In 1997 a unique bill was introduced in the Minnesota legislature: the Economic Efficiency and Pollution Reduction Act (EEPRA). In order to achieve environmental and economic goals, EEPRA reduces payroll and income taxes by $1.5 billion and increases fuel taxes by an equal amount.
Under EEPRA, energy-intensive businesses would pay higher net taxes while energy-efficient businesses would pay lower net taxes. While this is an intended outcome of the tax shift, businesses in Minnesota are concerned that the tax shift could impose a competitive burden on certain sectors. This report evaluates that issue by analyzing the impact of EEPRA on Minnesota’s most energy-intensive business sectors and estimating the potential for those sectors to offset any increased tax burden through cost- effective efficiency improvements.
The report examines the 37 most energy intensive sectors in Minnesota. These sectors’ firms spend, on average, 4.8 percent or more of their sales revenue on energy. These sectors account for about 2.2 percent of Minnesota’s industrial output.
EEPRA would increase the gross energy costs of these businesses, on average, by about 30 percent. EEPRA provides for a conditional and partial exemption from the tax shift for energy- intensive firms. All firms in our analysis would qualify for the highest exemption — 75 percent. This exemption applies to both the energy tax increase and the payroll tax decrease (a reduction of about 21 percent in the employer’s FICA contribution).
Thus the net energy cost increase, after the exemption, comes to 7.5 percent. When the reduced payroll costs are deducted from this, the average energy-intensive firm will experience the equivalent of a 6.2 percent increase in energy costs, with a range of 4.0 to 7.4 percent.
To offset this increase in costs, the average firm would have to improve its energy efficiency by 6.2 percent. Substantial evidence exists that virtually all industrial groups can cost-effectively improve their energy efficiencies such that they gain a net advantage from EEPRA. Studies also suggest that firms that improve their energy efficiencies achieve even greater financial savings from associated efficiency improvements (e.g. reduced disposal costs, reduced water usage, higher productivity and yields). Reductions in non-energy operation and maintenance expenses can outstrip energy savings by a factor of five or more.
Despite the attractive returns from investments in energy efficiency, most businesses have not taken full advantage of the potential savings in this area. There are several reasons for this.
- Except for a very few businesses, energy is not a large expense.
- Manufacturers are typically small firms with fewer than 20 employees. Their effort is focused on getting their product out the door.
- Businesses rarely invest in operational improvement measures that have paybacks longer than 1-2 years.
- Manufacturers, like all people, are resistant to change.
- Businesses have limited capital for reinvestment.
EEPRA helps to overcome these obstacles by offering carrots and a stick.
- The stick is that EEPRA will substantially increase energy costs.
- The carrot is that EEPRA offers up to a 75 percent reduction in energy taxes for firms that invest in all cost-effective efficiency improve- ments.
- Another carrot is that EEPRA offers $50 million to finance industrial audits and improvements.
- The fund will be disbursed by a Minnesota Efficiency Bank. The Efficiency Bank provides technical information as well as access to expertise.
- The Efficiency Bank provides capital on more attractive terms (lower rates, longer terms) than industry can obtain for its other needs.
- The Efficiency Bank can develop benchmarks for each industry and case studies of energy efficiency efforts for comparitive purposes. The legislation is silent on how the Efficiency Bank appropriations are to be allocated or the location, function and structure of the Efficiency Bank itself. The best use of the money might be to set aside $5 million to pay for audits and the rest, aside from the necessary start-up and overhead financing, be used for financing efficiency improvements. The costs of the audits would be rolled into the efficiency improvement financing package and repaid from energy and operational cost savings.
The $5 million might pay for total assessment audits; that is, audits that analyze overall operational efficiencies, not just energy consumption, on approximately 250 plants. The $45 million could finance efficiency improvements on about 75 plants. This represents a significant portion of the needs of the most energy-intensive firms. However, if all the businesses in the state with energy costs over 2 percent of sales (the level at which a partial exemption begins) wanted to use EEPRA funds to invest in efficiency improvements, the capital requirements would exceed $1.9 billion. Therefore the state may need to identify sources of additional capital for efficiency financing.
Of all the industrial sectors examined, the iron ore (taconite) sector would be most burdened by EEPRA. Although efficiency improvements could offset part of the increased net tax impact on this industry, another strategy might be designed specifically for this sector. This strategy would take advantage of the unique tax status of the taconite industry under Minnesota law. The industry currently pays a production tax on each ton of taconite produced. Thus an increase in production increases the tax paid in equal proportion. Substituting a carbon tax for the production tax allows the industry to pay a lower tax per ton if they reduce the energy used to mine a ton of ore.
EEPRA offers Minnesota not only a tool for reducing pollution and expanding the economy but a tool for improving productivity and lowering the operating costs of its industrial sector to make it more competitive with industries outside the state.