This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: I just want to say one word to you: plastics.

In recent years, governments have attempted to address climate change and the causes contributing to it through myriad tax incentives and disincentives. We've seen attempts to curb carbon emissions and to focus on renewable energy. Here in the U.S., the Inflation Reduction Act included many new energy tax credits and incentives designed to lower U.S. emissions. However, these credits don't cover all of the issues leading to global warming and ecological harm.

So today we're looking at one problem that has yet to be fully addressed on a national level and a potential tax solution. Joining me now to talk about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast.

Marie Sapirie: Thanks for having me.

David D. Stewart: Now I understand you recently talked about this issue with someone. Could you tell us who you talked to?

Marie Sapirie: I spoke with Professor Roberta Mann. She teaches tax law at the University of Oregon School of Law. Her academic writing focuses on examining the ways in which the tax system affects the environment. Professor Mann also worked for the Joint Committee on Taxation and the Office of Chief Counsel at the IRS, and she served on the National Academies of Science Committee for studying the greenhouse gas impact of the tax code as the only tax lawyer.

David D. Stewart: And what did you talk about?

Marie Sapirie: Professor Mann discussed how a Pigouvian tax on plastic, particularly single-use plastics, might be used to reduce the amount of single-use plastics being produced.

To put the idea in context, the first fully synthetic plastic dates back to 1907. So from a historical perspective, plastics haven't been around all that long, but as everyone knows today they're ubiquitous. And the stream of single-use plastic packaging often ends with plastic waste entering the natural environment where it eventually poses problems for both ecology and human health.

Professor Mann's recent paper targeting plastic pollution with taxes analyzes the two main aspects to reducing the environmental problems posed by plastics: reducing emissions from plastic production and reducing the externalities from plastic waste.

David D. Stewart: All right, let's go to that interview.

Marie Sapirie: Thank you, Roberta, for joining me today to discuss how principles of environmental taxation might be applied to help reduce plastic waste and avoid further ecological harm.

Roberta Mann: Hello, Marie. Thank you for having me.

Marie Sapirie: So before we get to the principles, would you describe the scope of the problem that plastics and single-use plastics in particular present?

Roberta Mann: Yes, and this is a problem that's been known for many years. But more recently, one report found that up to 12.7 million metric tons of plastic entered the ocean in 2010 alone. And world plastics production increased more than 20 times in the 50 years between 1964 and 2014.

And in 2022, the world produced more than 367 million metric tons of plastic. And this is really significant because only 9 percent of plastics had ever been recycled. So that means that most of those plastics are still in the environment, many of them in the ocean.

And another study found that by 2050 there will be more plastic in the ocean than fish. And a study that came out of Australia found that it's not only fish that are being impacted by plastics, but humans, all of us, ingest an average of a credit card-worth size of plastic each week.

Marie Sapirie: Your paper explains that 99 percent of plastics are derived from petroleum or other fossil fuels, and that illustrates the connection between oil and gas and plastic production. Would you give us a brief overview of the history of the tax incentives available to the oil and gas industry?

Roberta Mann: The oil and gas industry has enjoyed tax incentives for over a hundred years. The first was percentage depletion, which came into the Internal Revenue Code in 1918. And if you look over the scope of that time period and you compare the tax incentives given to the fossil fuel industry versus renewables, you'll see there's kind of a tipping point around 2009 where renewables actually got more tax subsidy than fossil fuels, at least in the U.S.

But if you look at the aggregate picture over time, the subsidies given to fossil fuels hugely dwarf those that have been given to renewable fuels. Which is not entirely surprising, seeing as we've used fossil fuels for a lot longer than we've used renewables.

So in addition to percentage depletion, which as I believe a lot of the listeners know, is a tax subsidy in that if you compare percentage depletion from cost depletion, cost depletion essentially allows a deduction for the cost of a material over time as it is being used in the production of other materials. Percentage depletion, on the other hand, is a percentage of the income derived from the activity, so it can actually exceed the taxpayer's basis in that activity.

And that's only true for oil and gas. It's been reduced over time. Now it only applies to independent producers, but it's still a huge benefit. There's also intangible drilling costs, which are deductible, and enhanced oil recovery, and that's just the tax incentives for oil and gas. There are also of course, tax incentives for other sorts of fuel, including coal.

Marie Sapirie: So the carbon capture and sequestration credit in section 45(q) was expanded recently in the Inflation Reduction Act. And that credit isn't of course specific to the oil and gas industry, but could you tell us how that credit is used by the industry?

Roberta Mann: Carbon dioxide, which can be a byproduct of oil production, can be used to be injected into oil wells to make oil wells productive longer. So that's enhanced oil recovery. It can also be used, and I know it may be used in the oil and gas industry, but it's also used in the electricity industry, specifically generating electricity with coal.

