Clean Water Infrastructure: A Variety of Issues Need to Be Considered When Designing a Clean Water Trust Fund
Published: 2009-05-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Environmental Protection Agency (EPA) has estimated that a potential gap between future needs and current spending for wastewater infrastructure of $150 billion to $400 billion could occur over the next decade. A number of entities are involved in planning, financing, building, and operating this infrastructure. Some of these stakeholders have suggested a variety of approaches to bridge this potential gap. One such proposal is to establish a clean water trust fund. In this context, GAO was asked to (1) obtain stakeholders' views on the issues that would need to be addressed in designing and establishing a clean water trust fund and (2) identify and describe potential options that could generate about $10 billion in revenue to support a clean water trust fund. In conducting this review, GAO administered a questionnaire to 28 national organizations representing the wastewater and drinking water industries, state and local governments, engineers, and environmental groups and received 22 responses; reviewed proposals and industry papers; interviewed federal, state, local, and industry officials; and used the most current data available to estimate the revenue that could potentially be raised by various taxes on a range of products and activities. GAO is not making any recommendations. While this report identifies a number of funding options, GAO is not endorsing any option and does not have a position on whether or not a trust fund should be established.
section_title: What GAO Found
paragraphs: In designing and establishing a clean water trust fund, stakeholders identified three main issues that would need to be addressed: how a trust fund should be administered and used; what type of financial assistance should be provided; and what activities should be eligible to receive funding from a trust fund. While a majority of stakeholders said that a trust fund should be administered through an EPA partnership with the states, they differed in their views on how a trust fund should be used. About a third of stakeholders responded that a trust fund should be used only to fund the existing Clean Water State Revolving Fund (CWSRF), which is currently funded primarily through federal appropriations, while a few said it should support only a new and separate wastewater program. A few stakeholders supported using a trust fund to support both the CWSRF and a separate program, while others did not support the establishment of a trust fund at all. In addition, more than half of the stakeholders responded that financial assistance should be distributed using a combination of loans and grants to address the needs of different localities. Finally, although a variety of activities could be funded, most stakeholders identified capital projects as the primary activity that should receive funding from a clean water trust fund. A number of options have been proposed in the past to generate revenue for a clean water trust fund, but several obstacles will have to be overcome in implementing these options, and it may be difficult to generate $10 billion from any one option by itself. Funding options include a variety of excise taxes. In addition, Congress could levy a tax on corporate income. An additional 0.1 percent corporate income tax could raise about $1.4 billion annually. Congress also could levy a water use tax. A tax of 0.01 cent per gallon could raise about $1.3 billion annually. Regardless of the options selected, certain implementation obstacles will have to be overcome. These include defining the products or activities to be taxed, establishing a collection and enforcement framework, and obtaining stakeholder support for a particular option or mix of options.

section_title: Letter
paragraphs: More than 220 million people in the United States are served by  wastewater systems that are composed primarily of a network of sewer  pipes and treatment plants that carry and treat wastewater before it is  discharged into surface water. Many of these systems were constructed  more than 50 years ago and are reaching the end of their useful lives. In  addition to the deterioration in the condition of this infrastructure, some  of these systems also lack the capacity to adequately treat increasingly  large volumes of wastewater, particularly during periods of wet weather.  As a result, these systems are releasing large quantities of untreated  wastewater into surface waters, which can pose a threat to human and  aquatic health. For example, according to Environmental Protection  Agency (EPA) estimates, wastewater systems annually discharge over 850  billion gallons of untreated sewage into U.S. surface waters. Although  federal, state, and local governments invest billions of dollars annually in  wastewater infrastructure—a total of about $40 billion in 2006—EPA and  others have estimated that current spending levels may not be adequate to  cover the costs of maintaining and replacing pipes, treatment plants, and  other parts of this infrastructure. According to EPA’s estimates, a potential  gap of about $150 billion to $400 billion between projected future  infrastructure needs and current levels of spending could occur over the  next decade. Without additional investment in the nation’s wastewater  infrastructure, EPA and other groups have asserted that the environmental  and public health gains made under the Clean Water Act during the last  three decades could be at risk.
A variety of approaches have been proposed to help bridge a potential gap  between projected future infrastructure needs and current levels of  spending. For example, one approach would be to increase federal funding  for the Clean Water State Revolving Fund (CWSRF) program, which is the  largest source of federal assistance for wastewater infrastructure. About  $689 million was appropriated in both fiscal years 2008 and 2009 for the  CWSRF program, and an additional $4 billion was appropriated by the  American Recovery and Reinvestment Act of 2009. Under the CWSRF  program, EPA provides capitalization grants to the states, which in turn  use these funds to make loans to local communities or utilities for various  water quality projects. As loans are repaid, the funds are cycled back into  the state-level programs to fund additional projects. New funding for the  CWSRF program is dependent on federal appropriations. In addition, EPA  has promoted its sustainable infrastructure initiative for water  infrastructure management, called the Four Pillars, to help meet  infrastructure needs. Among other things, the Four Pillars calls for  wastewater and drinking water utilities to charge rates for the service they  provide that are high enough to enable them to fund future capital needs in  addition to their routine operations and maintenance. Still another  approach that has been considered to bridge a potential gap between  projected future infrastructure needs and current spending levels is to  establish a clean water trust fund. In general, federal trust funds collect  revenue and distribute funds that have been set aside for specific  purposes. A clean water trust fund would provide a dedicated source of  funding for wastewater infrastructure that would be similar to some of the  trust funds that Congress has established for other infrastructure and  environmental programs, such as highway infrastructure construction and  coastal wetlands restoration. Some of the revenue for federal trust funds is  generated through federal excise taxes on specific products and services.
In this context, you asked us to provide information on the issues that  would need to be addressed if Congress decided to establish a clean water  trust fund to help meet the potential gap between projected future  wastewater infrastructure needs and current spending levels. Specifically,  this report (1) describes stakeholders’ views on the issues that would need  to be addressed in designing and establishing a clean water trust fund and  (2) identifies and describes potential options that Congress could consider  that could generate revenues of $10 billion annually to support a clean  water trust fund.
