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I. Introduction

This report outlines five environmentally responsible options that together would generate about $1 billion in new state revenues over the biennium. These options also have the potential to promote environmental responsibility in Texas by encouraging lower industrial emissions, prompting more careful use of natural resources, and offering a better mix of fuels in the energy and transportation sectors.

Just as we impose "sin taxes" on alcohol and cigarettes to pay in part for the detrimental impacts of their use, many economists believe governments should likewise consider taxing activities that generate pollution. Concepts such as the “polluter pays principle” are part of this belief.

Today, these ideas may be more important than ever, given the financial constraints facing the State of Texas. A combination of declining sales tax revenue, higher Medicaid and other health costs, a growing school-age population, and loopholes in the tax structure have conspired to make meeting Texas’ basic needs and services even more challenging. Environmental protection programs will not escape these difficulties, particularly when it comes to funding clean air programs such as the Texas Emissions Reduction Plan and the Title V Operating Permit Program.

In 2001, the Texas legislature passed Senate Bill 5 to set up the Texas Emissions Reduction Plan (TERP), administered jointly by the Texas Commission on Environmental Quality (TCEQ), Texas Comptroller of Public Accounts, the Public Utility Commission (PUC), and the newly created Council on Environmental Technology. Under TERP, these four entities provide and manage grants for a number of consumer, industrial and energy incentive programs designed to reduce emissions. The fund, created in Senate Bill 5, was designed to develop emission-reducing technologies, pay for cleanup and replacement of diesel engines, provide incentives to purchase clean cars, and encourage more efficient energy use.

When the TERP legislation was passed and approved by Governor Perry, the Legislative Budget Board estimated that the plan would generate $133.4 million in FY 2002 and increase to $165.2 million in FY 2006.1 These funds would be raised through a combination of registration fees, sales tax on older diesel motor vehicles, vehicle inspection fees, and a $225 fee on motor vehicles registering for the first time in Texas.

However, the first-time registration fee was invalidated when the courts ruled it violated inter-state commerce rules. As a result, only 20 percent of the TERP funds have been generated. This is a problem that desperately needs to be corrected. These TERP funds are absolutely essential if Texas is to meet its clean air obligations in Houston, Dallas-Ft. Worth and other areas. If we do not fund these programs, the EPA has announced it will not approve the state’s clean air plans. We propose three new fees to fund portions of TERP: a high-sulfur diesel fuel fee, an annual vehicle registration pollution fee (fee-bate), and a new electric generator fee.

Similarly, Texas’ Title V Federal Air Operating Program must be fully funded to assure that Texas’ large industrial facilities are meeting their statutory and regulatory requirements and that they are achieving their clean air obligations. Unfortunately, this program – run by the TCEQ – is facing serious shortfalls in the coming years. This is due in large part to the “volume discount,” whereby large companies with significant air emissions pay less per-ton than do smaller companies. We propose lifting the existing cap on emissions that can be taxed to fund the Title V program.


Legislative Budget Board, Fiscal Note, SB 5 Enrolled Version, May 23, 2001.

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