Because if that can be shown that there is a carbon capture for that, then they can get a credit. And some environmentalists have expressed concern that that's really going to extend the life of coal-fired electrical plants. I'm not sure if that is true, but certainly the credit has become significantly more generous than it was in the past.

Marie Sapirie: So looking to possible solutions, what principles of environmental taxation should lawmakers look to?

Roberta Mann: Well, environmental taxation has actually a long history and it's generally credited to an economist in the 1920s known as A.C. Pigou. And he posited the idea that certain types of products do not bear their full societal cost. So in other words, there's a negative externality associated with those products.

And for example, with respect to a fossil fuel such as coal, the cost of coal and the cost of generating electricity from coal does not bear the full cost of the health effects and environmental effects of using coal to generate electricity.

So the theory would be if you impose a tax on the users of coal, that you would want to put the level of the tax ideally at the social cost of the fuel, and that would thereby internalize these external costs that the use of this product is causing.

So that's really the principle of environmental taxation. And of course the design is obviously very important. So one thing might be to, how do you select the tax base for the application of environmental taxation?

Another issue might be, where do you put the incidence of the tax? Are you going to tax the ultimate consumer of electricity that is generated by using coal or the ultimate consumer of the plastics if that's what we're taxing? Or do you put it more upstream on the manufacturer of the product?

So those are some of the questions. And if you think about the ideal, which is that you put the level of the tax on the social costs, that makes it quite difficult because there's a lot of difference of opinion in terms of what is the social cost of a particular product. And we saw that certainly with the social cost of carbon during the previous administration that was downgraded to be much less than it was previously.

And so in my view, although the social cost of the product is really the ideal, I think it's important to begin with some level of taxation and then to adjust it as you see whether the use of the product declines, whether alternative products have been developed and put into the market.

Marie Sapirie: So is there a situation in which legislators might consider making the tax temporary instead of permanent? So for example, if the tax is needed mostly as a boost to transition away from single-use plastics, that might argue in favor of a temporary tax, or should it be long-term and adjusted as they go?

Roberta Mann: Well, I mean, of course. Whether a tax or, for that matter, a subsidy is enacted as permanent or temporary depends on a lot of other factors other than what is the effect of the policy. Of course it depends on revenue and revenue estimates and the budget window. And so I think that's primarily what drives temporary provisions is really budgetary concerns rather than policy concerns in general. But if you think about putting a tax on an item and, "OK, well let's only put it on for a few years because that'll solve the problem, we won't have to get rid of it," I think that's really not the right way to think about it.

Because if you are taxing something to cause a business to internalize the societal harm that their product is causing, well, if they in fact do decide to develop alternative products that do not use the underlying element that caused the societal harm, then you don't really have to make the tax temporary because it's going to go away on its own.

And in fact, that's some of the arguments against having a carbon tax. Because if you impose a carbon tax and you make it part of the government's planned revenue generation, then if it really has the effect that environmentalists hope that it has, which is to reduce the emissions of carbon, then all of a sudden you don't have the revenue that you were hoping to have.

So I think that really, it doesn't need to be transitional because it's going to be transitional. But maybe you should think about understanding that the revenue might also be transitional if the policy is in fact going to help internalize the costs.

Marie Sapirie: So how could legislators decide the optimal price to encompass the social cost?

Roberta Mann: Well, like I said, I think that's really difficult to do. And so what I would hope that legislators would do, and I think it's probably what they would do, would be to impose some level that is viewed as being possibly politically acceptable, which seems like probably the level is not very high.

And then to see what happens and then to reassess that level after assessing the behavioral changes that have been made as a result of the tax. But I think it's very difficult to assess the social cost. Clearly there's data about health, there's data particularly about health of localities where plastics cracking plants have been placed.

But particularly if you're going to assess attacks at a federal level, it's kind of difficult to put all those elements into it. So I would say let's just try it and see what happens and then adjust.

Marie Sapirie: And regarding the incidents of the tax, how could it be designed to ensure that the tax and compliance burden falls on producers and that it doesn't become a regressive tax?

Roberta Mann: That's another really difficult issue. So of course, producers who are selling a product can pass that tax along to their consumers. But there's a limit to that because the market will at some point, if the good or service is replaceable, if there's a substitute for it, consumers are going to move to that substitute and not pay the additional cost of the tax. So that's one limitation on it. Well, it really kind of depends on whose behavior you want to change.

If you want to change consumers' behavior, and we can see this in the case of plastics, with plastic bag bans for consumers, you can see it for consumers having to pay an extra amount to purchase plastic bags at the market, that's going to drive consumer change. If you want to drive change at the producer level, then you should put the incidence of that tax on the producers.