To determine stakeholders’ views on the issues that would need to be  addressed in designing and establishing a clean water trust fund, we  reviewed past legislative proposals and wastewater industry position  papers on establishing such a fund. In addition, we interviewed a variety of  stakeholders, both individuals and groups, with knowledge of wastewater  infrastructure issues, including those from the wastewater industry and  federal, state, and local government. Based on the information gathered  from these interviews, we developed and administered a questionnaire to  obtain the views of these and other stakeholders on the issues that need to  be addressed in designing and establishing a trust fund. We sent this  questionnaire to national organizations representing the wastewater  industry, drinking water industry, state and local governments, engineers,  and environmental groups. We sent out 28 questionnaires and received 22  responses, for a response rate of 79 percent. Some stakeholders did not  answer all of the questions on the questionnaire, so the number of  responses for each question can vary. We also reviewed reports and  documents on the CWSRF and interviewed federal and state officials  responsible for implementing this program to gain an understanding for  how this program might interact with a clean water trust fund. Finally, we  visited three states—Arizona, Maryland, and Wisconsin—and the District  of Columbia, where we interviewed state and local officials about their  wastewater infrastructure needs and how a clean water trust fund could  be designed to meet these needs. We chose these locations because they  were geographically dispersed, had different wastewater infrastructure  needs, and used various approaches to finance wastewater projects.
To identify potential options for funding a clean water trust fund that  could generate $10 billion annually, we reviewed past legislative proposals  and position papers from wastewater industry groups that discussed  specific funding options. We also reviewed reports on how existing federal  environmental and infrastructure trust funds are funded and conducted  Internet searches to identify funding options that states are using to  finance wastewater projects. We used our questionnaire to gauge  stakeholders’ support for various funding options for a clean water trust  fund and to obtain their views on the extent of the connection between  these funding options and wastewater infrastructure use. In addition, we  interviewed federal and state officials to identify the challenges likely to  be associated with implementing these funding options. To estimate the  revenue that these options could potentially generate, we used the most  recent government data available to estimate the value of products or  activities that could be subject to a federal tax and applied a range of tax  rates to these values based on current or past taxation policies. The  estimates presented in our report are not official revenue estimates as  would be prepared by the Joint Committee on Taxation, and they are  subject to various limitations. For example, we did not model or estimate  consumer or market responses to these funding options, possible  noncompliance, or the cost of implementing and enforcing these options.  As a result, our revenue estimates may be higher than actual receipts that  would be generated from these funding options. Moreover, we do not  endorse any option and do not have a position on whether or not a clean  water trust fund should be established.
A more detailed description of our scope and methodology is presented in  appendix I. We conducted our work from June 2008 to May 2009 in  accordance with all sections of GAO’s quality assurance framework that  are relevant to our objectives. The framework requires that we plan and  perform the engagement to obtain sufficient and appropriate evidence to  meet our stated objectives and to discuss any limitations in our work. We  believe that the information and data obtained, and the analysis  conducted, provide a reasonable basis for any findings and conclusions.
subsections: section_title: Background
paragraphs: Americans rely on wastewater systems to protect public health and the  environment. These systems are composed of a network of pipes, pumps,  and treatment facilities that collect and treat wastewater from homes,  businesses, and industries before it is discharged to surface waters. EPA  sets standards for the quality of wastewater that can be discharged under  the Clean Water Act. Under this law, the National Pollutant Discharge  Elimination System (NPDES) program limits the types and amounts of  pollutants that industrial and municipal wastewater treatment facilities  may discharge into the nation’s surface waters. During the wastewater  treatment process, solid materials, such as sand and grit; organic matter  from sewage; and other pollutants are removed from wastewater before it  is discharged to surface waters. This treatment helps to ensure that the  quality of surface water is not degraded and that it can continue to be used  for drinking water, fishing, and swimming. About 16,000 publicly owned  wastewater treatment plants exist in the United States, and the American  Society of Civil Engineers estimates that between 600,000 and 800,000  miles of sewer pipe help to deliver wastewater to these treatment plants.  These systems are primarily publicly owned and provide wastewater  service to more than 220 million Americans.
Local communities have the primary responsibility to provide funding for  wastewater infrastructure. According to U.S. Census Bureau (Census)  estimates, in fiscal year 2006 local communities spent about $38 billion on  wastewater operations and capital projects, while states spent about $1.3  billion. In addition, the federal government provides financial assistance  for wastewater infrastructure, with EPA providing the largest amount  through its CWSRF program. Under the CWSRF program, which was  established in 1987, the federal government provides capitalization grants  to states, which in turn must match at least 20 percent of the federal  grants. The states then use the money to provide low-interest loans to fund  a variety of water quality projects, and loan repayments are cycled back  into the program to be loaned out for other projects. In 2007, states  provided CWSRF loans totaling about $5.3 billion to communities and  other recipients.
Several studies have documented the deterioration in the condition of the  U.S. wastewater infrastructure. According to EPA, the majority of the  nation’s sewer pipe network was installed after World War II and is  reaching the end of its useful life. Similarly, many of the wastewater  treatment plants that were upgraded in the 1970s to comply with the Clean  Water Act are aging and will need to be upgraded or replaced in the future.  The American Society of Civil Engineers recently described the condition  of the nation’s wastewater infrastructure as “poor,” and cited a lack of  investment in critical components of this infrastructure as a contributing  factor to this condition. The deteriorating condition of the nation’s  wastewater infrastructure has direct impacts on human and aquatic health.  Specifically, many older wastewater systems lack the capacity to treat  increasingly large volumes of wastewater, particularly during periods of  wet weather. In addition, cracks in sewer pipes allow rain or snowmelt to  enter the wastewater system and overwhelm its capacity to adequately  treat wastewater. Untreated wastewater can be released during the  resulting sewer overflows associated with these wet weather events and  introduce significant levels of pollution into local water bodies, which can  pose risks to human health and result in beach closures and fish kills. EPA  estimates that over 850 billion gallons of untreated wastewater are  released annually into U.S. surface waters.
Although local, state, and federal governments have invested billions in  wastewater infrastructure over the years, studies by EPA and the  Congressional Budget Office (CBO) suggest a potential gap exists between  what is currently being spent on wastewater infrastructure and estimated  future infrastructure needs. EPA’s 2002 analysis estimated a potential gap  for wastewater infrastructure capital improvements, along with operations  and maintenance, of about $150 billion to $400 billion over the period from  2000 to 2019. CBO estimated a gap of about $60 billion to $220 billion in  capital funding alone over this same period. Without additional  investment in the nation’s wastewater infrastructure, EPA and other  groups have asserted that the environmental and public health gains made  under the Clean Water Act during the last three decades could be at risk.
