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CRS Reports on LUST Trust Fund Financing

APR. 18, 1997

97-472 E

DATED APR. 18, 1997
DOCUMENT ATTRIBUTES
  • Authors
    Noto, Nonna A.
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    LUST, trust fund
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 97-11688 (6 original pages)
  • Tax Analysts Electronic Citation
    97 TNT 81-58
Citations: 97-472 E

                              97-472 E

 

 

                           April 18, 1997

 

 

                       CRS REPORT FOR CONGRESS

 

 

       LEAKING UNDERGROUND STORAGE TANK TRUST FUND (LUST) 1

 

 

                            Nonna A. Noto

 

                    Specialist in Public Finance

 

                          Louis Alan Talley

 

                    Research Analyst in Taxation

 

                         Economics Division

 

 

SUMMARY

 

 

[1] The Leaking Underground Storage Tank (LUST) Trust Fund was established in 1986. The trust fund provides money for the Environmental Protection Agency (EPA) or the states, under cooperative agreements, to pay cleanup and related costs involving leaking tanks if no financially solvent owners can be found, or if the owner or operator refuses or is unable to comply with an urgent corrective order. Thus, both EPA and the states use trust fund monies to oversee and enforce corrective actions. The EPA allocates money to the states to clean up the sites posing the greatest threat to human health and the environment. The trust fund was primarily financed by a 0.1 cent per gallon tax on fuels, which expired December 31, 1995. Some additional revenue for the trust fund comes from recoveries from parties responsible for leaking tanks under provisions of the Solid Waste Disposal Act as amended by the Superfund Amendments of 1986 (P.L. 99-499). The fund currently holds approximately $1 billion. Since the fund's inception the Congress has appropriated about one third of the total funds available. The President's FY1998 budget has proposed extending the tax, but no tax legislation has yet been introduced. However, on April 16, 1997, the House Commerce Committee unanimously approved H.R. 688 to broaden the range of cleanup and enforcement purposes for which LUST monies may be spent. In addition, the bill provides that at least 85% of the annually appropriated funds from the LUST trust fund be distributed by EPA to states.

BACKGROUND

[2] In response to concerns for the cleanup costs associated with leaking underground storage tanks containing petroleum products, Congress established the Leaking Underground Storage Tank (LUST) Trust Fund through passage of the Superfund Revenue Act of 1986, Title V of P.L. 99-499. From 1987 through 1995 the fund received revenues from a tax of 0.1 cent a gallon on several categories of motor fuels: gasoline, diesel fuel, special motor fuels, fuels used in aviation, and fuels used in commercial transportation on the inland waterways, as well as a 0.05 cent per gallon tax on methanol.

[3] First effective January 1, 1987, the tax was scheduled to expire on the earlier of December 31, 1991, or the last day of the month in which the Secretary of the Treasury estimated that net revenues in the fund were at least $500 million. The tax terminated on August 31, 1990, because the trust fund had reached its net revenue target. 2 Under provisions of the Revenue Reconciliation Act of 1990 (P.L. 101-508) the tax was reinstated at the same 0.1 cent per gallon rate, without a revenue ceiling, but with a termination date of December 31, 1995. Also to be deposited in the trust fund are any monies recovered from parties found responsible for leaking storage tanks, under provisions of the Solid Waste Disposal Act (SWDA) as amended by the Superfund Amendments and Reauthorization Act of 1986 (P.L. 99-499).

[4] The balance in the LUST fund has continued to grow past the $500 million target met in 1990. The fund currently holds approximately $1 billion. Interest earnings on the billion dollar balance are approximately $50 million per year. While the 0.1 cent tax was in effect, it generated about $150 million per year. Thus, total annual receipts were roughly $200 million. Outlays from the fund were lower: $73 million in 1994; $70 million in 1995 (FY1995 was the last full year of excise tax revenues). Only about one third of the funds available since inception have been appropriated.

THE PRESIDENT'S FY1998 BUDGET PROPOSAL AND H.R. 688

[5] The President's FY1998 budget states that legislation will be proposed to extend the tax through September 30, 2007. The budget also indicates that legislation will be proposed to expand the use of the fund to include several related EPA programs which also address groundwater protection from contamination. 3 However, the priority of the fund is expected to remain the cleanup of leaking underground storage tanks.

