CRS REPORT ADDRESSES TIMBER EXPORT TAXES.

                          Kenneth R. Thomas

The Pacific Northwest, which has a significant capacity to harvest and mill timber, has in recent years become a major exporter of unprocessed timber to foreign countries. ¹ Because of the relatively high prices of these logs, some domestic milling operations have been put at a disadvantage in bidding for unprocessed timber. ² The result has been that some local mills have been unable to fill orders for processed lumber because of their economic inability to purchase the necessary timber, which in turn has resulted in the loss of jobs in these mills.

The imposition of state export taxes on unprocessed logs has been looked upon by some as a method of achieving either of two goals: (1) raising revenue which could then be used to alleviate economic hardships created by the inability of domestic mills to obtain sufficient unprocessed timber to maintain production; or (2) reducing foreign demand for unprocessed logs to increase the ability of domestic mills to obtain such logs. ³ This report will examine the constitutional and international law ramifications of individual states imposing export taxes or duties ⁴ on goods exported from that state.

Under the Constitution, states may impose export taxes only if the Congress grants them the authority to do so. Thus, this report first addresses the provision of the Constitution which expressly allows the Congress to authorize states to impose export taxes. The report will also address whether Congress could authorize states to impose a tax on the harvest, sale, or interstate movement of goods for export, so as to prevent the evasion of state export taxes by shipping logs through another state. ⁵ Finally, as states are generally prohibited from violating international agreements entered into by the Executive Branch, the memorandum will also address the applicability of the General Agreement on Tariffs and Trade (GATT) to export taxes.

II. CONGRESS' POWER UNDER THE CONSTITUTION TO AUTHORIZE STATES TO IMPOSE EXPORT TAXES

The United States Constitution provides that Congress has the power to lay and collect "Taxes, Duties, Imposts and Excises," ⁶ although it restricts the Congress from the direct imposition of export duties on goods exported from the individual states. ⁷ States, however, are specifically allowed to impose export duties that the Congress has authorized, provided that all the proceeds from such duties are remitted to the United States Treasury. ⁸ Thus, there is clear textual support for the proposition that the federal government can authorize states to impose export duties on exports from that state. ⁹

Although all funds from state export duties must be deposited in the United States Treasury, it would appear that such monies could be utilized to alleviate the economic hardships which result from domestic mills' inability to obtain unprocessed logs. Such monies could be allocated to a trust fund within Treasury, which could then be distributed either through recurring ¹⁰ or permanent appropriations. ¹¹ Such monies could then be directed by way of such trust fund to lessening the economic impacts of domestic mill layoffs, retraining mill workers, or similar programs.

III. CONGRESS' POWER UNDER THE COMMERCE CLAUSE TO AUTHORIZE STATE TAXATION OF INTERSTATE ACTIVITY

If a state were to impose an export duty on unprocessed logs, then it would appear likely that the state would also need to examine the possibility that persons would evade these duties by the artifice of shipping or selling the timber out of state, and exporting the unprocessed logs via the ports of another state. Consequently, a state might also wish to impose an excise tax ¹² on the harvesting, interstate transportation, or sale of unprocessed timber which is intended for export from another state. Again, however, it would appear that Congress would need to authorize such a tax.

The U.S. Constitution provides that the Congress shall have the power to regulate commerce with foreign nations and among the several states. ¹³ Under the Commerce Clause, the courts have generally required congressional consent before a state can enforce laws which burden interstate commerce. ¹⁴ However, once Congress has granted states this authority, there appear to be few limits on how the states can implement their mandate. ¹⁵

It should be noted that the excise tax in question could be collected against different parties, depending on what activity the tax was applied against. For instance, if the tax is to be applied against the activity of cutting timber for foreign export, i.e. a "stumpage" tax, then the owner of the timber at the time of harvesting would be liable for the tax. ¹⁶ If however, the tax was on the interstate transportation of the timber for foreign export, then the owner of the timber at the time of transportation of the timber out of state would be liable for the tax. It is not clear, however, whether a state would have the jurisdiction to impose a tax on activities related to the timber originating in the state once the timber has left the taxing state; consequently, a state might not have the authority to tax individuals who export timber from another state unless that individual undertakes some activity within the taxing state. ¹⁷