However, these studies by EPA and CBO note that this gap is not  inevitable, and policy makers and wastewater groups have proposed a  variety of approaches to help bridge this gap, including the following:  Implement EPA’s Sustainable Water Infrastructure Initiative. This  initiative, which is called the Four Pillars, encourages wastewater and  drinking water utilities to improve the management of their systems, to  systematically plan ahead for infrastructure needs, and to charge the full  cost of the service they provide to customers. Charging the full cost would  require utilities to charge prices that reflect the costs of building,  maintaining, and operating a wastewater system over the long term.
Increase funding for the CWSRF. Federal CWSRF capitalization grants to  the states had been declining in recent years, despite growing wastewater  infrastructure needs. In both fiscal years 2008 and 2009, $689 million was  appropriated for the CWSRF program, which was below the average from  2000 to 2007 of about $1.2 billion. Some proponents of the CWSRF have  recommended increasing federal appropriations for this program and the  program has recently received additional federal funding. The American  Recovery and Reinvestment Act of 2009 appropriated $4 billion in funding  for the CWSRF program, and the President’s budget request for fiscal year  2010 asks for an increase in funding for the program. In addition, some  have suggested increasing the pool of available CWSRF funds by  encouraging more states to use their federal capitalization grants as  collateral in the public bond market. This practice, known as “leveraging”  allows states to borrow additional money to lend out through the CWSRF.  Currently, about 27 states leverage their capitalization grants.
Establish a national infrastructure bank. Three bills were introduced in  the 110th Congress that proposed establishing a national infrastructure  bank or other entity that would provide financing for a variety of  infrastructure projects, including wastewater infrastructure projects.  This entity would independently evaluate projects and determine the m appropriate way—through loans, grants, or other financial tools—to  finance them.
Encourage public-private partnerships. Historically, wastewater  infrastructure has commonly been owned and operated by public entities,  such as local municipalities. However, other approaches exist where  private entities can provide services such as designing, constructing, or  operating infrastructure projects, including wastewater systems. In recent  years, these partnerships have become more common in the  transportation sector.
Lift private activity bond restrictions on wastewater projects. Private  activity bonds are tax-exempt bonds issued by state or local governments  to provide special financing benefits for qualified projects. These bonds  are used to provide financing to private businesses for certain facilities,  such as airports, electric and gas distribution systems, mass transit  systems, solid waste disposal sites, and wastewater plants. Because  private activity bonds are exempt from federal tax, states and  municipalities can borrow money at lower interest rates. However, states  are limited in the amount of private activity bonds that they can issue  annually. While certain projects such as airports and solid waste disposal  facilities are exempt from this cap, wastewater infrastructure facilities are  subject to this cap. Removing this restriction could increase the level of  low-interest financing available for wastewater projects.
Create a federal clean water trust fund. Establishing a clean water trust  fund could help to provide a dedicated source of federal funding for  wastewater infrastructure. Federal trust funds, such as the Highway and  the Airport and Airways Trust Funds, are used to account for funds that  are dedicated for spending on a specific purpose. Unlike trustees of  private trust funds, a federal agency may exercise a greater degree of  control over its trust fund.  As authorized by law, the federal government  may control the fund as well as its earnings and raise or lower future trust  fund collections and payments or change the purposes for which  collections are used.
section_title: Stakeholders Identified Three Key Issues That Would Need to Be Addressed in Designing and Establishing a Clean Water Trust Fund
paragraphs: Three main issues would need to be addressed in designing and  establishing a clean water trust fund, according to stakeholders. These  issues include: how a trust fund should be administered and used; what  type of financial assistance should be provided for projects; and what  activities should be eligible for funding.
Administration and use of a trust fund. Stakeholders told us that  designing a clean water trust fund would involve deciding what agency or  entity would administer the fund and whether the trust fund would be  used to fund the CWSRF or a separate program. A majority of stakeholders  (15 of 20) responding to our questionnaire expressed the view that a trust  fund should be administered through an EPA-state partnership like the  current CWSRF program. However, as figure 1 shows, stakeholders  differed in their views on how a trust fund should be used.
About a third of stakeholders (7 of the 20) expressed the view that a trust  fund should be used only to fund the existing CWSRF. Stakeholders cited  several reasons for this view, including their interest in building on the  success of the CWSRF program, avoiding the redundant administrative  costs associated with establishing a new wastewater infrastructure  program, and providing a dedicated funding source to increase available  funding for the CWSRF program.
Three of 20 stakeholders that responded to our questionnaire said that a  trust fund should not be used to support the existing CWSRF, but rather to  fund a separate and distinct wastewater infrastructure program. One of  these stakeholders told us that the CWSRF does not prioritize funding to  wastewater systems with the greatest needs. Stakeholders we interviewed  said that CWSRF loan amounts can sometimes be inadequate to meet the  needs of large urban areas that have large and costly infrastructure  projects and that smaller communities may lack the administrative  capacity to go through the process of applying for a CWSRF loan. In  addition, our past work has found that states vary in the way they allocate  CWSRF funds for small or economically disadvantaged communities and  that some states have placed limits on the amount of CWSRF funding any  one borrower can receive in a single year.
Twenty-five percent of questionnaire respondents (5 of 20) supported  using a trust fund to both fund the CWSRF and establish a separate and  distinct program. These stakeholders said the CWSRF needed a dedicated  source of funding, but that the flexibility of a new program could help to  address some of the CWSRF’s limitations.
Finally, 3 of 20 stakeholders responding to our questionnaire were  opposed to the creation of a clean water trust fund to support the nation’s  wastewater infrastructure. According to these stakeholders, utilities  should be self-sustaining through the rates they charge their customers  and by more efficiently managing their systems. These stakeholders also  attribute the potential gap between projected future wastewater  infrastructure needs and current spending to the reluctance of wastewater  utilities to charge the full cost of the services they provide. Charging the  full cost would require utilities to charge prices that reflect the costs of  building, maintaining, and operating a wastewater system over the long  term. Our past work has highlighted similar concerns with the  management of local wastewater utilities. Specifically, we found that many  utilities were not routinely charging the full cost for wastewater services  and that the practice of systematically identifying and planning for  infrastructure improvements, known as asset management, could help  utilities better address their infrastructure needs.
