Mr. KELM. Very much so. Right now, of course, we are concerned about imports. They haven't been a factor up until now, but now they are talking about shipping Colombian coal-barging it up the Mississippi River, so it would be landed on docks only 20 miles from our mines. I understand that coal comes in at about $5 a ton cheaper than we can produce it. It is a real threat to the future. Mr. DUNCAN. Does anyone care to add anything? Mr. DAVIS. I don't believe so, Mr. Duncan. Thank you. Mr. DUNCAN. Thank you. Thank the panel and thank you, Mr. Chairman. Mr. ANTHONY. Mr. McGrath. Mr. McGRATH. Thank you, Mr. Chairman. I have no questions for the panel except to express the statement that during our deliberations on this tax reform measure, we should be very conscious of what the individual impact of the measures that we do adopt has on various industries throughout our country, and I would say from the testimony that we have heard today, some of the provisions would be very detrimental to this particular industry, and we should keep that in mind. Mr. ANTHONY. I have a few questions. I wish you could educate me a little bit. First of all, Mr. Kelm, in your testimony you stated that the conferees in the 1984 tax bill overrode the unanimous opinion of the Tax Court. Could you explain in more basic language what that actually did? Mr. KELM. Are you talking now about the reclamation-- Mr. KELM. Yes. The Tax Court decided-in fact, I believe it went to a higher court-decided some years ago that it was proper to accrue reclamation expenses because those expenses were both certain Mr. ANTHONY. This is after a mine closes? Mr. KELM. No, I believe this applies also to reclamation during the existence of a mine. The big problem, of course, comes about when the mine is closed because your income disappears. Mr. ANTHONY. What actually did the conferees do? Mr. KELM. The conferees adopted a section of the Internal Revenue Code which permits accrual of reserves for reclamation and mine closing on an economic basis such that it sets up, in effect, a memorandum account to which is added an amount of interest each year, an imputed interest, so to speak, and then the amount of the reclamation expenses are credited against that reserve. So what it does, it says to you although you can accrue the reserves, you have to add to the reserves you have acrued an imputed interest in order to give effect to the fact that you are not going to expend the moneys until a later date. Now that section, which was specifically for the mining industry and was put in at the very last minute in last year's coal bill, is proposed to be rpealed entirely by the President. Mr. ANTHONY. Let's go back and see if I can get a little bit better grasp on what is going on. If I am an owner of property that has coal under it, I sell it outright and if I held it for the requisite number of holding days, I get capital gains treatment. Under current law, if I lease it under a long-term lease, I still get capital gains treatment. The President would propose to take away that capital gains treatment for the lessor-owner of the property. All right. Assume I own the land and I lease it out. What then becomes the obligation of the lessee? What if the lessee holds it for a year, does not develop it and, in turn, subleases it to another party or sells his lease to another party? How is the income treated for that transaction? Mr. DAVIS. Are you asking me that question? Mr. ANTHONY. I am just asking the panel. Mr. DAVIS. The answer to the question, Mr. Chairman, is divisible into two parts. The answer to the first part of the question is that if there is an advanced royalty payment or a minimum royalty payment paid by the lessee to the lessor, and no mining in fact occurs, then those payments are treated as ordinary income. If either the advanced royalty or the minimum royalty is recoupable over the term of the lease, that is chargeable against tonnage royalties which are subsequently mined, then both of those payments are treated as tonnage royalties and entitled to capital gains treatment. In the case of the sublease, in the original instance, the sublessor was not entitled to capital gains treatment of payments which he received, but he now is-the code was amended to provide that a sublessor is also entitled to capital gains treatment. Mr. ANTHONY. Under the code today? Mr. DAVIS. That is correct, under 631(c). Mr. ANTHONY. The sublessor- Mr. DAVIS. The sublessor, provided he retains an economic interest in the coal, that is, some continuing interest in the coal deposits, such as a royalty payment based upon the amount of the coal which is mined, is entitled to capital gains treatment. In other words, the base lessor would be entitled to a royalty. The sublessor would be entitled to an overriding royalty. Assuming some continued economic interest, the royalty payment received-overriding royalty payment-received by the sublessor