Profitable Pollution Control

As I noted in a recent post, corporations are nothing if not inventive when it comes to reducing their property taxes and asking you to pick up the tab. Last week they were touting SB 394, which allows a handful of companies to treat almost all their property as intangible, and therefore not taxable. This week they were back in the Senate Tax committee promoting HB 156, sponsored by Rep. Mike Miller, which would make their tangible pollution control equipment tax exempt as well. If they keep going this way, pretty soon they won’t be worth anything at all, at least for tax purposes.

The rationale these guys offer for exempting pollution control equipment is that it “doesn’t add anything to their bottom line.” They keep it around only because a slew of EPA regulations require them to, and since it doesn’t help them make money, it’s not worth anything. Presumably, if the regulations went away, so would the pollution control equipment, and these folks would be able to pollute to their hearts’ content.

Superficially, at any rate, this seems to make some sense. Capital equipment that allows a business to reduce its costs and increase its profits is obviously valuable and worth having. If I can buy a $1,000,000 machine that over its lifetime reduces my labor, or energy, or raw material costs by, say, $1,500,000, my “bottom line” is going to be a little plumper. But if that machine is simply reducing my pollution, and I can pollute for free, I’m gaining nothing.

The trouble is, the days when I could pollute for free are long gone.

One of the insights of environmental economics that’s wormed its way into the formulation environmental policy is that economic efficiency requires firms to “internalize their externalities.” In real people talk, that means that if companies are imposing costs on the rest of society by polluting the environment, they should darn well pay for them. “Paying to pollute” is a policy that most environmental economists really like: make companies pay, and let them figure out how much and what kind of pollution control equipment they want to install to cut those payments down.

Exhibit A of the “paying to pollute” principle is probably the carbon tax, which a lot of people (not including climate change deniers) tend to like. But that’s not typical. Lots of people get a little queasy about the idea of allowing companies to pump crud into the air and water as long as they pay for it. Sure, the economists say that making companies pay for pollution will induce them to control and reduce it, but can we really count on that? And should the natural environment really be rented out as a dumping ground for industrial and household waste? Because of these doubts, we have typically decided not to require companies to pay for their pollution, and instead required them, through regulations, to install pollution control equipment.

So now imagine that we drop the regulations and that the companies are no longer required to install pollution control equipment. Would their bottom line improve? Well, of course it would, if they didn't have to pay for their pollution,

But that’s not the deal: they are regulated so they don’t have to pay. Take away the regulations and they do. So having that pollution control equipment in place, even if it’s there because the EPA says it has to be, is keeping companies from being presented with big fat pollution invoices, and that adds plenty to their bottom lines.