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Enforcement Economic Models
The enforcement economic models are used to analyze the financial aspects of enforcement actions. Five models currently are available:
- ABEL - Evaluates a corporation's or partnership's ability to afford compliance costs, cleanup costs or civil penalties.
- BEN - Calculates a violator's economic savings from delaying or avoiding pollution control expenditures.
- INDIPAY - Evaluates an individual's ability to afford compliance costs, cleanup costs or civil penalties.
- MUNIPAY - Evaluates a municipality's or regional utility's ability to afford compliance costs, cleanup costs or civil penalties.
- PROJECT - Calculates the real cost to a defendant of a proposed supplemental environmental project.
The Models:
Click
here to install any or all of the following five
models:
About the Models
All five penalty assessment computer models were modified as part of the routine annual update process. In addition to updating the financial information in the models (i.e. tax rates, inflation rates, discount/compound rates) and enabling the applications to launch by double-clicking on a file name, OECA made a number of modifications to some of the models either to enhance their utility or to respond to changes in policy and/or legal interpretation. The models experiencing the most significant changes were PROJECT, INDIPAY and ABEL.
With ABEL, the most significant change was adding the capacity to utilize tax information from Commonwealth of Puerto Rico tax returns. ABEL, since its inception, provided line references only for Federal corporate and partnership tax returns. That was a significant problem in Puerto Rico due to its unique tax issues. In some cases, all we had to analyze were Commonwealth tax returns because certain companies did not have to file federal tax returns. So the new version of ABEL can now prompt the user for where to find the data on those Commonwealth forms.
The changes to BEN and MUNIPAY, were relatively insignificant. A typical BEN output will probably be slightly lower due to a decrease in the spread between the discount/compound rate and the inflation rate. BEN also now analyzes an additional entity type: not-for-profit organizations. For not-for-profits, BEN combines a zero-percent tax rate with a discount/compound rate based on the pre-tax interest rate for corporate debt. Prior to this version, we lumped all the not-for-profit entities in the municipal category, which applied a discount/compound rate based on the cost of municipal bonds. While that rate did approach the not-for-profit organizations cost of capital, this new version is a much better approach.
In regard to INDIPAY, the model had been giving the user the option of either conducting an ability-to-pay analysis for a violator that was currently employed, or for a violator that was retired. The “retiree loop” was useful for determining when the retirees could not afford the civil penalty, clean-up costs and/or compliance costs. But the retiree loop did not give any definitive guidance when the violator could afford to pay regardless how financially strong the retirees were. The revised INDIPAY model now provides that guidance where retirees can afford to pay and how much that amount is. The retiree loop’s calculations have also been refined, although that change will be transparent to most users. In addition, INDIPAY now compares the individual tax payer’s living expense against IRS averages for a family of the same size.
In regard to PROJECT, the Internal Revenue Service announced that it was going to consider any money spent on supplemental environmental projects (SEP’s) to be the equivalent of penalty money and therefore not tax-deductible. Early in the model’s history we had asked the IRS for guidance on that issue, and in the mid 1990's the IRS declined to offer that guidance. So the PROJECT model was created such that the user had to specify whether the violator intended to deduct the SEP costs. PROJECT was designed to handle either situation. With the IRS finally issuing its decision on this matter, PROJECT was modified such that the user cannot adjust any of the SEP expenses for taxes. For those SEP’s where the violator never intended to deduct any of the costs, this change has no impact. But for those violators that were intending to deduct these expenses, the impact is significant. Since the costs are no longer tax deductible, the cost of the SEP increases substantially, so that same SEP without any depreciable or deductible costs now has more mitigative value by about 40 percent.
It is also worth noting that PROJECT had a second, totally non-enforcement use: determining when P2 projects broke even. Some of our users were businesses that were making purely business decisions. But all that depended upon tax adjustments for all the P2 projects costs, which is totally appropriate in this non-enforcement context. Unfortunately, with the tax adjustments gone, PROJECT can no longer be used for this P2 evaluation purpose.
If you are a representative of a state, tribal, local or national government and need help installing, using, or understanding the models' outputs, please call the EPA Enforcement Economic Models Help line, staffed by an Agency contractor, at 888-ECONSPT (888-326-6778). This is an international toll-free line. Users can also access the help line via e-mail at benabel@indecon.com. For further information, contact Jonathan Libber of EPA's Office of Enforcement and Compliance Assurance. He can be reached at (202) 564-6102 or by e-mail at libber.jonathan@epa.gov.
Illegal Competitive Advantage (Beyond BEN Benefit)
Illegal competitive advantage (ICA) is not addressed by any of the above models. ICA is economic benefit that goes beyond the simplifying paradigm of delayed or avoided pollution control expenditures that BEN addresses. The EPA Science Advisory Board issued an Advisory (PDF) (55 pp, 228 KB, About pdf) on September 7, 2005 regarding some suggested changes in how EPA looks at this issue. EPA responded to the Advisory and is in the process of implementing the changes to the ICA approach that the SAB recommended. In the meantime, EPA will continue to seek benefit recapture based on this type of economic gain while the Agency is implementing those changes. Note that one of these changes is that the name of this type of economic gain will now be referred to as Beyond BEN Benefit instead of ICA.