A separate question from who might be made responsible for paying tax on timber is how such a tax would be enforced. Although a state could, for example, require certification that all relevant taxes had been paid prior to exportation from that state, it might not have the authority to enforce such a requirement in other states. The United States Customs Service, however, could be authorized by Congress to require such certification of all timber leaving the United States, thus preventing exporters from evading the state tax requirements of the state where the timber originated.

IV. THE IMPOSITION OF EXPORT DUTIES BY THE STATES UNDER THE GENERAL AGREEMENT ON TRADE AND TARIFFS

As with most international economic compacts, the General Agreement on Tariffs and Trade (GATT) is not a treaty ratified by Congress, but an executive agreement entered into by the President with explicit authorization by the Congress. ¹⁸ As the President has the constitutional power to enter this agreement, the states might be prohibited from violating the provisions of GATT unilaterally. ¹⁹ The Congress, however, does appear to have the constitutional authority to impose legislative restrictions on exports which would violate the agreement, and could theoretically authorize the state to do so. ²⁰ Thus, in order to determine if the states might need Congressional authorization to violate the GATT, it is important to determine if the GATT prohibits export taxes.

Although the GATT contains provisions which could possibly be used as a basis to negotiate that export duties be fixed or eliminated, this avenue has not yet been exploited by the signatory countries. ²¹ During a recent round of GATT negotiations, an agreement was concluded regarding export restrictions and charges. ²² This understanding, however, merely concluded that there was a need to reassess the relevant GATT provisions regarding exports. ²³ While there are restrictions on the use of export taxes for discriminatory purposes, an export tax which would be applied even- handedly would not appear to be prohibited. ²⁴ Thus, if a federally sanctioned state duty was imposed on the exportation of unprocessed logs, and the tax applied to exports going to all foreign countries, this would appear not to be a violation of the GATT.

² Reportedly high prices may be a result not only of high demand, but of higher prices for lumber in the Japanese construction industry, and from the relative strength of the Japanese yen against the American dollar. Id. at col. 1-2.

³ For an analysis of other methods of regulating timber exports, see Thomas, Regulation of Timber Exports: Legislative Options, November 14, 1989 (CRS Report for Congress No. 86-617).

⁴ The terms "export taxes" and "export duties" are used interchangeably in this memoramdum.

⁵ Without some additional mechanism to regulate interstate movement of logs, there may be legal limitations to the enforcement of a state export tax which could dilute its effect. For instance, a state might not be able to collect an export tax from an out-of-state party who bought goods after they had been transported out of the state, and then decided to export them. Generally, for a state to have the necessary jurisdiction to tax an activity such as exporting, the state must show that the ACTIVITY to be taxed has some connection with the state seeking to impose the tax. National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois, 386 U.S. 753, 756 (1966). Consequently, it might be necessary for Congress, to make state imposed export taxes effective, to also authorize the states to impose a tax on the harvesting or sale or transportation of timber for export. This combination of export duties and interstate taxation could prevent goods from being exported from the country without a tax burden. See infra text accompanying note 12-17.

⁶ U.S. Constitution, Art. I, section 8, cl. 1.

⁷ U.S. Constitution, Art. I, section 9, cl. 5 provides that: "No Tax or Duty shall be laid on Articles exported from any State".

⁸ U.S. Const. Art. I, section 10, cl. 2 provides that:

No State shall, without consent of Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws; and the net produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Control of the Congress.

⁹ More generally, a leading commentator has stated that, under the Commerce Clause, Art. 1, section 8, cl. 3, Congress can authorize the states to "exclude foreign commerce, to discriminate against it, to impose heavy burdens on it, to satisfy minor local interests at the price of major obstacles to such commerce, to establish a patch- quilt of local idiosyncrasies." L. Henkin, Foreign Affairs and the Constitution 237 (1973). The commentator, however, goes on to note that "such concessions to localisms are infrequent domestically, and are rare as regards foreign commerce." Id. In fact, it is not clear that the Congress has specifically authorized any states to impose export taxes on goods leaving their ports.