Type of financial assistance. Another design issue that stakeholders  identified was specifying the type of assistance—grants or loans—that a  clean water trust fund would provide. Over half of the stakeholders  responding to our questionnaire (13 of 21) favored distributing funding to  wastewater infrastructure projects using a combination of loans and  grants. According to many of these stakeholders, the type of assistance  provided by a trust fund should be tailored to the applicant’s needs and  capacity. Some of these stakeholders explained that while some  communities can take on debt and pay back loans for wastewater projects,  others may need grants because they are unable to pay back loans. Other  stakeholders who we talked to also stated that loans impose discipline on  borrowers, who are responsible for repayment, but that grants may be  needed for certain communities that cannot make loan repayments, such  as those with declining or low-income populations. These stakeholder  views are consistent with some of the policy debate surrounding the  reauthorization of the CWSRF, in which certain groups have supported the  distribution of grants, as well as loans, for certain wastewater projects,  through the CWSRF as is currently allowed under the Drinking Water State  Revolving Fund. A provision allowing some funding to be distributed as  grants would be similar to recent legislation; specifically, some of the  funding provided to the CWSRF by the 2009 American Recovery and  Reinvestment Act can be distributed in the form of grants.
In contrast, 3 of 21 stakeholders who responded to our questionnaire told  us that funding to support wastewater infrastructure projects should be  distributed using loans only while 2 said that only grants should be used.  The stakeholders supporting the use of loans said that the funds from the  repayment of these loans provide a source of funding to meet future  infrastructure needs, and that below-market interest rates can be offered  on these loans as an affordable way for communities to fund wastewater  infrastructure. One of the stakeholders who said that funding to support  wastewater infrastructure projects should be distributed using grants  stated that a grant program will help lower costs for municipalities and  allow them to offer more affordable wastewater utility rates.
Eligible activities. Finally, stakeholders said that designing and  implementing a clean water trust fund would involve determining the type  of wastewater infrastructure activities that the fund would support. Most  stakeholders who responded to our questionnaire supported using a trust  fund for planning and designing wastewater projects (18 of 21) and for  capital costs (19 of 21). Some stakeholders noted that these two activities  are closely linked—planning and designing are essential components of  carrying out capital projects. Stakeholders that supported using the trust  fund for capital costs identified many of the activities that are currently  eligible for funding under the CWSRF as those that should be eligible to  receive support under a clean water trust fund. These activities include  expanding wastewater systems to meet existing needs, replacing or  rehabilitating wastewater collection systems or treatment facilities, and  correcting wastewater overflows from wastewater systems. Many of these  stakeholders said that capital costs should be given priority because these  are major costs and represent the most pressing needs for utilities.  Moreover, according to some stakeholders, capital costs should be eligible  for funding because communities may incur significant costs when  upgrading or rehabilitating their wastewater systems in order to comply  with Clean Water Act requirements or other federal mandates. In addition  to capital costs, stakeholders identified other activities that should be  eligible for funding, including providing rate-payer assistance to low- income households, supporting green infrastructure and nonpoint source  pollution projects, and training wastewater plant operators. Only 2  stakeholders responded that a trust fund should be used to support  operations and maintenance for wastewater utilities.
Appendix II provides the full range of stakeholder responses to the  questionnaire on design issues.  Appendix III provides a list of stakeholder  groups that responded to our questionnaire.
section_title: Various Options for Funding a Clean Water Trust Fund Could Generate a Range of Revenues, but Each Option Poses Certain Obstacles
paragraphs: Although a variety of options have been proposed in the past to generate  revenue for a clean water trust fund, generating $10 billion from any one  of these alone may be difficult. In addition, each funding option poses  various implementation challenges, including defining the products or  activities to be taxed, establishing a collection and enforcement  framework, and obtaining stakeholder support.
subsections: section_title: A Variety of Options Are Available That Could Generate a Range of Revenue to Support a Trust Fund
paragraphs: Various funding options, including excise taxes on products that may  contribute to the wastewater stream, an additional tax on corporate  income, a water use tax, and an industrial discharge tax, could generate a  range of revenues for a clean water trust fund. However, it may be difficult  to raise $10 billion for a clean water trust fund from any one of these  options because of the small size of the tax bases of many of these  options.
subsections: section_title: Excise Taxes on Products That May Contribute to the Wastewater Stream
paragraphs: Excise taxes on products that may contribute to the wastewater stream  could be used to generate revenue for a clean water trust fund. These  products include beverages, fertilizers and pesticides, flushable products,  pharmaceuticals, and water appliances and plumbing fixtures. While past  proposals for funding a clean water trust fund have identified these  products as contributing to the wastewater stream, limited research has  been done on their specific impact on wastewater infrastructure,  according to EPA. See table 1 for a description of these product groups  and how these products may contribute to the wastewater stream.
The tax base for each group of products in 2006—the value of products  manufactured domestically as well as those imported, but excluding  exports—varied from about $26 billion for water appliances and plumbing  fixtures to about $156 billion for pharmaceuticals, after adjusting these tax  bases to 2009 dollars. In addition, raising $10 billion from a tax on any  individual product group would require tax rates varying from a low of 6.4  percent for pharmaceuticals to a high of 39.2 percent for water appliances  and fixtures. Alternatively, a lower tax rate could be levied on a number  of these product groups that would collectively generate about $10 billion.  Table 2 shows the tax bases for the product groups along with the revenue  that could be generated from a range of tax rates. Appendix IV presents  additional information on the tax bases for these funding options.