And another benefit of that is there are fewer producers than there are consumers. So you have less administrative burden to place the tax on the producers, but then again, they might be able to pass it on. But it does depend on what the market will bear.

Marie Sapirie: Are there ways in the carbon tax proposal to provide relief, especially for lower-income taxpayers?

Roberta Mann: Of course, of course there is. And that's been examined by a lot of commentators, including Donald Marples at the Tax Policy Center and Eric Toter. So there are a lot of different ways of doing it, but one is a tax and dividend approach where the tax is imposed, but then lower-income individuals may get a dividend. Or even simpler, a pro rata dividend to the whole population, which is actually going to reduce the regressivity because there are more poorer people than rich people. So it would end up distributing more to poorer populations.

So you could definitely do it that way. You could recycle the revenue into product design and research and development, which may or may not help with the regressivity, but it certainly would help with developing substitute products. But I think the tax and dividend is really the way to reduce regressivity, and you could do it in a number of different ways.

Marie Sapirie: So how could a tax that targets plastic be designed to make it easy for the IRS to administer it?

Roberta Mann: Well, I think the Break Free from Plastics Act, which was introduced in 2021, and again in 2022, maybe is a kind of a good place to start with that discussion. Because it's designed to go at the producer level, which does make it easier for the IRS to administer it. And it specifically is designed to hit the particular types of plastic that are most often used for single-use plastics.

So I think that could be helpful, but really what makes it easier for the IRS is to put it on the producer. And of course, the less complicated a tax is, probably the easier it is to administer for the IRS. But on the other hand, I think that in terms of plastic particularly, it's probably more effective to tax plastics rather than taxing something like carbon.

I mean, I think it's great to tax carbon, but I'm not sure if that would hit plastics as well-targeted as a plastics tax.

Marie Sapirie: And should there be carveouts for certain applications, for example, medical uses, and probably also the small percentage of plastic that's recycled?

Roberta Mann: Absolutely. And I think a good model for that is the United Kingdom's plastics tax. They actually have really generated quite a bit of revenue with that. And there is a carveout for plastics that are at least 30 percent recycled and also plastics that are used for medical use. And the idea is to encourage businesses to design and use plastic packaging that's easier to recycle and discourage the creation of plastic packaging that is difficult to recycle.

So I think that's a really good model for that. And yes, it took effect in April 2022, and it applies to plastic packaging which is imported or produced in the U.K. And they define that as packaging, which is predominantly plastic by weight, and the tax rate is £200 per ton of plastic packaging which does not contain at least 30 percent recycled plastic. And I think that's a good model.

Marie Sapirie: So let's turn to the models as well. We have some recent examples of plastic taxes that have the objective of reducing the externalities from plastic waste, the United Kingdom's and also in Maine and Oregon, their taxes as well. Can you talk more about what those examples show and any lessons that we could draw from them about how to design a tax for this purpose?

Roberta Mann: Well, of course, if you're designing a tax at the local level, that's probably not going to have as much impact as a national-level tax would have. And so in Maine — and this is a model that also is echoed in this Break Free of Plastics Act, which is a federal bill — so they create an extended producer responsibility scheme. And the idea there is that the producers have the responsibility to develop recycling methods, and they do set a fee on the costs of collecting and processing a given producer's packaging material. And they put those fees into a packaging stewardship fund. And Oregon kind of does a similar thing.

And it also requires producers to join a producer responsibility organization and requires the environmental, it's called the Environmental Quality Commission, to establish a per ton fee that these producer responsibility organizations will pay to collectors of mixed waste. So kind of a fee that goes towards recycling.

And of course, I mean, recycling is really not a panacea for plastic waste. It certainly hasn't been in the past as exemplified by the statistic that only 9 percent have been recycled, but it tends to be a bit more of a distraction than really a solution. If consumers feel that their plastics are being recycled, they're not going to worry so much about using plastics because, hey, it's going to be recycled, that's going to be great.
And if they really aren't recycled, then those consumers are being misled. And a lot of the plastics producers have actually really embraced this idea of, "Oh, well, consumers should recycle." And as a practical matter, it's not really working out too well. It's just making people feel better about a problem that's not really being addressed.

And plastics producers and the chemical associations are really against taxing plastics and taxing the elements of plastics. They would much prefer to rely on recycling. So I think that, in and of itself, gives you an idea of the effectiveness of taxes. They probably would be a lot more effective than encouraging recycling.

Marie Sapirie: In your article you discussed the question, is clean energy enough to address the harm from plastic production? And recently in the past few years we've had the Inflation Reduction Act that greatly expanded the incentives for clean energy and added both elective payment and transferability in Section 6417 and 6418. What effect could those changes have on the piece of reducing emissions from plastic production? And are there other changes that should be made to the tax law to reduce those emissions?

