individualized needs of the infant and caregiver  For example, Massachusetts state officials told us that their decision to remove a baby from the home depends on a myriad of factors and is determined on a case-by-case basis  Officials explained that if a mother is discharged from the hospital and begins using drugs again and does not have adequate supports in place to care for her baby, CPS may decide to place the infant in foster care  However, if a mother has existing support systems in place to mitigate safety risks, CPS may decide to keep the baby in the home  In our survey, all 51 states reported that their agencies either always or sometimes refer parents or caregivers to substance use treatment programs, and most states reported that they always or sometimes refer parents or caregivers to parenting classes or programs (49), and other supportive services (49)  CPS officials in each of the three states that we visited told us that their plans of safe care include referrals to address not only the immediate needs of the infants, but also the needs of the parent or caregiver  For example, officials from a local Kentucky CPS agency told us that staff refer mothers of substance-exposed infants to a program called Sobriety Treatment and Recovery Team (START)  START is comprised of a social worker and a peer support mentor who has at least 3 years of sobriety, previous involvement with CPS, and was successfully able to regain or keep custody of her own children  According to officials, the START program has been able to provide participants with quick access to substance use disorder treatment  Officials from a Massachusetts local CPS agency told us that one of the services that they provide to parents of substance-affected infants is a parent aide who can help monitor how the parent is caring for the infant, such as administering the infant’s medications appropriately and ensuring the parent is not abusing the infant’s drugs  In addition, a parent aide can provide emotional support and help parents adjust after the infant is discharged from the hospital  Kentucky officials noted the effect that a healthy caregiver has on the outcome of the infant and emphasized that a baby cannot be healthy if the mother is not  Kentucky CPS officials said that they have found that the earlier caregivers enter treatment, the better the outcomes are for mothers and babies  According to Kentucky officials, parents who participate in the START program are less likely to have their child placed in foster care  Officials from the states that we visited told us that developing and monitoring plans of safe care under CAPTA’s new requirements for infants affected by their mother’s legal use of prescribed medications, as well as plans for these infants’ caregivers, present challenges  Specifically, officials reported concerns about increased caseloads, particularly if they are required to provide plans and services for infants at low risk of abuse or neglect, the content of plans, and confidentiality restrictions  Thirty-one of 50 states reported on our survey that staffing or resource limitations was very or extremely challenging, and CPS officials across the 3 states we visited said that the opioid epidemic has directly contributed to increased caseloads  According to a local Kentucky CPS office, the number of babies that met criteria for being accepted for investigation has increased about 55 percent from 2011 to 2016, while the number of staff has remained the same  Similarly, hospitals reported being impacted by this challenge  For example, staff at four hospitals we visited told us that they have delayed discharging infants from the hospital because CPS social workers did not identify caregivers to whom infants may be released or make plans for infants in a timely manner  In addition, staff from three hospitals told us that some CPS workers are difficult to contact and not especially responsive to their questions  One hospital social worker told us that she is concerned that the changes to CAPTA that require notifying CPS of all substance-affected newborns will inundate the agencies with cases  Officials from two of the three states we visited anticipated that providing services to infants affected by the legal use of prescribed medications, but not likely to be at risk for child abuse and neglect, will result in an increase in the number of families referred to CPS  This, in turn, will require a plan of safe care and further strain limited resources  Twenty- five states reported in our survey that the plan they develop for substance-affected infants is the same as for other children in CPS care, suggesting that states devote the same level of resources to these infants as other cases  The states we visited interpret CAPTA to require that plans of safe care be developed for all substance-affected infants who are referred to CPS, including those who may not meet usual criteria to be accepted for an investigation  Some state officials we interviewed questioned whether the new CAPTA requirements would allow for the best use of limited resources  For example, one senior state CPS official questioned whether it would be a good use of resources to develop plans of safe care for mothers in substance use disorder treatment or mothers using opioid medications due to chronic pain  A local