March/April 1994
Many state governments and other public entities offer a variety of financial incentives that scrap recyclers may be able to use to save money, be more competitive, and expand into new niches.
By Kent Kiser
Kent Kiser is an associate editor of Scrap Processing and Recycling.
Times were that government had little interest or involvement in the issue of recycling, much less the business of recycling, but oh how the times have a-changed. Thanks to the so-called solid waste disposal crisis and the resulting recycling fever that has swept the country in recent years, legislators at all levels not only rank recycling issues high on their legislative rosters, but government, in general, is becoming a veritable benefactor for both existing and new recycling businesses. For proof, just take a look at the buffet of grants, loans, tax credits, and other financial incentives available to recyclers from many municipalities, states, and other quasi-public groups.
Aside from the standard investment tax credits that have been available to all industry on the local and state levels for decades, and with the exception of a short-lived federal recycling income tax credit in the late 1970s, these recycling market development incentives are a relatively recent phenomenon. Most of these newer financial incentives are designed to increase the recycling rate of and build markets for postconsumer materials that have traditionally been disposed—items such as scrap tires, household batteries, plastics, used oil, and yard debris—with the goal to enable a municipality or state to divert as much material from disposal as possible, thus easing its waste management burdens. As a result, many programs either give preference to or exclusively support operations that recycle such “target” materials. Also, these programs are often restricted to government or nonprofit groups, with some not even permitting these recipients to “pass through” their grants or loans to private companies.
Still, not all programs use these narrow criteria, so there are incentives available to private for-profit recyclers, including those that only handle traditional scrap materials—and therein lies an opportunity.
What's Offered
Talk about variety. When it comes to recycling incentives, there can be vast differences between the offerings of one state or group and another. Some states such as California, Indiana, and New Jersey offer a feast of options, while some such as Idaho, Oklahoma, and Utah offer virtually zilch. And some others that have all the right programs on the legislative books have no funding to activate them.
In general, the incentives potentially available to scrap recyclers fall into three broad categories—tax credits, grants, and loans—each of which encompasses several options.
Investment tax credits do just that—give recyclers tax credits for investing. Most programs pertain to purchases of new equipment, but some also apply to capital expenditures on land, buildings, and other development.
With an equipment credit, recyclers are allowed to subtract a certain percentage of the price of new equipment from their corporate state income tax. Some states require such credits to be taken over several years, while others also limit the amount of a firm's credits to no more than, say, 25 to 50 percent of its overall income tax in any given year. In most cases, equipment tax credits apply only to processing equipment such as balers, shredders, granulators, and shears, though material-handling machines such as forklifts and some rolling stock are sometimes covered.
A few states also offer enhanced investment tax credits to companies that open or expand in designated enterprise zones, which are usually blighted urban areas targeted for economic revival. Many scrap recyclers may, in fact, already be operating in enterprise zones and could, therefore, be eligible for such credits.
Sales tax credits either exempt recyclers from paying local and/or state sales tax on certain purchases, or require them to pay only a percentage of the tax. These credits usually apply to processing equipment, though some also cover material-handling machinery, on-site mobile equipment, pollution-control systems, and even fuel.
Property tax credits allow recyclers to take deductions from their property tax in several ways. Some North Carolina recyclers, for instance, can make deductions based on the percentage of their real estate, facilities, and equipment that is used exclusively for recycling, up to 100 percent. Other states simply allow recyclers to deduct a percentage of their property tax based on purchases of new processing equipment. Companies that operate or locate in enterprise zones can usually choose from a variety of incentives in this area, including incremental property tax breaks in which they pay no or low tax the first year but gradually more in subsequent years until they are paying the full tax rate.
Grants are given for everything from recycling equipment purchases to employee training/retraining to community education to research and development.
Loans can be either zero-interest or low-interest (several interest points below prime) and usually come with a payback period of five to 10 years. Some states allow recyclers to use their loans only to buy equipment, while others are more lenient, permitting the money to be spent on buildings, land, and production and development costs.
Two caveats about grants and loans: First, some require recyclers to either pony up matching funds or at least a percentage of a project's cost. And second, while a state or group may offer such "free" or cheap money, the funds may only be available to government entities and nonprofit groups.
Loan guarantees allow the state to serve as a guarantor for a bank loan, thus enabling a recycler to secure funds that might otherwise have been unavailable. New York also offers loan subsidies in which it will buy down the interest rate on a loan from a conventional lender, which can help applicants better qualify for a loan and reduce their payment burden.
In addition to these incentives, scrap recyclers in some states can take advantage of these other offerings:
Price subsidies, usually available only to recyclers of targeted postconsumer materials, level the playing field for manufacturers that consume certain recyclables by providing a rebate for the difference in price between recycled-content products and similar products made from virgin materials.
lnfrastructure development support—as in installing or improving access roads, storm sewers, water lines, and rail spurs—can be available to recycling companies that are building or expanding, particularly those doing so in enterprise zones or industrial development regions. These grants and loans are usually given to counties and municipalities, which then use the funds to expand the infrastructure to meet the recycler's needs.
lnformation/technical assistance gives recyclers access to experts, publications, videos, and data that can help them run their businesses, make presentations, decide where to locate or expand, explore new recycling ideas, and more.
Success Stories
Sure, these programs look good on paper, you say, but have any scrap recyclers actually benefited from them? For a perfect example, look no further than Marty Forman, president of Poly-Anna Plastic Products Inc. (Milwaukee), who has gleaned about $200,000 in grants and rebates from Wisconsin to help build his plastic recycling business.