Roberta Mann: Well, I think that certainly encouraging clean energy is going to reduce emissions overall. And the Inflation Reduction Act has been called the largest climate bill ever enacted in the U.S. And estimates by economists suggest that it might have an even greater effect than was originally estimated in terms of emissions reductions. And also certainly the transferability provisions do make it a lot easier for renewable energy developers.

So traditionally, before these transferability provisions, renewable energy developers could not sell their tax credits that they were eligible for. And if they did not have sufficient liability because these tax credits were not refundable, they really were not as helpful as they might've been. And so they had to enter into rather complex partnership transactions to share the credits with the tax equity investors, which is what you call the other people in the partnership who are going to be using the tax credits.

It's just a lot easier for them to transfer the credits and not have to enter into these rather complex partnership transactions. So I think those are really great provisions to encourage transferability and to make it easier to use the renewable energy tax credits. That being said, really a large part of the emissions from plastics comes from the feedstock itself.

So over 90 percent of plastics are produced using fossil fuels as a feedstock. In other words, the plastic — the very element that makes up plastic — is made from oil, and it has to be processed, which uses additional energy. So if the plastic is processed, it's turned into plastic. If it's turned into plastic with renewable energy, that would reduce its emissions profile, but it's still not going to eliminate it because of the fact that the plastics are made of petroleum. So I think that's going to have a relatively limited effect on the emissions from plastic.

And of course, plastics, they're not only carbon emitters, of course they're carbon emitters, but not only carbon emitters, they're also made up of lots of different chemicals, which can have bad effects on human health. Many plastics are endocrine disruptors, which can cause fertility problems and cancers. Manufacturing those products also emits other pollutants into the air and many cracking plants — so ethylene cracking plants make up the basic building blocks of plastics — and many of them are put in areas that are poor populations. So Louisiana's Cancer Alley has a big cracking plant that was just recently opened. And so yeah, using renewable energy might be a way of reducing some of those emissions, but I don't think it's going to be anywhere near sufficient to really address the problems that plastics cause.

Marie Sapirie: Are there any other aspects of designing a plastic tax that should be considered?

Roberta Mann: Really, we could go back to talking about whose behavior do you want to change? And if we think about designing a plastic tax to change consumer behavior, I think that's helpful in certain contexts. And we've certainly seen that in the case of plastic bags.

So an economist from NYU did a study looking at, well, what works better: taxing plastic bags or giving an additional bonus for using your own bag? So the 5 cents for bringing your own bag, which works better. And she found that taxing the plastic bags works better, so that's helpful.

But I think a problem with focusing on the consumer and trying to get the consumer to not use plastic is that it's very difficult for a consumer. Almost everything that you touch has plastic.

There was a New York Times article where the journalist wanted to spend 24 hours not touching plastic, and he had to have his wife open the door because the handle was coated with plastic. He brought his own chair to ride in the subway, which is kind of silly because, yeah, he's sitting in his own wooden chair, but he's surrounded by plastic. He bought a special toothbrush that didn't have plastic in it. It was kind of ridiculous. And so I think we really need to create an incentive on the part of the producers to do something else.

Let's help produce products that either are only long-lived plastics, so plastics that are used in vehicles. My glasses, which I'm going to have for a number of years, are made out of plastic. And not use plastic for things that are single-use and then just throw away.

So plastics aren't all bad. They can be very helpful, but if we use them in a more appropriate way, and if we gave consumers alternatives to single-use plastics and incentivize producers to do something different, I think that would go a long way towards solving the problems. Some places' bans have worked tremendously well.

But I'm not sure that that's something that is going to be acceptable in the U.S. and in a broad sense other than plastic straws and plastic bands, plastic bags.

Marie Sapirie: Well, thank you so much for joining the podcast today.

Roberta Mann: Well, thank you. Thank you very much for asking me.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Senior Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?

Jasper Smith: Thanks, Dave. In Tax Notes Federal, Reuven Avi-Yonah argues that research and experimentation expensing is the wrong way to subsidize research. Four former Treasury employees announced the Tax Reform Project and invite tax experts to submit their ideas for improving the tax system.

In Tax Notes State, three DLA Piper practitioners provide an overview of state gambling tax administration and explained the use of net operating losses using Louisiana and Iowa as examples. Three Andersen tax practitioners explained differences between the sales tax and use tax systems and how these distinctions continue to cause confusion.

In Tax Notes International, Jenny Longman and Nora Newton Muller explained U.S. tax consequences for a bare owner. Sharon Katz-Pearlman explores the possible effects of the U.N. resolution past November 2023 to create a framework convention for international tax cooperation.

And finally, in Featured Analysis, Marie Sapirie provides an overview of commentator letters on the proposed energy investment tax credit regulations.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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