CPS official we interviewed stated that drug exposure, in and of itself, is not necessarily a safety risk, and CPS should not intervene with families who are not at risk for child abuse or neglect  Instead, hospitals or treatment providers should intervene and refer families who do not meet criteria for CPS involvement, but could benefit from additional supports, to voluntary services  Kentucky public health officials told us that the period after a woman gives birth is a critical time for families as mothers may be stressed, sleep-deprived, exhausted, and may have other children in the home  This period may be especially challenging for mothers with substance use disorders, if adequate supports are not in place  According to officials women are typically covered for substance use treatment during pregnancy; however, this coverage ends roughly 60 days after the baby is born  In written responses to our survey, some states reported that they would rely on other agencies to develop plans of safe care  Similarly, in order to manage limited CPS resources, officials from two of the three states that we visited said they are considering having hospitals or other agencies assume responsibility for developing plans of safe care when there is no evidence of abuse or neglect and there appears to be minimal risk to the safety and well-being of the infant  Kentucky officials told us that they envision that CPS will be responsible for developing a plan of safe care for notifications that are accepted for investigation, while hospitals, or another agency, will be responsible for developing plans of safe care for referrals that are screened out by CPS  According to CPS state officials, the plan of safe care for the infant and the family can be part of the discharge plan prior to the family leaving the hospital  However, officials reported that obtaining cooperation from other agencies may be difficult


Report 2:  Some state officials reported being concerned that other agencies may not feel obligated to develop these plans, in part, because CAPTA provides funding to child welfare, and other agencies may therefore believe that child welfare should be responsible for developing the plan of safe care  CPS officials we interviewed in two of our site visit states, as well as one state we followed up with, told us that they were unsure of whether their current plans will meet new CAPTA requirements because CAPTA does not define a plan of safe care  For example, Massachusetts officials said that their plans include everything that a family might need to ensure the safety of the child, including resources to ensure stabilization and reunification of a family, but they are not sure whether the plans meet new CAPTA requirements, in part because they are not familiar with the term “plan of safe care ” An official in another state was also unsure about whether his state’s “safety plans” would meet CAPTA requirements  According to the official, safety plans may include a treatment plan for mothers, and referral services, such as early intervention for the child  In practice, plans of safe care generally address gaps that place an infant at risk for harm or neglect  However, state officials we interviewed reported being unsure about what a plan of safe care should look like for families where these gaps do not exist  Also, in a written response to our survey, one state expressed uncertainty about CPS’ role if required to work with infants who do not typically receive CPS services  For example, a Pennsylvania official said that it is unclear what types of interventions child welfare should conduct with families of infants exposed to legal substances, such as medications prescribed by doctors, when the caregivers are taking their medications correctly  Similarly, officials also questioned whether a plan would be necessary, and what the plan would entail, for caregivers who are already addressing their substance use disorder and taking steps to ensure their infant’s safety  Officials from a local Kentucky CPS office described a case in which a mother was participating in medication-assisted treatment, had attended counseling three times per week throughout her pregnancy, and was continuing treatment in the postpartum period  Through CPS’ investigation, the agency found that the case was not substantiated, in part, because there were no additional services that CPS could connect her with that she was not already receiving  Officials across the three states we visited also said that state and federal drug and alcohol confidentiality restrictions may challenge their ability to monitor plans of safe care  To monitor plans of safe care, CPS staff may need access to confidential information in order to know how caregivers are progressing in treatment, particularly now that these plans must address the substance use disorder needs of the caregiver  However, federal law restricts the disclosure and use of alcohol and drug patient records maintained in connection with the performance of any federal- assisted alcohol and drug abuse program  Generally, confidential information may be disclosed in accordance with the prior written consent of the patient  State and local CPS staff we interviewed said that strict confidentiality requirements make it challenging for drug and alcohol treatment providers to