Alternatively, a per unit excise tax could be levied on these products. For  example, according to the Container Recycling Institute, there were about  215 billion bottled and canned beverages sold in 2006. Levying a 1 cent  tax on these bottles and cans could yield about $2.2 billion, and raising $10  billion would require a tax of about 5 cents.
section_title: Additional Tax on Corporate Income
paragraphs: Another option that could be used to fund a clean water trust fund is to  levy an additional tax on the incomes of corporations. This tax would be  similar to the Corporate Environmental Income Tax (CEIT) that helped  fund the Superfund program until 1995. Increasing the current corporate  income tax by levying an additional 0.1 percent on the $1.4 trillion in  corporate taxable income reported in 2006, after adjusting for inflation,  could raise about $1.4 billion annually. Higher tax rates would need to be  levied to generate a larger amount of revenue. For example, a 0.5 percent  tax could raise $6.9 billion and to raise $10 billion from this option, an  additional tax of about 0.7 percent would need to be levied. However, this  level of taxation would exceed the 0.12 percent CEIT that was in place  under Superfund when it expired in December 1995.
section_title: Water Use Tax
paragraphs: Another option to fund a clean water trust fund is a tax on water usage. A  tax on water use could involve a volume-based charge or a flat charge  added to local residential, commercial, and industrial water utility rates  paid by water customers. For a volume-based charge, levying a tax of 0.01  cent per gallon on the 13.4 trillion gallons of water that were delivered to  domestic, commercial, and industrial users from public supplies in 2000  could raise $1.3 billion annually, while a tax of about 0.1 cent per gallon  could raise about $13 billion annually. Alternatively, a flat charge could  be added to household wastewater bills, similar to Maryland, which  charges households $30 annually to help fund wastewater infrastructure in  the state. At a national level, imposing a flat charge of $30 annually on the  approximately 86 million households that receive wastewater service from  wastewater utilities could raise about $2.6 billion annually. Raising $10  billion from a flat charge on households would require a charge of about  $116 per year per household. Based on EPA estimates from 2003,  American households paid about $474 annually for water and wastewater  services; therefore, imposing an annual charge of $116 on households  would represent an approximately 25 percent increase in customers’ water  and wastewater bills.
section_title: Industrial Discharge Tax
paragraphs: A final option that we identified that could raise revenue to fund a clean  water trust fund is an industrial discharge tax. A tax on industrial  discharge could potentially be levied in two ways. The first would be to  levy a fee on National Pollutant Discharge Elimination System (NPDES)  permits. These permits, required under the Clean Water Act, allow a point  source to discharge specified pollutants into federally regulated waters. A  second approach would be to levy a tax on toxic chemical releases to  water reported by industrial facilities to the Toxics Release Inventory  (TRI), which contains data on the quantities of toxic discharges to air,  water, or land for 581 chemicals and 30 chemical categories. However, it  is unclear what level of taxation could be levied to generate $10 billion  from either of these approaches because of data limitations. Specifically,  EPA lacks complete and reliable data on the number of NPDES permits  issued nationwide. Similarly, EPA does not have complete data on all of  the toxic releases because TRI data are based on self-reporting by facilities  that release chemicals above certain thresholds. In addition, these reports  can be based on estimates of their toxic releases instead of actual  measurements.
section_title: Each Funding Option Poses Certain Implementation Challenges
paragraphs: Implementing any of the funding options discussed above poses a variety  of challenges, including defining the products or activities to be taxed and  establishing a collection and enforcement framework, according to  interviews we had with agency officials and other stakeholders.
subsections: section_title: Excise Taxes on Products That May Contribute to the Wastewater Stream
paragraphs: According to Internal Revenue Service (IRS) officials, implementing excise  taxes on products requires the agency to develop clear and precise  definitions of the products to be taxed, as authorized by Congress. These  definitions determine whether taxpayers are required to pay excise taxes  and how much tax they owe. In implementing excise taxes in the past, the  IRS has developed these definitions after receiving comments from  relevant industries. As part of this process, a decision also would need to  be made regarding whether the tax would be levied on a per unit basis or a  percentage of sales basis. Of the $71.3 billion that the federal government  collected from federal excise taxes in 2007, many items are taxed on a per  unit basis—a gallon of gasoline, for example—but some items are taxed on  a percentage of sales—such as an airline ticket, which is taxed at 7.5  percent of the ticket price. The larger the number of taxable products  covered by an excise tax, the greater the challenge of defining these  products, according to IRS officials. In addition, any exemptions to the  excise tax would also need to be defined. According to IRS officials, a  large number of exemptions could present additional implementation  challenges because the agency would have to process applications from  taxpayers seeking refunds for taxes paid on exempted products. IRS  officials told us that the administrative costs associated with designing and  implementing any new excise taxes could be substantial and this process  could take more than a year to complete.
In addition, once the taxable product(s) have been defined, IRS also would  need to modify its excise tax collection and enforcement framework.  Implementing new excise taxes would require the IRS to update the forms  currently used to submit excise taxes and its computer systems to  document these receipts, as well as training agency staff on administering  the new excise taxes. Moreover, implementing new taxes would increase  the auditing and enforcement responsibility of the IRS. In addition, to  increase compliance the IRS conducts outreach to those who would be  required to pay these excise taxes. All of these activities—making changes  to forms and computer systems, training staff, and conducting outreach— would need to occur well in advance of the start of the tax filing season to  eliminate possible confusion and could increase the agency’s  administrative costs, according to IRS officials. In addition, the challenge  in collecting and enforcing excise taxes can be impacted by the point at  which the tax is collected and the number of taxpayers. According to IRS  officials, collecting and enforcing an excise tax at the manufacturing level  is preferable because it involves fewer taxpayers than a tax that is levied  at the retail level.
section_title: Additional Tax on Corporate Income
paragraphs: According to IRS officials, implementing an additional tax on corporate  income would require defining the types of corporations and the portions  of their income that would be subject to this tax. For example, under  Superfund, the CEIT was levied only on corporations that had income in  excess of $2 million. In addition, while the current collection system for  corporate income taxes could be used to collect this additional tax, this  change would need to be communicated to both corporate taxpayers and  IRS tax examiners to promote compliance.
section_title: Water Use Tax
paragraphs: Implementing a tax on water use also would pose challenges such as  developing a collection system, deciding how to structure the tax, and  determining the tax base or which users to tax. Collecting this tax could  be difficult, because according to water and wastewater officials we spoke  with, it would most likely involve relying on some of the billing systems in  place for the nation’s existing 50,000 community water systems and over  16,000 publicly owned wastewater plants along with other local  government entities. However, all of these water and wastewater  suppliers do not uniformly bill their customers based on the volume of  water use. Instead, some charge a flat fee or have other types of rate  structures. Some stakeholders said that a flat charge on households would  be easier to administer, but that a volume-based charge on water use  would be more equitable. In addition, decisions would need to be made  regarding which users of the system—households, commercial, and  industrial—would be subject to the tax.