would be entitled to capital gains treatment. Mr. ANTHONY. What would be the economic interest he would have to retain? Mr. DAVIS. As I indicated, an economic interest is a continuing interest in the coal deposit such as a royalty payment, which is based on the amount of the coal mined. That is the usual situation with respect to coal disposal contracts such as leases. There are other more complicated illustrations, but that is the usual case. Mr. ANTHONY. In the normal course of business, would the lessee most normally be the processor? In other words, would the typical transaction go between a property owner and to the processor lessee? Mr. DAVIS. Normally it would. Mr. ANTHONY. How prevalent would be an interim gap of having it go from a landowner to a lessee and then the lessee becoming a lessor and selling it or leasing it to the processor? Mr. DAVIS. I can't answer that precisely. The typical transaction would be the transaction between the lessor and lessee-operator. There would be situations where the lessee-operator would enter into subleases or contract mining arrangements. Mr. ANTHONY. Now, how does that differ from Federal lands where you lease from the Federal Government and pay a royalty? What is the treatment? Mr. KELM. The treatment of the royalty payment? Mr. ANTHONY. The same circumstances I described a while ago, in which a sublessee is involved. In other words, let's say I lease from the Federal Government and I am not the processor, and then I turn and lease to a processor. How are the payments received from the processor treated? Mr. KELM. I have difficulty answering that because I have never confronted that myself. I don't know what the purpose of the middleman would be except as a broker. Mr. ANTHONY. I was just asking if that occurs. Maybe it doesn't occur. Mr. KELM. In my situation, although we do lease coal, we always lease it directly from the person who owned it and not through a third party of any kind. Mr. ANTHONY. I am interested in knowing if this occurs. If I don't get any followup information, I will assume that it doesn't occur. If you know of any circumstances of that occurring, I would like to know. Mr. DAVIS. I can respond to that better outside the context of Federal coal leasing. I am not that conversant with Federal coal leasing. It does, in fact, occur and lessees do, in fact, sublease coal which they have leased to others. Mr. ANTHONY. Off of Federal lands? Mr. DAVIS. I can't speak to that with regard to Federal lands. Mr. ANTHONY. The reason I am curious about it is because in reviewing the President's proposal and trying to determine if it treats all different industries equal for capital gains treatment, I have found that there are some different treatments from either mineral or other resources, and timber is one. I believe the timber people will be here the 31st and I will get a chance to talk to them about it. In that case, a person could buy timber from the Federal Government, hold it for 6 months and 1 day and turn around and sell it to a processor. Then he is entitled to capital gains. I was wondering whether there is an analogous situation in the coal industry? If you find out there is, I would like to know about it so I can put all these together in some type of context. Mr. DAVIS. We will inquire and provide you with further information with regard to that. I am simply not that knowledgeable about Federal coal leasing. Mr. ANTHONY. I think you have made a strong case for your industries, and I think Mr. McGrath is right. The numbers, the dollars, and the impact that you have talked about is very dramatic and is something we are going to have to take into close consideration as we decide what to do. We thank you for your contribution for your industry and for the record. The committee will stand in recess until 2 o'clock, at which time we will hear from the panel comprised of Ruth Caplan, Dr. Jan Beyea, Jack Doyle, and Dr. David Campbell, Geoffrey Webb, and Robert E. Wolf. [Whereupon, at 12:05 p.m., the committee was adjourned until 2 p.m.] AFTERNOON SESSION Mr. ANTHONY. The committee will come to order. The panel that was announced, consists of Mr. Doyle, Mr. Campbell, Mr. Beyea, and Ms. Caplan. Why don't we go ahead and get started and we will just start off with Environmental Action, Ruth Caplan, action director. If Mr. Webb or Mr. Wolf come in, somebody can instruct them to have a seat at the witness table and we will hear from them. Why don't you start off, Ms. Caplan. I don't know if you heard my admonition to the other witnesses, but your complete statement will be accepted for the record and you are free to summarize it or proceed as you deem best. STATEMENT OF RUTH CAPLAN, ACTING DIRECTOR, Ms. CAPLAN. Thank you very much, Mr. Chairman. On behalf of the panel, I would like to thank you for providing this opportunity to testify on the broad range of environmental concerns arising from the present