Why the revenue base for the Environmental Stewardship Fund needs to be broadened

State government enacted a $4-per-ton tax hike on the disposal of municipal waste in 2002. The revenue from the tax hike was earmarked for Pennsylvania ’s Environmental Stewardship Fund. The tax hike was seen as a step toward long-term fiscal stability for the Environmental Stewardship Fund and the Growing Greener environmental programs that the fund supports. 

What officials didn’t anticipate or didn’t appreciate at the time was the “rebound effect” the tax hike would have.

When waste disposal in Pennsylvania became dramatically more expensive due to the tax hike—the tax went from 25 cents per ton to $4.25 per ton in one leap —the waste business in Pennsylvania suffered.

Municipal waste, like any commodity, is price sensitive. Those with waste to dispose seek the least expensive rate.

Prior to 2002, the amount of waste disposed in Pennsylvania was climbing. Since then, the volume of in-state waste disposed in Pennsylvania has leveled off and the amount of out-of-state waste disposed in Pennsylvania has dropped significantly.

Waste disposal is a necessary service that generally accompanies and reflects economic growth. The waste industry also creates and sustains 31,500 jobs in Pennsylvania and contributes $3 billion a year to the economy.

Often overlooked, however, is that the waste industry is a significant generator of tax revenue. But if overtaxed there can be a rebound effect. More money comes in at first, but then the tax burden depresses business activity, growth declines or stops, and over time tax revenue ultimately goes down. 

What can be seen as a tax-induced revenue decline for the Environmental Stewardship Fund has grown sharper year by year. 

Revenues going into the Environmental Stewardship Fund jumped up to $90 million in 2003-04 after the tax hike—but have declined ever since. It’s estimated that revenues in fiscal 2009-10 will drop to $67.9 million. Projecting forward, it’s likely the trend will continue. 

At the same time, debt service obligations on the Environmental Stewardship Fund for past Growing Greener projects are climbing. This year, debt service estimated at $29.9 million will account for 42 percent of fund expenditures. In six years it’s projected that the debt service load will reach $48.4 million. 

With revenues declining, the squeeze between declining revenue and increasing debt service will leave less and less to pay for Growing Greener initiatives, things such as water and sewer grants, watershed protection, conservation programs, and related infrastructure improvements. 

Another tax hike on waste to bolster the Environmental Stewardship Fund likely will only deepen the rebound effect. Driving the price of waste management higher will hurt consumers, businesses, and local governments and will aggravate rather than solve the revenue situation.

The real solution lies in broadening the revenue base of the Environmental Stewardship Fund—finding new sources of revenue. That’s the challenge state government currently faces.

Total Disposal in PA (pdf 68kb)