section_title: Industrial Discharge Tax
paragraphs: Implementing an industrial discharge tax also could be difficult because  there is no federal system currently in place to charge and collect such a  tax. As a result, key steps, including defining the tax base—whether to tax  discharge permits or actual discharge—determining a tax rate, and  developing a collection and enforcement framework, would need to be  completed before such a tax could be implemented. These efforts would  likely be complicated by a lack of complete and accurate data on the  number of permit holders and quantity of industrial discharge.  Implementing such a tax would include the following specific challenges:    Permit-based tax. Determining which of the two types of NPDES  permits—individual or general—would be taxed and setting a tax rate  could be difficult. Individual permits are typically issued for single  facilities, such as wastewater treatment plants, while a single general  permit can cover multiple facilities that are engaged in similar types of  activities and located in a specific geographic area, such as construction  sites. According to EPA officials, the types of effluent and levels of  discharge covered by these two types of permits can vary significantly and  charging a flat tax to all permit holders may not be equitable. In addition,  because EPA currently does not collect any taxes or fees on NPDES  permits, the agency would have to develop a basis for establishing a tax  rate and put in place a collection and enforcement framework before a  permit-based tax could be implemented.
Discharge-based tax. Currently, EPA does not collect any taxes on  industrial discharges, and to implement such a tax would require EPA to  put in place a collection and enforcement framework. Developing such a  framework could be difficult because EPA does not have complete data on  the industrial discharges that are occurring or on the environmental and  human health hazards posed by such discharges. For example, while the  TRI has information on approximately 265 chemicals that are discharged  to water, these data are based on annual reports submitted by industrial  facilities. Moreover, EPA has limited national data on the discharge of  conventional pollutants to water because many facilities that discharge  these pollutants are not required to report this information to EPA. In  addition, determining a basis for a tax rate could be difficult because of  the potentially large number of chemicals and their varying characteristics.  While EPA has developed toxic weighting factors that provide a relative  measure of the toxicity for most of the TRI chemicals, EPA officials told us  that there are inherent scientific difficulties in using existing toxicity  weighting systems to compare toxicity among chemicals.  Specifically,  they told us that these systems may not adequately distinguish between  cancer and non-cancer hazards and considering all such hazards together  can be misleading.  In addition, EPA has not developed toxic weighting  factors for all chemicals in the TRI. EPA officials pointed out that these  weighting factors were not developed for taxation purposes, and they  expressed concern that using the TRI for this purpose could potentially  discourage industries from reporting their full discharges to the TRI. Such  an outcome would be a significant concern given that one of the TRI  program’s primary goals is to increase the public’s access to the best  available information on toxic chemical releases in their communities.
section_title: Obtaining Stakeholder and Industry Support for Funding Options Could Pose Additional Challenges
paragraphs: Consideration of stakeholders’ and industry views is important in  developing a new taxation system, because voluntary compliance with any  tax is influenced by whether taxpayers view a tax as being transparent,  credible, and logical. While a majority of stakeholders supported three of  the eight funding options, we identified some stakeholders who had not  yet taken a position on these options, making it difficult to gauge their  level of support for these options. In addition, industry groups  representing most of the product groups that we identified as potential  funding options were generally opposed to levying excise taxes on these  products. Furthermore, obtaining widespread stakeholder support may be  difficult because many stakeholders do not perceive a strong connection  between most of these funding options and wastewater infrastructure use.
subsections: section_title: Excise Taxes on Products That May Contribute to the Wastewater Stream
paragraphs: The proportion of stakeholders supporting excise taxes on the five  product groups ranged from over a half to about a third. Specifically, over  half of stakeholders responding to our questionnaire supported excise  taxes on fertilizers and pesticides and flushable products, and about half  supported excise taxes on beverages and pharmaceuticals. In contrast,  only about a third of stakeholders supported an excise tax on water  appliances and plumbing fixtures. More importantly, we identified some  stakeholders who had not yet taken a position on any of the five excise tax  options—they neither supported nor opposed these options or did not  know or had no opinion on these options—making it unclear what their  level of support would be if excise taxes on these product groups were  proposed. Specifically, half of stakeholders responding to our  questionnaire had not yet taken a position on taxing water appliances and  plumbing fixtures, while about a third of stakeholders did not have a  position on taxing beverages or pharmaceuticals. Table 3 shows the level  of stakeholders’ support for excise taxes on each of the five product  groups that we identified.
Obtaining stakeholder support for some of these excise taxes may be  difficult because stakeholders did not always see a strong connection  between these products and wastewater infrastructure use. For example,  about half of stakeholders did not see a strong connection between  pharmaceuticals and water appliances and plumbing fixtures and  wastewater infrastructure use. On the other hand, stakeholders saw a  strong connection between fertilizers and pesticides and flushable  products and wastewater infrastructure use. Taxing these two product  groups to fund a clean water trust fund also garnered the greatest level of  stakeholder support. Table 4 shows stakeholders’ views on the extent of  the connection between wastewater infrastructure use and the five  product groups.
In addition, industry groups were consistently opposed to a tax on their  specific product groups to support a clean water trust fund. In their view,  their products did not contribute significantly to the deterioration of  wastewater infrastructure and therefore should not be taxed. Stakeholder  and industry reasons for their support or opposition to these excise taxes,  along with the views of wastewater utility operators, are summarized in  table 5.
