impression. It is common for profits to be distributed among wholly-owned subsidiaries through overriding royalties and other means, to make it appear that the parent company is making little money.

It is undoubtedly true that some coal mines operating at the margin of profitability would close down under these proposals. It is also true that supply in the marketplace would move toward more cost-efficient operations. But there is nothing wrong with that. There is no shortage of coal in this country and no shortage of potential suppliers. Indeed the over capacity of the industry today (the excess of coal which could be readily produced if a market existed) is greater than it has ever been, probably in the range of 250 million tons per year.

Energy Secretary John Herrington has been quoted in the trade journal Energ Daily as saying that the changes won't make much difference because U.S. coal markets are likely to remain relatively 'soft' into the next decade and there is "little likelihood that a significant number of new mines would be opend for some time, even under present tax policy".

A

Help from the government hasn't been limited to the tax code, either. Eighteen billion tons of public coal have been leased to industry at a fraction of what would have been received in private transactions. series of sweetheart deals, from the leasing of coal at below market rates to free contract extensions have been promoted by the present Administration.

It is ironic that so many in the coal industry who so vigorously supported Ronald Reagan and his call to end handouts and government intervention in the marketplace have spent the last several years procuring cheap leases, supporting the Synthetic Fuels Corporation, and arguing for special tax subsidy of the coal industry. For those who avow the magic of the marketplace, let it work its will.

Whether or not any changes in the tax code occur, Mr. Chairman, the long term situation for this industry will be essentially the same. The electric utility and steel industries, principal customers for U.S. coal, will not be undergoing significant expansion in the foreseeable future. The world price of oil continues its slide, which will pressure coal markets considerably. The industry can already produce far more than it can sell, and thus is quite competitive internally. Coal is moving from east to west, from underground to surface mines, from union to non-union. Whatever one thinks of these developments, they will not be affected by a change in percentage depletion or the change in reclamation deductions.

The proposals are fair, representing an improvement in economic and environmental policy. We would support their immediate adoption, instead of the five-year phase-in the Administration suggests.

Thank you.

Mr. ANTHONY. Thank you, Mr. Webb. Has Mr. Wolf had an opportunity to appear? We will go ahead with questions, and we hope Mr. Wolf will appear before we get through.

I want to thank you for your testimony. It is a shame that the panel table is not large enough so when some of these special interest groups who are testifying, such as the coal industry who testified earlier today and the oil and gas and electric utility people who have testified previously, had been over on one side and they on the other, I think it might have livened up what some people have said have been fairly boring hearings.

Your testimony really gives a lot of food for thought. I must say it is a contrasting opinion from those that are being delivered by people who are in the industry will give us an opportunity to read it and look over it.

Let me tell you that I share your concerns in many, many respects. I want to tell you a true story about one of my friends. This gentleman owns some hardwood land in Louisiana. I found out that he was in the process of clearing it. I called him and talked to him and said, "Why would you want to clear hardwood land when we have an oversupply of commodities right now and farmers are going broke right and left?"

He says, "Well, I put the pencil to it. I can make more money by clearing the land, putting it into soybeans, putting the soybeans into a Government loan, and letting the Government take over my soybeans, than I can for growing it and selling it for hardwood." Many of you make this very point. Here is an individual who is farming the Tax Code and not farming his land. I tried to talk this gentleman into donating the land for nature conservancy so we could save it, which I have been able to do in some other areas in the State of Arkansas. But being one that didn't get to be wealthy by not being sharp with a pencil, he put the pencil to it and said "I came out better clearing it and putting it into soybeans."

Unfortunately today those hardwood trees are no longer in existence, and he is in the process of putting a soybean crop in. Your point couldn't be any more directly stated. When you make testimony like this and members of the committee have an opportunity to see first-hand what actually is happening in the marketplace, I think it demonstrates we have some tough decisions to make if we are serious about tax reform.

I have made my statement. I would like to ask each one of you a question. Is tax reform a laudable goal and a goal this committee should attempt to secure for the country starting in September after our August recess? Should we attempt to revise and reform the Tax Code?