¹⁰ See, e.g., 16 U.S.C.A. section 412 (1989 Cum. Supp.)(establishment of African Elephant Conservation Fund).

¹¹ Existing examples of permanent appropriations include the social security trust programs, unemployment insurance, and the civil service retirement trust. Staff of House Budget Comm., Congressional Control of Expenditures, 95th Cong., 1st Sess. 63 (Comm. Print 1977).

¹² An excise tax is a tax paid on the use, consumption, or sale of a commodity.

¹³ U.S. Const. Art. I, section 8, cl. 3. The courts have held that the power of Congress to burden the flow of commerce between the various states is "plenary" or absolute. Katzenbach v. McClung, 379 U.S. 294 (1964); Buttfield v. Stranahan, 192 U.S. 470, 493 (1904); L. Henkin, supra note 9, at 69-70. The Commerce Clause has become the basis for far-reaching regulations over a variety of areas, and the courts have been reluctant to find that Congress has over-stepped the limits of its power under the clause. Id. at 70.

¹⁴ For example, in the case of South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82 (1984), the Supreme Court struck down an Alaska state law which imposed a "primary manufacture requirement" on all contracts for the sale of state timber, a provision that required that timber bought from the state be partially processed in the state prior to export. The Supreme Court found that the Alaskan law constituted a burden on commerce, and that the Congress had not expressly sanctioned the state statute. The implication of the South-Central case would seem to be that a state can burden the exportation of certain goods from the state without violating the Constitution if there is a clear expression of congressional intent to allow the state to do so.

¹⁵ For example, the imposition of a congressionally sanctioned "discriminatory" state tax was upheld in the case of Prudential Ins. Co. v. Benjamin. 328 U.S. 408 (1945). In Prudential, the Supreme Court held that the McCarran-Ferguson Act, 15 U.S.C. section 1011 et seq. (1982), contained a clear expression of congressional intent to allow a state, in this case South Carolina, to impose a tax on a foreign corporation doing business in the state, despite the fact that there was no similar tax applied to domestic corporations. Here, the Supreme Court rejected an argument by the Prudential Insurance Corporation that the Congress could not allow the states to burden commerce in any way that was not available to them constitutionally absent congressional approval. 328 U.S. at 422. The Court found no such limitation to the plenary nature of the Congress' commerce power, and consequently upheld the state tax, despite its potentially burdensome nature on interstate commerce.

¹⁶ Such tax burden might then be considered in setting the price of the timber to any future purchaser of such logs.

¹⁷ See supra note 5.

¹⁸ E. McGovern, International Trade Regulation section 2.233 (1982). The GATT, rather than being a single agreement, is composed of more than one hundred agreements and protocols relating to international trade. J. Jackson, W. Davey, International Economic Relations 296 (1986).

¹⁹ J. Jackson supra note 18, at 309.

²⁰ Id. Other member countries could then, however, ask that a GATT panel be appointed to determine if such legislation was in fact violative of the GATT. Although there have been few panel decisions regarding challenges to export restrictions over the past forty years, the United States has obtained a successful panel ruling against restrictions on the export of unprocessed fish imposed by Canada. See GATT, Canada -- Measures Affecting Exports of Unprocessed Herring and Salmon (1987). This decision determined that a Canadian law requiring that certain fish caught in Canadian waters could not be exported until processed violated the GATT.

²¹ E. McGovern supra note 18 at section 5.13. Article II of the GATT provides for a schedule of import duties, but does not appear to address export duties.

²² Id.

²³ Apparently, one reason that negotiations over export taxes have been difficult is because of questions concerning national sovereignty over natural resources. Jackson, supra note 18, at 889 (1986).

²⁴ E. McGovern supra note 18, at section 5.13.