[6] The balance in the LUST trust fund will continue to grow under the Administration's budget proposal for FY1998, which would increase both the outlays and revenues of the fund. The President's proposal would add $53 million in outlays to the approximately $65 million in projected outlays under the LUST program for FY1998, for a total cash outgo of $118 million. The budget projects for FY1998 $45 million from interest earnings plus $162 million from a reinstated tax of 0.1 cent per gallon, for total receipts of $207 million. Thus, the projected net surplus for FY1998 is $89 million, or 55% of the $162 million in reinstated tax revenues.

[7] On April 16, 1997, the House Commerce Committee unanimously approved H.R. 688, titled the Leaking Underground Storage Tank Trust Fund Amendments Act of 1997. Under the Underground Storage Tank (UST) statute, UST owners and operators are required to meet certain leak detection and prevention standards in 1998. These standards are an important safeguard against future underground storage tank leaks. However, monies in the LUST fund cannot currently be used by the states to monitor compliance with these standards. The LUST trust fund now provides money for EPA or states, under cooperative agreements, to pay cleanup and related costs involving leaking tanks if no financially solvent owners can be found, or if the owner or operator refuses or is unable to comply with an urgent corrective order. The bill broadens the range of enforcement purposes for which states may expend money from the LUST fund. As drafted, the bill permits states the ability to use money for financial assurance programs. Such assurance funds could be used in those cases where a company's ability to remain in business after paying cleanup costs would be significantly impaired. Further, the bill allows states to use LUST funds to administer their assurance funds. States are prohibited from using monies to help with 1998 UST compliance requirements so as not to place those that have already complied at a competitive disadvantage.

[8] Because of rising enforcement needs and the prospect of increased funding, many in Congress wish to be assured that future appropriated monies will be used for environmental protection and not on administrative overhead. This bill requires the EPA to award at least 85% of appropriated amounts to the states each year. Like the Congress, the EPA envisions the states as the primary implementers for the supervision of corrective action where underground leaks have occurred. In the past, the EPA has on average met the 85% requirement imposed under the bill.

MOTOR FUELS EXCISE TAXES

[9] The taxes on motor fuels finance several different trust funds, falling under three different programmatic categories. Revenues from motor fuels fund the Aquatic Resources, Highway, Land and Water Conservation, Airport and Airway, Inland Waterways, and the National Recreation Trails trust funds. By far the largest amount of revenue goes to transportation programs, with lesser amounts going to nature conservation and recreation and to environmental cleanup. Typically, the revenues from each of the motor fuels taxes are allocated to the particular nature or transportation trust fund depending upon the type of engine or vehicle for which the fuel was purchased. In contrast, the LUST fund for environmental cleanup was financed by a small tax on most types of fuel regardless of use.

[10] The close correspondence between the types of products taxed and the programmatic categories should not be surprising. Historically, a concerted effort has been made to tax products whose use is closely correlated with use of the services financed by the trust fund or closely associated with causing the damages to be redressed. Indeed, a key factor in establishing a program supported by dedicated excises is likely to be the ability to identify a product that can be taxed on an administratively reasonable basis and with public acceptance of the reasonableness of singling out that specific product for taxation.

[11] The excise taxes dedicated to trust funds are intended to approximate charges directly associated with a particular government program. Characterizing excise taxes as fees or charges, in turn, leads logically to directing those revenues to a particular expenditure program through a trust fund or special fund arrangement.

[12] The current dedicated excise taxes on motor fuels serve two quite different roles. The excise taxes financing the nature- conservation-and-recreation and the transportation categories of trust funds can be described as "user taxes." They reflect the "benefits principle" of taxation. 4 They are intended to tax the current or potential beneficiaries of the government program.

[13] In contrast, the excise taxes financing the environmental cleanup and health damage compensation categories of trust funds (such as the LUST fund) can perhaps be better described as "liability taxes" or "damage taxes."

LIABILITY EXCISE TAXES

[14] Liability excises are imposed in situations when those actually responsible for the damages cannot be held directly accountable. Instead, taxes are levied on the current production of a product associated with causing the damages that the government program is trying to rectify. The taxes are employed to finance several insurance-type trust funds established to make payments authorized by the government to compensate for certain environmental and health damages.

[15] A serious evaluation of almost any excise tax used as a pricing mechanism is likely to conclude that some taxpayers are overcharged while others in society pay too little in relation to their use of the government program (in the case of user taxes) or their responsibility for the problems the government program is addressing (in the case of liability taxes). A major criticism is that an excise tax tends by its nature to be only a rough approximation of the appropriate price. It does not charge the user of the government service directly, but rather levies an indirect charge by taxing a private sector product that is commonly associated with use of the government service or with causing the damage to be addressed.