About a third of stakeholders responding to our questionnaire (6 of 19)  opposed or strongly opposed this option. Another 7 stakeholders had not  taken a position on this funding option, making it unclear what their level  of support would be. Furthermore, of the eight funding options,  stakeholders saw the least connection between this funding option and  wastewater infrastructure use, with nearly two-thirds of stakeholders (11  of 18) responding that there was little or no connection. In fact,  stakeholders’ inability to see the connection was one of the reasons they  cited for their opposition to this funding option. Other reasons that  stakeholders provided for opposing this option were the current economic  crisis and that corporations already pay taxes and fees to local systems for  wastewater treatment services. Among the reasons that stakeholders gave  for supporting this option were that the nation, and all industrial sectors,  benefit from clean water, and this tax would be spread across a number of  different polluting industries.
section_title: Water Use Tax
paragraphs: Stakeholder opposition to this funding option was the strongest of the  eight funding options we identified. Over half of stakeholders (11 of 21)  that responded to our questionnaire opposed a water use tax to fund a  clean water trust fund. Some of these opponents said that such a tax  would infringe on the ability of local utilities to raise rates for their own  needs. Drinking water industry officials said that many communities have  adopted comprehensive asset management plans and raised their water  rates to pay for infrastructure needs, and it would be unfair to tax all  communities and then distribute money to those communities that have  not managed their systems well. In addition, stakeholders we interviewed  said that redistribution of tax revenue would be a concern with this option  if communities contributed more to the trust fund than they received back  in funding. They also told us that a water use tax could  disproportionately affect low-income households because these  households pay a larger portion of their income for their water bills. On  the other hand, 5 stakeholders supported this funding option and some  said that rates are still relatively low in many parts of the country and local  ratepayers should pay for the costs of the infrastructure they use.
section_title: Industrial Discharge Tax
paragraphs: Over a third of stakeholders (7 of 19) supported or strongly supported an  industrial discharge tax, while another 7 stakeholders neither supported  nor opposed this option. The most common reasons that stakeholders  gave for supporting this option was that industries should pay for the  pollution they discharge. Among the reasons that stakeholders provided  for opposing this option was that industrial facilities already pay for  wastewater services.
section_title: Agency Comments
paragraphs: We provided a draft of this report to EPA and IRS for review and  comment. Neither agency provided written comments to us. EPA provided  technical comments, which we have incorporated as appropriate.
As agreed with your offices, 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 to the Administrator of EPA,   the Commissioner of  IRS, and interested congressional committees. In  addition, the report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staffs have any questions regarding this report, please  contact me at (202) 512-3841 or mittala@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine stakeholders’ views on the issues that need to be addressed  in designing and establishing a clean water trust fund, we reviewed past  legislative proposals and wastewater industry position papers on  establishing a clean water trust fund. In addition, we interviewed over 50  different stakeholders with knowledge of a variety of wastewater  infrastructure issues, including individuals and groups from the  wastewater industry; industry associations; and federal, state, and local  government; and obtained their views on establishing and designing a  clean water trust fund. During this process, we identified other relevant  stakeholders to speak to by asking interviewees to identify other  knowledgeable stakeholders in this area that we should contact, a process  known as the “snowball” approach.
Based on the information obtained through these interviews and our  review of reports, we developed and sent a questionnaire to 28 national  organizations with expertise in one or more of the following areas:  financing of wastewater projects, constructing and maintaining  wastewater infrastructure, local and state wastewater infrastructure  needs, and environmental protection. Prior to sending out this  questionnaire, we pretested the questionnaire with stakeholders and made  changes based on their input. This questionnaire asked for their views on  how a clean water trust fund should be administered, the types of  activities it should fund, and how funding should be distributed. We  received responses from 22 of these stakeholders. Of the 6 stakeholders  that did not respond, 4 of these told us they could not come to a consensus  on behalf of their organization. For a list of the groups that responded to  the questionnaire, see appendix III. We also reviewed information on the  Clean Water State Revolving Fund (CWSRF) program and interviewed  federal and state officials responsible for implementing this program to  gain an understanding for how this program might interact with a clean  water trust fund.
We also visited three states—Arizona, Maryland, and Wisconsin—and the  District of Columbia where we interviewed state and local officials about  their wastewater infrastructure needs and how a clean water trust fund  could be designed to meet these needs. We selected these states because  they were geographically dispersed, had different wastewater  infrastructure needs, and used various approaches to finance wastewater  projects. On these visits, we toured wastewater facilities in large and small  cities and spoke with local and state officials about how they were  financing wastewater projects.
To identify and describe potential options for funding a clean water trust  fund that could generate $10 billion annually, we reviewed past legislative  proposals and position papers from wastewater industry groups that  discussed specific funding options for such a fund. We also reviewed  reports on how existing federal trust funds that support environmental  and infrastructure projects are funded and conducted Internet searches to  identify funding options that some states were using to finance wastewater  projects. Finally, we interviewed stakeholders with knowledge of  wastewater infrastructure issues, including those from the wastewater  industry and federal, state, and local government to identify other options  that could be used to generate revenue for a clean water trust fund.
To estimate the revenue that these options could potentially generate, we  used the most recent government data available to estimate the value of  products or activities that could be subject to a federal tax—the tax  base—and applied a range of tax rates to these bases, which were based  on current or past taxation policies.
For the five excise taxes we identified, we used the U.S. Census Bureau  (Census) data from the 2006 Annual Survey of Manufactures, which  provides data on the value of products manufactured domestically by  different industrial codes, known as North American Industry  Classification System (NAICS) codes. We identified specific NAICS codes  for the five groups of products that could be subject to an excise tax. For  three of our excise taxes—beverages, fertilizers and pesticides, and  pharmaceuticals—these products are captured in a discrete set of NAICS  codes according to Census officials. For the two other product groups— flushable products, and water appliances and plumbing fixtures—we  examined prior reports to examine how these products were defined,  analyzed these NAICS codes along with their descriptions, and worked  with Census officials to ensure our list of NAICS codes was reasonable. To  this value of products produced domestically, we added the value of  products imported and subtracted the value of products that were  exported to determine the tax base for these product groups. We made  this calculation because according to Internal Revenue Service (IRS)  officials, federal excise taxes are generally levied on imports but not on  exports. We then converted the values of these tax bases to 2009 constant  dollars. Certain limitations exist with regard to our use of these data to  estimate potential revenue from the funding options. Specifically, our use  of NAICS codes for these groups of products may include a wider range of  products than would be part of actual excise taxes on these products. In  addition, due to data limitations, there are certain products that are not  captured in our tax bases. For example, toilet paper is not included in our  tax base for flushable products because this product is grouped under a  NAICS code with other sanitary paper products that most likely would not  impact wastewater infrastructure, such as disposable diapers. To  determine the reliability of these data, we reviewed documentation from  Census, interviewed relevant officials, and conducted some basic logic  testing of the data, and we determined the data were sufficiently reliable  for our purposes. For our estimate of a per container charge on bottled  and canned beverages, we used Container Recycling Institute data on the  number of packaged beverages sold in the United States in 2006. To  determine the reliability of these data, we spoke with officials familiar  with these data and reviewed relevant documentation on the data. We  determined the data were sufficiently reliable for our purposes.