share information about mothers and infants  A CPS state director from Pennsylvania said that treatment providers are often reluctant to provide CPS case workers with information or updates on a mother’s treatment, which prevents child welfare workers from fully understanding how mothers are progressing with their treatment and the extent to which those in treatment are adhering to prescribed directions as outlined by treatment providers  In addition, one official from a state we visited said state statutes regarding sharing of drug and alcohol treatment information may be more restrictive than the federal statute  Some states have developed ways to obtain confidential information about mothers in substance use disorder treatment  For example, officials from one local CPS office told us that in instances when they have to develop a long-term plan of safe care for families, they have mothers sign a release of information form in order to obtain updates about her treatment adherence from the medication- assisted treatment provider  Similarly, a local Massachusetts CPS office told us that typically staff obtain releases from mothers so that they can verify whether mothers are actively participating in their treatment and that there are no records of relapse  In HHS’ role to assist states in the delivery of child welfare services, two agencies—ACF and the Substance Abuse and Mental Health Services Administration (SAMHSA)—provided technical assistance to states through the National Center on Substance Abuse and Child Welfare (NCSACW)  In addition, in ACF’s role to administer and monitor states’ implementation of CAPTA, the agency has provided some guidance to states on the provisions pertaining to substance-affected infants and has begun its monitoring responsibilities  ACF and SAMHSA, which leads public health efforts to reduce the impact of substance abuse and mental illness, established the NCSACW in 2002  The NCSACW provides technical assistance to states, and has issued publications and hosted forums to help states develop policies and procedures around issues affecting substance-affected infants  The technical assistance has focused on a broad range of issues, including collaboration among service providers, and plans of safe care  With respect to collaboration, NCSACW has issued several studies that identify opportunities for strengthening interagency efforts to prevent, intervene, identify, and treat prenatal substance exposure  The NCSACW collaboration guides encourage states to involve CPS agencies with medical providers in an interagency collaborative setting, thereby facilitating the process for CPS agencies to be notified of substance- affected infants  Regarding plans of safe care, NCSACW has provided technical assistance and best practices to states around development of these plans  For example, in one state it has facilitated discussion groups to help the state develop a model plan  From calendar year 2011 to 2016, NCSACW processed approximately 600 requests from state CPS agencies for short-term technical assistance related to improving care for substance-affected infants and their families  This short-term technical assistance included activities such as responding to telephone inquiries, mailing information, identifying needed resources, and making referrals  The NCSACW has also provided in- depth assistance to 16 states to strengthen collaboration and linkages across child welfare, addiction treatment, medical communities, early care and education systems, and family courts to improve outcomes for substance-affected infants and their families  Through this in-depth assistance, NCSACW identified areas for improvement in states, including a lack of clarity regarding compliance with CAPTA requirements (such as identification, notification, and developing plans of safe care) and the need for state models to comply with CAPTA requirements to develop plans of safe care  In one state, the project overview report indicated that a next step for the in-depth technical assistance is to continue development of the plan of safe care model and ensure practices and protocols are in place across systems to meet CAPTA requirements  The report indicated that this will include ongoing work with hospitals to ensure consistent identification of infants with prenatal exposure and notifications to CPS  Although18 states reported in our survey that technical assistance from the NCSACW was very or extremely helpful, 11 reported that it was moderately helpful, 7 reported that it was slightly helpful, and 1 reported that it was not at all helpful  Eleven states reported that they were not familiar with this assistance  Since July 2016, when the most recent amendments to CAPTA were enacted, ACF has issued one information memorandum and two program instructions to states about provisions relating to substance-affected infants  According to an ACF official, information memoranda share information with states, while program instructions provide interpretations of the law and inform states of actions they must take  ACF issued an August 2016 information memorandum informing states of the 2016 amendments to CAPTA  The August 2016 information memorandum also provided states with best practices, drawing on an NCSACW guide on collaboration for developing multi-systemic approaches