[16] Despite its shortcomings, an excise tax may nonetheless emerge as a compromise financing mechanism. While the excise tax may be recognized as an imperfect charge, in some cases it is viewed as preferable to having the taxpayers at large bear the financing responsibility, or having no government program at all. Administratively, it may be far more convenient to initiate and collect an excise tax than to implement a system of true user fees.

[17] Among the trust funds financed by liability excise taxes, the one that most closely resembles an insurance program is the Vaccine Injury Compensation Trust Fund. It differs from the other trust funds in the environmental and health damage groups in two important respects. First, the vaccine injury program adheres to the budget principle that the general fund of the U.S. Treasury should bear the responsibility for "retrospective liability," related to events that occurred prior to the establishment of the trust fund program and that the trust fund should only finance "prospective liability," related to events that occur after the program is established. For some other trust funds in the liability category, the taxes are collected to pay in large part for damages that are the result of past activities. This is especially true in the cases of the Abandoned Mine Reclamation Fund, the Black Lung Disability Trust Fund, and the Superfund.

[18] This contrasts with other trust funds (including the LUST fund) in the environmental cleanup and health damage liability categories for which, in theory, the government tries to assign liability and collect damages. In practice, however, very little liability has been assigned to responsible parties and even less collected in damages. Damages may be uncollectible because they are attributable to unidentifiable producers, past producers now out of business, or known current producers from whom liability payments cannot be collected because they have insufficient assets or because they are contesting the liability claim. If the government is able to collect damages from identifiable parties, the monies collected are deposited into the corresponding trust fund in the cases of the Superfund, Leaking Underground Storage Tank, Oil Spill Liability, and Black Lung Disability trust funds.

[19] The inability to identify the responsible parties and hold them accountable is, in fact, one of the prime reasons for the establishment of these government compensation programs. But the very existence of the trust fund as a safety net may increase its burden by reducing the incentive on the part of damaged parties to pursue the legally responsible parties.

[20] The inability to collect damages from those directly responsible also means that others will have to pay. The liability taxes typically cannot be levied specifically on the parties directly responsible for the damages or in accurate proportion to the damage they caused. Further, many of the companies responsible for causing the damage are no longer in business.

[21] Instead, the liability taxes are commonly levied on a product closely associated with causes of the damage. The overriding rationale is that it is preferable for the burden to fall on the associated industry and its customers rather than on taxpayers at large. Not unexpectedly, there are complaints from producers and consumers in the taxed industry who feel they should not be held responsible for damages caused by others in the past.

[22] The main reason for governmental intervention with liability taxes is the difficulty in holding responsible private parties accountable. This may be due to weaknesses in the legal system or other enforcement mechanisms, the inability to identify responsible parties, or the inability or unwillingness of responsible parties to pay. The collection of damages may take a long time and/or involve high legal costs.

[23] In the case of several of the liability taxes, according to considerations of economic efficiency and equity it may be most appropriate for the general fund to finance the cost of the compensation program, particularly with regard to damages caused in the past. However, there may be a strong political or moral desire to assign responsibility and related costs to a subset of the economy. Even if the damages were caused in the past, it may be considered preferable to have current producers and users of the product bear the costs of the program, rather than taxpayers at large.

[24] As such these excise taxes emerge as a compromise financing solution. Placing an excise tax on a product whose usage is closely correlated with use of the government service is regarded as a practical alternative to implementing a system of user charges. To establish a reliable revenue source for a damage compensation fund, an excise tax is placed on the product or products most closely associated with causing the damage to be redressed.

 

FOOTNOTES

 

 

1 Although this report refers to legislation under consideration in the Congress, it is not intended to track particular bills through the legislative process. For information about current legislation and its status, please consult the Bill Summary and Status file of the Legislative Information System (http://www.congress.gov).

2 Internal Revenue Service Announcement 90-82, released June 27, 1990.

3 U.S. Office of Management and Budget. Budget of the United States Government, Appendix, Fiscal Year 1998. February 6, 1997. pp. 944-945.

4 This contrasts with the "ability to pay principle" upon which the income tax is based. In fact, one of the commonly cited disadvantages of excise taxes -- other than luxury taxes -- is that they are regressive, taking a larger share of income from lower income than from higher income groups. Excise taxes are not different from market prices in this regard, however.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Noto, Nonna A.
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    LUST, trust fund
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 97-11688 (6 original pages)
  • Tax Analysts Electronic Citation
    97 TNT 81-58
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