For our estimate of the corporate income tax, we used data from the IRS  2006 Statistics of Income and identified the value of taxable income that  corporations had in this year. The amount of income subject to tax at the  corporate level includes taxable income less certain deductions such as a  corporation’s net operating loss or other special deductions. To determine  the reliability of these data, we reviewed documentation from IRS and  interviewed relevant officials. We determined the data were sufficiently  reliable for our purposes.
For our estimate of the water use tax, we used 1995 and 2000 data from  the United States Geological Survey (USGS) on estimates of water  delivered by public and private suppliers to domestic, commercial, and  industrial users. After consulting with USGS officials, we estimated the  use for residential, commercial, and industrial uses for 2000 based on  information available in 1995. Specifically, we used the 2000 estimate for  total public supply water deliveries and the 1995 estimate of the  proportion of total water deliveries to domestic, commercial, and  industrial users in 1995 because the 2000 USGS report included  information on total water deliveries but did not include information on  types of users. To determine the reliability of these data, we interviewed  USGS officials and reviewed relevant documentation on the data. We  determined the data were sufficiently reliable for our purposes. For our  estimate of a flat charge on household wastewater bills, we used  Environmental Protection Agency (EPA) data on the population served by  publicly owned treatment works to estimate the number of households  that receive wastewater services. To determine the reliability of these  data, we spoke with EPA officials and reviewed relevant documentation  on the data. We determined the data were sufficiently reliable for our  purposes.
For our estimate of an industrial discharge tax, we examined data from the  National Pollutant Discharge Elimination System (NPDES) permit system  and the 2006 Toxics Release Inventory (TRI). For the NPDES permit  system, we determined there were not reliable national data on the total  number of NPDES permits issued. For the TRI, we determined that these  data were based on self-reported information from only certain facilities  that discharged above a certain level. Moreover, these reports can be  based on estimates rather than actual measurements. The TRI also does  not contain data on discharges of conventional pollutants. Due to these  data limitations, we determined that these data were not sufficiently  reliable to make an estimate of the revenue that could be generated from a  tax on industrial discharge.
After identifying the taxable bases for these different funding options, we  applied various tax rates to these bases based in part on existing or past  taxation policies. Our review of existing federal excise taxes found that  most excise taxes levied as a percentage of sales range from 3 percent to  12 percent so we applied the rates of 1 percent, 3 percent, 5 percent, and  10 percent to our tax bases. For the tax on corporate income, we used 0.1  percent because a 0.12 percent on corporate income had been used to  fund Superfund. For the water use tax, we used existing and proposed  water taxes as the basis for the tax rates we applied. For all of the funding  options, we also calculated the tax rate that would be needed to generate  $10 billion annually.
The revenue estimates presented in our report are not official revenue  estimates as would be prepared by the Joint Committee on Taxation, and  they are subject to various limitations. For example, we did not model  consumer or market responses to these funding options, the potential  extent of noncompliance, or estimate the cost of implementing and  enforcing these options. As a result, our revenue estimates may be higher  than actual receipts that would be generated from these funding options.  Ultimately, the amount of revenue that any of these options would  generate would depend heavily on the number of products that would be  taxed, the tax rate used, and the compliance with the tax.
To identify the challenges associated with implementing these different  funding options, we interviewed federal and state officials who might be  involved in collecting and enforcing these taxes. At the federal level, we  spoke with IRS officials who collect and enforce excise taxes and  corporate income taxes. For the water use tax, we also spoke with  representatives of wastewater and drinking water utilities to learn about  how they collect fees from the users of their systems and how a federal tax  on water might make use of these systems. We also spoke with officials  who were involved in taxing some of these products already. At the federal  level, we spoke with officials in the Alcohol and Tobacco Tax Trade  Bureau regarding the federal excise tax on alcoholic beverages, and we  also spoke with EPA officials about the fees the agency levies on  pesticides. On our state visits, we spoke with officials who had experience  with implementing some of these funding options as well.
To identify stakeholders’ views of these funding options, we examined  position papers that discussed these funding options. We also used our  questionnaire to gauge stakeholder support for these options and to learn  about their views on the connection between these options and  wastewater infrastructure use. In addition, we spoke with industry groups  that represented some of the products that could be targeted by excise  taxes for their views. In particular, we spoke with groups representing  many of the manufacturers in the following industries: beverages,  fertilizers and pesticides, flushable products, pharmaceuticals, and water  appliances and plumbing fixtures.
We conducted our work from June 2008 to May 2009 in accordance with  all sections of GAO’s quality assurance framework that are relevant to our  objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations in our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for any findings and conclusions.
section_title: Appendix II: Summary of Stakeholder Responses to Questionnaire
paragraphs: This appendix provides information on stakeholders’ responses to our  questionnaire about their views on the issues that need to be addressed in  designing and establishing a trust fund as well as their views on the  potential funding options that could be used for this fund. A list of  stakeholders that responded to the questionnaire is presented in Appendix  III.
section_title: Appendix III: Stakeholders Responding to Questionnaire on a National Clean Water Trust Fund
paragraphs: The following stakeholders responded to our questionnaire regarding the  issues that need to be addressed in designing and establishing a national  clean water trust fund as well as potential funding options that could be  used for this fund.
section_title: Appendix IV: Estimated Tax Bases for Excise Tax Funding Options
paragraphs: To estimate the tax base for products that may contribute to the  wastewater stream, we added the value of products manufactured  domestically and the value of products imported and subtracted the value  of products exported. This appendix provides information on (1) the  specific industrial classification codes we used to define product groups,  (2) the value of products manufactured from the U.S. Census Bureau’s  (Census) 2006 Annual Survey of Manufactures, and (3) the value of  imports and exports from Census’ Foreign Trade Division that we used to  develop the tax bases for the five product groups discussed in this report.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Sherry L. McDonald, Assistant  Director; Janice Ceperich; Nancy Crothers; Cindy Gilbert; and Scott  Heacock made significant contributions to this report. Also contributing to  this report were George Bogart, Richard Eiserman, Carol Henn, Sarah  Reyneveld, Anne Stevens, Jack Warner, and James Wozny.