to assist child welfare, medical, substance use disorder treatment, and other systems to support families affected by opioid use disorders  In January 2017, ACF issued a program instruction which provided guidance to states on implementing the 2016 amendments to CAPTA made by CARA and informed states of the flexibilities that they have under the law  Particularly, the guidance noted that: “CAPTA does not define ‘substance abuse’ or ‘withdrawal symptoms resulting from prenatal drug exposure ’ We recognize that by deleting the term ‘illegal’ as applied to substance abuse affecting infants, the amendment potentially expands the population of infants and families subject to the provision [that states have policies and procedures in place to address their needs]  States have flexibility to define the phrase, ‘infants born and identified as being affected by substance abuse or withdrawal symptoms resulting from prenatal drug exposure,’ so long as the state’s policies and procedures address the needs of infants born affected by both legal (e g , prescribed drugs) and illegal substance abuse ” “While CAPTA does not specifically define a ‘plan of safe care,’ CARA amended the CAPTA state plan requirement       to require that a plan of safe care address the health and substance use disorder treatment needs of the infant and affected family or caregiver ” “CAPTA does not specify which agency or entity must develop the plan of safe care; therefore the state may determine which agency will develop the plans  We understand that in most instances the state already has identified the responsible agency in its procedures  When the state reviews and modifies its policies and procedures to incorporate the new safe care plan requirements in CARA, the state may wish to revisit its procedures regarding which agency develops the plan of safe care, including any role for agencies collaborating with CPS in caring for the infant and family ” In addition, in April 2017, ACF issued a program instruction on reporting requirements, including changes in those requirements brought about by the 2016 amendments to CAPTA  ACF conducted limited monitoring of states prior to the amendments passed in 2016  According to ACF officials, if presented with evidence of potential deficiencies, the agency would attempt to learn more about the state’s activities  In one instance, ACF reviewed South Carolina’s policies and found them to not be in compliance with the notification and safe care plan requirements of CAPTA  It directed the state to develop a program improvement plan to bring it into full compliance, which South Carolina submitted in April 2016  In a recent progress report (February–April 2017), South Carolina reported that it was focused on updating statutes, developing policies and procedures, training child protective service workers, and building relations with health care providers  In response to the 2016 amendments to CAPTA that added the requirement for HHS to monitor state policies and procedures to address the needs of substance-affected infants, ACF officials told us that staff in regional offices will review states’ annual reports, submitted in June 2017  In its program instruction describing the reporting requirements, ACF asked each state to submit a new Governor’s Assurance, as well as a narrative explaining what they have done in response to the amendments  Specifically, ACF asked states to provide information on any changes that were made in state laws, policies, or procedures related to identifying and referring infants affected by substance abuse to CPS as a result of prenatal drug exposure  It also requested updates on states’ policies and procedures regarding the development of plans of safe care; a description of how states have developed systems to monitor plans of safe care; and a description of any outreach or coordination efforts the states have taken to implement the amendments, among other things  According to ACF officials, as of October 1, 2017, some states have provided information and a Governor’s Assurance demonstrating compliance with the amended provisions and some states have been placed on Program Improvement Plans, but the agency does not yet have information on the status of all states  An ACF official explained that, in their annual reports, some states either acknowledged that they are trying to get legislation enacted to bring them into compliance with the law and it has failed, or that they are not in compliance, for example, because they were limiting their policies to those infants affected only by illegal substances  In addition, in May 2017, ACF issued a technical bulletin informing states of the new data collection requirements that resulted from the 2016 amendments to CAPTA  ACF stated that it intends to collect data required by the amendments to CAPTA through the National Child Abuse and Neglect Data System, beginning with states’ submission of fiscal year 2018 data  This system is maintained by ACF and contains data from states about children who have been abused or neglected  ACF issued a Federal Register notice about the proposed data elements and requested comments on the accuracy and quality of the proposed data collection, among other things; the comment period closed in July 2017  In the Federal Register notice, ACF notes that the 2016 