Tax Code. There is growing recognition within the environmental community of the critical role which the Tax Code plays in shaping the way our natural resources are used. Other national environmental organizations, including the Sierra Club, the Wilderness Society and Natural Resources Defense Council, which could not join us today on the panel, share our concerns and plan to submit statements for the record. Witnesses today on the panel include National Wildlife Federation, National Audubon Society, the Environmental Policy Institute, and witnesses for the Rural Coalition and Friends of the Earth, who we expect to join us. I would like to turn now to the energy sector. Under current tax law, the Government is spending more than $27 billion to subsidize energy production. This figure is conservative, since the estimates of expenditures for the oil and gas industry do not include several major tax benefits due to the lack of data. Of this amount, all but approximately $1 billion goes to nonrenewable resources. I have illustrated this point on the chart to your left. As you will see from the chart, electric utilities and oil and gas, in the column on the left, receive by far the greatest benefit from the Tax Code. Coal, our most abundant fossil resource, is given negligible support. While as en environmentalist I am not here today to advocate soil subsidies, I think that the gross differences in levels of tax expenditures reflect the lack of any consistent energy policy in the tax code. The large subsidies for oil and gas encourage more rapid depletion of our most scarce resources. Dr. Jan Beyea will testify on the environmental impacts of these tax expenditures. Table I of the testimony provides the breakdown of tax benefits used in the chart with synthetic fuels and coal conversion broken out from renewables and allocated to oil and gas and goal respectively. Federal subsidies provided to the electric utility industry, currently at an annual level of about $12 billion, contribute to the poor planning and wasteful investments which have characterized the electric utility industry in recent years. After more than a decade of overbuilding, the utility industry has a generating reserve margin of 36 percent, about twice what regulators recommend. Construction is continuing today on about 40 nuclear plants which will produce power at rates far above the cost of available alternatives. As these plants come on line, the resurgence of power marketing will accelerate as utilities try to recover their costs by marketing their excess power. This will create a strong counterforce to conservation efforts. Without the massive Federal tax subsidies for new investment, utilities would be forced to pursue more creative ways to meeting their customers' energy needs such as load management and energy efficiency improvements. These approaches do not have the major environmental impacts associated with central station generation, whether they are fossil or nuclear. None other than an official of Consolidated Edison Co., has recently stated that a loss of Federal tax benefits for utilities would stimulate less capital-intensive forms of energy development, yet conservation and load sifting may become more appealing than new power plant construction. Treasury I stands in sharp contrast to the billions of dollars in tax expenditures for energy under current law. Subsidies for all energy sources should be removed. If adopted, it would be a major step toward a level playing field, with energy investments being made according to their economic merits rather than being based on maximizing tax subsidies. Treasury II is the black spot in the middle of the chart. While the environmental community strongly supports the extension of conservation tax credits, a number of organizations publicly supported the income provisions in Treasury I even though these credits would be repealed. Treasury I provides the benchmark for income tax reform. No other tax reform proposal is as comprehensive. By contrast, as you will see from the chart, Treasury II takes one step forward by removing some of the energy subsidies but then takes a giant step back by tilting the playing field even more steeply against renewable energy resources. Renewables would receive just 1.1 percent of the total expenditures, according to our calculations Even under present law, they receive 3.6 percent of the total, assuming the present energy tax credits are extended. I submit that Treasury II is unfairness masked as tax reform. Under this proposal, electric utilities would retain significant investment incentives for capital construction, even with the loss of the investment tax credit. This is because the tax life for fossil plants would be shortened from 15 to 10 years. This just about makes up for the effect of the lower tax rate. We calculate tax expenditures of $4.5 billion annually due to the capital cost recovery system. |