7.10.1. Subsidies for Timber, Minerals, and Water Extraction

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It has been widely asserted that timber, minerals, water, and public grazing land have been priced below their true social cost and in many cases even below their private cost. For all of these resources, user fees such as those described in Section 4 have been assessed. However, to the extent that these fees are lower than the private cost of the resources or services on which they are charged, such resources and services are actually being subsidized to the detriment of environmental protection.

As mentioned in Section 4, for example, livestock grazing fees on federal lands imposed according to a formula established by the 1978 Public Rangelands Improvement Act (PRIA) are widely believed to be below market value. Although fees have been between $1.35 and $1.98 per animal unit month (AUM) since 1986, the Bureau of Land Management (BLM) and Forest Service estimated in 1992 that fair market values were $4.75 per AUM for sheep and varied across regions from $4.68 to $10.26 per AUM for cattle and horses. The costs of the grazing programs were $2.40 to $3.24 per AUM for the Forest Service and $2.18 to $3.21 per AUM for BLM. The low end of the cost range applies if only the funding directly linked to the livestock grazing program is considered, while the high end considers all range management funding. Cody (1994).

See: Congressional Research Service, Report for Congress: Grazing Fees: An Overview Web site. Moreover, state and private fees are significantly higher than PRIA fees. Data from the National Agricultural Statistics Service indicate that in 1993, private fees in 17 western states averaged $9.80 and state government fees average $4.58. As noted in Section IV, the PRIA fee that year was $1.86. Green Scissors Campaign of Citizens United to Terminate Subsidies (January 1995).

See Sacred Cows: Proposal & Savings Web site

See: Congressional Research Service, Report for Congress: Grazing Fees: An Overview Web site

Table 7-16 shows that estimated U.S. Bureau of Reclamation irrigation water subsidies in selected areas ranged from 57% to 97% of the Bureau's full water delivery cost. Excessive irrigation has been associated with a number of environmental problems, including water shortages and contamination of water with natural pollutants and agricultural inputs.

Historically, the mining (including oil and gas) and timber industries have benefitted from preferential taxation of their income. The impact of subsidizing mineral and timber production through the tax code is to favor virgin material use over secondary (recycled) materials. Two types of adverse environmental effects may result from such subsidies: destruction of natural areas as minerals and timber are harvested and excessive disposal of materials that otherwise might be recycled.

Percentage depletion allowances for petroleum and other minerals, for example, allow companies to write off as expenses arbitrary percentage reductions in mineral deposits resulting from their operations. The value of these allowances for oil and gas was estimated at over $2 billion annually from 1980 to 1982 but has since decreased to insignificant levels. One reason for the decrease is that only independent oil and gas companies (which account for about 30% of total U.S. oil and gas consumption) are now entitled to allowances. Moreover, only 25%-40% of these independent companies pay the standard (rather than alternative minimum) tax required for eligibility for allowance claims, and many of these are excluded from claims by other criteria under the tax code. Percentage depletion allowances for other minerals were worth over $500 million annually for much of the early 1980s but fell in value after the 1986 tax reform. Oil, gas, and other mineral extraction companies also have the advantage of being able to expense (rather than capitalize) exploration and development costs.

Timber companies were formerly allowed to consider certain timber income as capital gains, which are subject to lower tax rates. This practice, worth about $800 million a year in the first half of the 1980s, was eliminated by the 1986 tax reform. However, the elimination of this practice led timber companies to increase their use of other previously underused tax advantages: provisions allowing timber management and reforestation costs to be expensed rather than capitalized and tax credits and accelerated amortization for reforestation activities. Government construction of roads to facilitate harvesting is another form of subsidy for timber.

7.10.1. Subsidies for Timber, Minerals, and Water Extraction

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