Forman's biggest helping hand came in the form of a $139,000 innovation demonstration grant, which he used to prove his process of making curbside collection bins out of 100-percent postconsumer high-density polyethylene scrap. Ms project appealed to Wisconsin authorities, in part, because it focused on plastics, which are one of the materials to be banned from land disposal in the state by 1995.
As a recycler of one of these targeted materials, Forman was also able to secure a rebate for the difference in price between his recycled bins and virgin-resin bins. "The rebate enabled me to lower my sales price, made me more competitive, and increased my sales," asserts Forman, who estimates that his total price subsidy in 1993 was about $40,000 to $50,000.
For another choice example, consider the experiences of David Forrester, president of Tires Into Recycled Energy & Supplies Inc. (TIRES) (Winston-Salem, N.C.), who has received even more generous incentives for his year-old scrap tire recycling company, which produces tire-derived fuel and crumb rubber. His firm received a $350,000 grant from North Carolina's Division of Energy, and instead of being offered as front-end seed money to help TIRES get rolling, the money was used as a recycling market subsidy. "As we demonstrated our ability to sell our products," Forrester explains, "the state would send us a check matching our sales dollar for dollar until the money was gone." Such financial assistance "helped us get through the startup period," he states. "Without it, we would have had to be that much better funded, and our startup would have been a slower process."
TIRES has also been exempt from paying property tax on its equipment because it devotes I 00 percent of its operation to recycling. This exemption translates into about a $15,000 annual savings for the firm, says Forrester, noting, "That's a pretty significant benefit. It's a nice incentive that helps us reduce our costs."
Thanks to these incentives, TIRES has been able to recycle close to 2 million scrap tires in North Carolina and employ 35 people, most of whom were previously unemployed, making the situation a positive proposition for both the company and the state.
Another recycling firm that has made headway in the financial incentives area is Schnitzer Steel Industries Inc. (Oakland, Calif.), which not only holds the distinction of being one of the few metal scrap recyclers to receive a state-supported loan, but also is the recipient of probably the single largest such loan to date—$750,000. The company will use this monetary assistance to install what is being hailed as a "first-of-its-kind" integrated shredding system.
Schnitzer was eligible for the loan because it operates in the Oakland/Berkeley recycling market development zone, one of 17 identified by the California Integrated Waste Management Board. The loans allow applicants to borrow up to 50 percent of a project's cost, up to $1 million, at a 1994 interest rate of 4.5 percent, and all loans must be repaid within 10 years. Schnitzer's new system will reportedly expand its shredding capacity by 30 percent, from 200,000 to 260,000 tons annually, and create five new jobs.
And while we're talking loans, three New Jersey scrap firms provide further proof that if you ask, sometimes you shall receive. Take Apache Auto Wreckers (Ridgefield Park), which received a $100,000 five-year, low-interest loan from the state Department of Environmental Protection and Energy to put toward the purchase of a front-end loader. George's Salvage Co. Inc. (Newton) put its $200,000 recycling loan to work constructing a new building, repairing the roof on an existing facility, and purchasing a paper baler. Then there's Jacob Goldberg & Son Inc. (Perth Amboy), which spent its $188,000 loan on a mobile shear. In New Jersey, as in many other states, loan recipients can only receive up to 90 percent of a project's cost.
Avoiding the ‘Scary Side'
Given these glowing examples of how incentives can benefit scrap recyclers, it may come as a surprise that some are far from enthused about such offerings. "We're aware of some of the details of our state's programs," says a Minnesota recycler, "but we haven't aggressively pursued any of them." Why this complacent attitude, especially when significant sums of money could be at stake?
Some claim they're simply too busy running their businesses to explore what's out there, while many others assume—often rightly—that their state's programs aren't open to private for-profit recyclers, or that they'd only be eligible if they began handling targeted postconsumer materials.
Others shy away from what they see as the extensive paperwork involved in applying, with one Oregon processor noting that a tax credit application took him almost 10 hours to complete. More important, these applications often require detailed financial information, including recent annual statements, business projections for coming years, and schedules of short-term notes payable, properties owned and/or mortgaged, and long-term debt. Many closely held scrap companies prefer to keep this information confidential.
For others, the issue is more sensitive, touching on their feelings about the relationship between government and business—their business in particular. "I just feel that, in the long run, it's a mistake for government to give these kinds of subsidies to recycling," says a Delaware processor. "I'd much rather see the state focus more on the procurement side by passing recycled-content mandates or requiring products to be designed for recycling." In particular, he asserts, purchases of recycling-related equipment should be based “more on market dynamics than government largesse." In summary—and getting more to the root of the matter—he states, "To me, the less interaction I have with government, the happier I am."
This recycler, and others like him, may not be happy for long, warns Marty Forman. "There's a definite scary side to these incentives," he says. "If scrap recyclers don't take advantage of them, then the money could be doled out to others who will use it to establish competition." Forman notes that the incentive funds in his state come from a surcharge on corporate income tax, which means that "every single Wisconsin business, including mine, has put money into the fund." What this means to him, he says, is that "I'd be pretty stupid not to take the money that's out there. Why should I let others use my tax dollars to compete against me?"
Others agree that it's better to aggressively reap the benefits available to scrap recyclers. "We're more than willing to pay our fair share," says an Indiana scrap executive, "but if incentives exist, we want to see if they can benefit us as well as the community." The plain fact is this: If you opt not to explore the incentives that are out there, you could be letting choice opportunities slip by. As one reflective Pennsylvania recycler expresses so well: "By not looking, maybe we've missed out on some things." •
Many state governments and other public entities offer a variety of financial incentives that scrap recyclers may be able to use to save money, be more competitive, and expand into new niches.