amendments to CAPTA require it to collect information from state CPS agencies on the number of notifications from health care providers that are accepted for investigation or screened out  Further, of those infants screened in, ACF is required to collect data on the number of safe care plans developed for substance- affected infants as well as the number of infants for whom a referral was made for appropriate services, including services for the affected family or caregiver  In the Federal Register notice, ACF proposed to collect this information using a combination of existing and new data from states  Thirty-two states reported in our survey that they already collect data on the incidence of substance-affected and/or substance-exposed infants; 15 of those 32 states also collect data on the incidence of NAS  Further, 18 states reported that they collect data on the number of notifications health care providers make to CPS  Of those states, 8 reported that they collect specific data on notifications related to infants diagnosed with NAS  Most states reported in our survey that additional guidance and assistance would be extremely or very helpful (see figure 3)  For example, 38 states reported that additional guidance on requirements for health care providers to notify CPS of substance-affected infants would be extremely or very helpful  Similarly, 37 states reported that additional guidance on developing, implementing, and monitoring plans to ensure the safety and well-being of substance-affected infants would be extremely or very helpful  In written responses to our survey, states suggested ideas for additional guidance, training, and technical assistance to help them address the needs of substance-affected infants  States’ suggestions ranged from assisting in the development of substance abuse training curriculum for staff to video conferences with other states to share information about implementing CAPTA  A few states suggested that the guidance ACF has provided to date is not clear and reported grappling with the meaning of terms such as “affected” and “legal vs  illegal” substances, and two states requested “concrete guidance” and “specificity ” A few other states suggested that it would be helpful to obtain additional information about meeting the requirements of plans of safe care within the constraints of state and federal confidentiality laws, technical assistance on what plans of safe care look like, and a format for a plan of safe care  ACF officials told us that states have flexibility with implementing the law and the agency does not anticipate issuing additional written guidance on the amendments to CAPTA made by CARA  ACF officials explained, in October 2017, that they were finalizing their review of the plans that states were required to submit  These plans are expected to include details on how the states are addressing the CAPTA requirements  While ACF could not provide the number, officials reported that some of the state plans submitted to date did not meet the requirements and those states have been asked to develop program improvement plans  They expect states to work with the ACF regional offices, which will provide or facilitate technical assistance to states on their implementation of the provisions, as needed  In addition to the review of state plans, ACF officials explained that regional officials may learn about states’ needs for technical assistance through meetings or informational exchanges  Finally, the NCSACW is expected to review and prepare a summary of CAPTA state plans, current state statutes and policies and procedures relating to amended CAPTA requirements  In addition, according to ACF, NCSACW will continue to offer technical assistance on the development and implementation of plans of safe care to states  Technical assistance may include responding to requests for information, disseminating written materials and resources, and conducting webinars/conference calls  Further, ACF reported that some states will receive more in-depth technical assistance, albeit in some instances on a time-limited basis  Undertaking these actions can enhance states’ understanding of CAPTA requirements and better address known challenges such as the ones described in this report  However, more specific guidance from HHS on the issues which states have expressed confusion can assist them in better understanding CAPTA requirements and providing more effective protections and services for the children and families most in need  The opioid epidemic has generated a significant increase in the number of substance-affected infants born and diagnosed with NAS  These vulnerable infants may be at risk for child abuse and neglect if adequate supports and services are not available to ensure their safety  CAPTA requires states to have policies and procedures to address the needs of these infants and their families, including mothers with a substance use disorder  However, states have experienced challenges implementing new CAPTA requirements  Many states reported in our survey that they are not completely adhering to the law  This is reflected in ACF’s review of state plans, some of which are resulting in program improvement plans  States cite challenges that stem, in part, from ACF’s lack of specificity in providing guidance on implementing CAPTA requirements  