Mr. Doyle, we will go from left to right, and then I will stop and let Mr. Wolf gather up his thoughts and make his statement.

Mr. DOYLE. If I may pick up on your statement of your acquaintance who has converted hardwood land to soybeans, we think that that is a good example of how the Federal Government is both encouraging resource abuse and in one case giving a deduction for the clearing of that land while another Federal program provides support for the soybean production in the context of the farm bill and farm policy. We think by, for example, eliminating the deduction for land clearing, you take away the incentive for converting that

land in the first place, and now you have the farm bill being drafted in the Agriculture Committee. We have historically, and we continue to promote as much production as possible. So there seems to be lack of consistency between what happens in the farm program area and what happens in the agricultural tax policy area.

But I think that one example is a very good one as to why we do need a tax reform, and certainly the Congress should move forward as quickly as possible after the recess to investigate all possibilities, and we feel quite strongly about the agricultural resource and farm structure question.

Mr. ANTHONY. Mr. Beyea.

Mr. BEYEA. I would certainly say in the area of energy, it would be well worth pursuing tax reform, and I urge you to do it.

Mr. ANTHONY. Mr. Webb.

Mr. WEBB. Well, we also would urge you to do it. I think in the area of energy, as well as others that are mentioned here, the tax system as it currently is structured makes certain sectors of the energy industry or certain sources of energy appear to be cheaper than they really are. That sends signals to the marketplace encouraging consumers to purchase a product which is apparently less expensive than it is, having the impact of subsidizing that one field and at the same time discouraging the development of other possibly viable alternatives because the pricing is skewed. This is particularly true in the nuclear and fossil areas as opposed to conservation efficiency and renewable sources of energy.

Mr. ANTHONY. Ms. Caplan.

Ms. CAPLAN. We have looked in most detail at the electrical utility industry and based on Edison Electric Institute's own figures, 24 percent of the capital that they needed for construction in 1983 was derived from tax benefits.

Mr. ANTHONY. Would you mention that number again?
Ms. CAPLAN. Twenty-four percent.

Mr. ANTHONY. We are talking about utilities?

Ms. CAPLAN. For electric utilities. That is a very large amount. It comes not just from the investment tax credit and the accelerated depreciation provisions, also surprisingly enough, from their use of pollution control bonds. You may be surprised to hear an environmentalist telling you pollution control bonds are not a good idea, but you are hearing it from me.

Mr. ANTHONY. They are costly.

Ms. CAPLAN. They are in fact subsidizing facilities that have environmental problems and, therefore, have to try and control it. Mr. ANTHONY. You are not opposed to pollution control or the use bonds? You are just opposed to the tax-exempt nature of the instrument?

Ms. CAPLAN. I am opposed to providing this kind of a subsidy for new facilities being built as opposed, for instance, to providing them for retrofitting plants, which is really why I think the pollution control bonds were first established by Congress. Instead today, they are being used for building new plants. In one case, in the building of the Vogle plant, about a quarter of the financing is coming through pollution control bonds because of a recent Internal Revenue Service ruling. I think that this is leading to major distortions.

The current expensing of interest during construction is another major subsidy to the utility industry. It allows them to move forward during times of high interest costs, to build these projects when otherwise they would not be economically efficient. Of course, what we find is that a lot of the alternatives have far less environmental impacts. If you are looking at more efficient use of energy through efficiency improvements, that obviously has much less environmental impact than having to use more of our fossil or nuclear resources to provide the same energy services.

Mr. ANTHONY. Before we go further, I am going to recognize Mr. Daub because he is under a time constraint. We are going to reserve Dr. Campbell's response and Mr. Wolf's testimony. Mr. Daub has a 3 o'clock appointment. I promised I would allow him to get his questions in before he leaves. Then we will hear from Mr. Wolf and go back to questions.

Mr. DAUB. I want to say I very much appreciate having a chance to hear this panel. A lot of the things you say certainly are ideas I support.

Mr. Doyle, I hope you read my bill.

Mr. DOYLE. Yes, sir. We do like your bill. We think it is a very important one.

