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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.