Specifically, states report that ACF has not provided clear guidance about which substance-affected infants health care providers are required to notify CPS about, as well what a plan of safe care is and for whom it should be developed  Given the challenges that states reported facing in implementing the provisions, a majority reported wanting more help from ACF, such as trainings and teleconferences with other states, to help overcome their challenges  Additional guidance and assistance from HHS would help states better understand what they need to do to develop policies and procedures that meet the needs of children and families affected by substance use  The Secretary of HHS should direct ACF to provide additional guidance and technical assistance to states to address known challenges and enhance their understanding of CAPTA requirements, including the requirements for health care providers to notify CPS of substance- affected infants and the development of a plan of safe care for these infants  We provided a draft of this report to HHS for review and comment  HHS’s comments are reproduced in appendix I  HHS also provided technical comments, which we incorporated into our report where appropriate  HHS did not concur with our recommendation  HHS stated that: in January 2017, ACF clarified in guidance several of the issues raised in the report, including the population of infants and families covered by the provision and the state flexibility inherent in determining which infants are “affected by” substance abuse, and the terminology used in the federal law of what a “plan of safe care” is; ACF believes it is necessary to allow states the flexibility to meet the requirements in the context of their state CPS program; several of the challenges that the GAO notes are not specific to CAPTA compliance with the safe care plan and notification requirements; and it does see the value in continuing to provide technical assistance to states to address known challenges and to enhance their understanding of CAPTA requirements  With respect to HHS’ January 2017 guidance, state officials reported in our survey and during site visits that they found some terms unclear and were uncertain about what is required of them  In written responses to our survey, states reported challenges understanding how to define substance-affected under CAPTA  In addition, as we note in our report, the guidance about plans of safe care described the following: “While CAPTA does not specifically define a ‘plan of safe care,’ CARA amended the CAPTA state plan requirement       to require that a plan of safe care address the health and substance use disorder treatment needs of the infant and affected family or caregiver ” States reported in our survey and in follow-up discussions that this lack of specificity remained an ongoing challenge for them  For example, as we discuss in our report, one state that we followed up with in August 2017 was still unsure about whether its safety plans would meet CAPTA requirements for plans of safe care  In addition, as of October 2017, HHS confirmed that some state plans did not meet CAPTA requirements and that the states were asked to develop program improvement plans  Accordingly, a key ongoing challenge was not addressed by the January guidance  Regarding allowing states flexibility to meet CAPTA requirements, we acknowledge in our report that HHS said that states have flexibility  However, in our survey and site visits, states indicated that they would find it helpful for HHS to provide them with greater specificity around terms, including the degree of flexibility they are allowed  States added that this would include parameters within which they can develop policies and procedures that meet CAPTA requirements  We continue to believe that additional guidance addressing these concerns would benefit states and could be provided without imposing additional mandates  Concerning HHS’ third point that some of the issues raised in the report are not specific to CAPTA, the states we visited interpret CAPTA to require that plans of safe care be developed for all substance-affected infants who are referred to CPS  During our discussions with states and in responses to our survey, state officials did not delineate which federal requirement impacted their approach to serving children and families  As stated in our conclusion, vulnerable infants may be at risk for child abuse and neglect if adequate supports and services are not available to ensure their safety  Lastly, HHS indicated that it will continue to provide technical assistance to states and fund demonstration sites to establish or enhance collaboration across community agencies and courts  Although continuing to provide technical assistance to states should be beneficial, our findings demonstrate that additional guidance is also needed  For example, 38 states reported that additional guidance on requirements for health care providers to notify CPS of substance-affected infants would be extremely or very helpful  Similarly, 37 states reported that additional guidance on developing, implementing, and monitoring plans to ensure the safety and well-being of substance-affected infants would be extremely or very helpful  Overall, given the results of our review, we continue to believe our recommendation is warranted  