Mr. DAUB. It has got five of your nine elements that you have listed on page 15 very, I think, soundly crafted into what could be at least the beginning of a way to legislatively achieve many of the things you are talking about. I think that they are potentially ideas that could go beyond just the negative impact that these once well-intended scheduled tax incentives were crafted to produce and be applied across the spectrum of economic activity.

But that is probably biting off a bigger chunk of tax reform on those issues than might be possible. But at least in the farming area, it would be my hope we might have your help, maybe talk to some of your colleagues in this field, and see if you can get them to help me work with members of the committee to achieve some of these elements in the proposed reform that is before us.

Mr. DOYLE. We think your bill is an important step forward, and I would draw your attention to the appendix of this statement. We made a survey of some corporate executives, 83 or 84, and we are finding some very interesting responses and support for some of the concerns that you have.

Mr. DAUB. I think everybody is beginning to realize the implications of putting an irrigation system on a piece of class 4(e) to 8 erodable soil on the theory that you can improve its value, thus at point of sale thereafter obtain a capital gain. In the meantime, of course, if you were farming it for real, you couldn't-given interest rates and a price for a bushel of corn or beans-pull enough off of it in a lifetime to pay for the real cost of that land. The artificial pricing that is occurring, both for the taxpayer and for the person interested only in shelter, just simply is distorting the real economic values.

The hog confinement operations are probably the most egregious place you look for the quick writeoff of the single purpose structure and see a steel building that can be written off in 5 years that is going to be good enough 17 years later that its real value ought to

be, in fact, that. We ought to expense it or depreciate it over its real life.

We appreciate your testimony. Let me ask one quick question. Mr. Webb, you said that you envisioned the shift to renewables as a future idea of a concept if we aren't already seeing it underway. Now, that means that you could very wholeheartedly support this kind of tax reform we are talking about because it would make the incidents neutral with respect to the different kinds of energy.

Ms. Caplan, you said we should take away all the credits. Maybe Mr. Webb implies that, but let me ask you how you get from today to tomorrow, for example, in renewables like ethanol, methanol, wind, solar, without inducement to level up the playing field relative to public power, nuclear and fossil fuels that now have those advantages and have been able to use them from the capital upon which they are competitive and would still be competitive without those breaks relative to the renewables. How do we get from here to there without having somewhere in between in the Tax Code?

Ms. CAPLAN. We certainly do need a transition, and I think that Representative Heftel's bill, H.R. 2001, is an attempt to create such a transition so that there would be a phasing out of the renewable and conservation tax credits. It was not easy for us, and the "us" includes solar lobby, when Treasury I came out, to say "OK, this is cutting all the subsidies, are we willing to take our humps along with everybody else? Do we really believe that renewables and conservation can compete in the marketplace?"

The answer is yes, particularly when you accurately price the energy resources to internalize the environmental costs, which, of course, we often don't do properly, but these resources will be able to be competitive. When the tax credits were first put in place, it was an attempt to make a more level playing field. I think what we see from the chart is what a paltry attempt, as good as those tax credits are, we really have. It is not level at all. Unfortunately, Treasury II makes things even much worse.

We do need a transition, and I think that some kind of a phaseout period for all of the energy subsidies would make sense, and that they should be on similar schedules.

Mr. DAUB. Mr. Webb.

Mr. WEBB. I think Ms. Caplan more or less spoke for us. I think there are other areas besides the Tax Code we would want to take a look at. For instance, we have all seen what is going on in the area of appliance efficiency standards, where the Government could help make large strides in conservation, but refuses to. I think we should not imply the Government has no role or should not engage in activities to assist in a transition over the long run from a fossil-based economy to a renewable-based economy. And the example of setting efficiency standards for the industry that everybody would have to meet, is something which is not done through the Tax Code but is a Government activity.

I think we could look at the issue of capital formation, as you point out. This does need to be looked at, and financing mechanisms are a real problem. The fact is that with renewables, we've practically got to have all the cash, as opposed to the smaller reguÎar bites which the fossil and nuclear industries take from consum

ers.