Effective implementation of our recommendation should help states better implement protections for children  As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies of this report to the appropriate congressional committees and the Secretary of Health and Human Services  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-7215 or larink@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix II  Kathryn A  Larin, (202) 512-7215 or larink@gao gov  In addition to the contact above, Sara Schibanoff Kelly (Assistant Director), Ramona L  Burton (Analyst-in-Charge), Kay E  Brown, Hannah Dodd, Ada Nwadugbo, and Srinidhi Vijaykumar made key contributions to this report  Also contributing to this report were Sandra L  Baxter, James Bennett, Gina Hoover, Jessica Orr, Rhiannon Patterson, Jean McSween, and James Rebbe 

ground_truth: The Colorado River Basin covers more than 246,000 square miles in seven U.S. states (Wyoming, Colorado, Utah, New Mexico, Arizona, Nevada, and California) and Mexico. Pursuant to federal law, the Bureau of Reclamation (part of the Department of the Interior) manages much of the basin's water supplies. Colorado River water is used primarily for agricultural irrigation and municipal and industrial (M&I) uses, but it also is important for power production, fish and wildlife, and recreational uses. In recent years, consumptive uses of Colorado River water have exceeded natural flows. This causes an imbalance in the basin's available supplies and competing demands. A drought in the basin dating to 2000 has raised the prospect of water delivery curtailments and decreased hydropower production, among other things. In the future, observers expect that increasing demand for supplies, coupled with the effects of climate change, will further increase the strain on the basin's limited water supplies. River Management The Law of the River is the commonly used shorthand for the multiple laws, court decisions, and other documents governing Colorado River operations. The foundational document of the Law of the River is the Colorado River Compact of 1922. Pursuant to the compact, the basin states established a framework to apportion the water supplies between the Upper and Lower Basins of the Colorado River, with the dividing line between the two basins at Lee Ferry, AZ (near the Utah border). The Upper and Lower Basins each were allocated 7.5 million acre-feet (MAF) annually under the Colorado River Compact; an additional 1.5 MAF in annual flows was made available to Mexico under a 1944 treaty. Future agreements and court decisions addressed numerous other issues (including intrastate allocations of flows), and subsequent federal legislation provided authority and funding for federal facilities that allowed users to develop their allocations. A Supreme Court ruling also confirmed that Congress designated the Secretary of the Interior as the water master for the Lower Basin, a role in which the federal government manages the delivery of all water below Hoover Dam. Reclamation and basin stakeholders closely track the status of two large reservoirs—Lake Powell in the Upper Basin and Lake Mead in the Lower Basin—as an indicator of basin storage conditions. Under recent guidelines, dam releases from these facilities are tied to specific water storage levels. For Lake Mead, the first tier of "shortage," under which Arizona's and Nevada's allocations would be decreased, would be triggered if Lake Mead's January 1 elevation is expected to fall below 1,075 feet above mean sea level. As of early 2019, Reclamation projected that there was a 69% chance of a shortage condition at Lake Mead in 2020; there was also a lesser chance of Lake Powell reaching critically low levels. Improved hydrology in early 2019 may decrease the chances of shortage in the immediate future. Drought Contingency Plans Despite previous efforts to alleviate future shortages, the basin's hydrological outlook has generally worsened in recent years. After several years of negotiations, in early 2019 Reclamation and the basin states transmitted to Congress additional plans to alleviate stress on basin water supplies. These plans, known as the drought contingency plans (DCPs) for the Upper and Lower Basins, were authorized by Congress in April 2019 in the Colorado River Drought Contingency Plan Authorization Act (P.L. 116-14). The DCPs among other things obligate Lower Basin states to additional water supply cutbacks at specified storage levels (i.e., cutbacks beyond previous curtailment plans), commit Reclamation to additional water conservation efforts, and coordinate Upper Basin operations to protect Lake Powell storage levels and hydropower generation. Congressional Role Congress plays a multifaceted role in federal management of the Colorado River basin. Congress funds and oversees management of basin facilities, including operations and programs to protect and restore endangered species. It has also enacted and continues to consider Indian water rights settlements involving Colorado River waters and development of new water storage facilities in the basin. In addition, Congress has approved funding to mitigate water shortages and conserve basin water supplies and has enacted new authorities to combat drought and its effects on basin water users (i.e., the DCPs and other related efforts).