HD10 - Examination of the Economic and Environmental Benefits of the Use of Recycled Material in the Manufacturing Process in Virginia (House Joint Resolution No. 28, Senate Joint Resolution No. 75; 2014)


    Executive Summary:
    House Joint Resolution No. 28 (HJR 28) and Senate Joint Resolution No. 75 (SJR 75), passed by the 2014 General Assembly, directed the Manufacturing Development Commission (the Commission) to examine the economic and environmental benefits of the use of recycled material in the manufacturing process in Virginia. The Commission incorporated this study topic as part of its 2014 agenda.

    This executive summary constitutes the extent of the Commission's findings with regard to the charge under HJR 28 and SJR 75. The Commission does not intend to submit any further report.

    HJR 28; SJR 75

    Delegate Daniel Marshall introduced HJR 28 for consideration by the General Assembly. SJR 75, a companion bill, was introduced by Senator Frank Wagner for consideration by the General Assembly. The preamble to both HJR 28 and SJR 75 recognized that Virginia's manufacturing sector is key to the Commonwealth's economic health. It further found that Virginia manufacturers are "using recycled material in the manufacturing process as a way to reduce energy consumption, curtail adverse environmental effects, and become more competitive." The preamble concluded that it is in the Commonwealth's best interest to create new markets and expand existing markets for recycled materials to provide a steady supply of recycled materials for use by manufacturers in Virginia.

    The resolutions directed the Commission to study the economic and environmental benefits of the use of recycled material in the manufacturing process in Virginia. The Commission was also charged with developing recommendations that would enhance the recycled materials market without creating any adverse impact on other business sectors.

    Many different materials can be recycled. The Commission focused its attention on the recycling of plastics, glass, and fibers.

    Virginia Incentives for Recycling

    At its first meeting in 2014, the Commission received an update on state incentives to promote industrial recycling. Code of Virginia § 58.1-439.7 allows individuals and corporations to claim a credit against state income taxes equal to 10 percent of the purchase price paid for machinery and equipment that is integral to recycling and used in facilities that manufacture, process, or compound goods from recyclable materials. The credit cannot exceed 40 percent of the individual's or corporation's Virginia income tax liability for the taxable year in which the machinery and equipment was purchased. Any unused tax credit may be carried forward for 10 years.

    The General Assembly has also enacted local option property tax exemptions for certain recycling machinery and equipment. Article X, Section 6 (d) of the Constitution of Virginia authorizes the General Assembly to (i) directly exempt from property taxes real property and equipment used primarily to abate or prevent air or water pollution or (ii) allow local governments to exempt such real property and equipment from property taxes. Pursuant to Article X, Section 6 (d) of the Constitution of Virginia, each locality is authorized under § 58.1-3661 of the Code of Virginia to exempt from its local property tax machinery and equipment that has been certified by the Department of Environmental Quality as integral to the recycling process and for use primarily for abating or preventing pollution of the atmosphere or waters of the Commonwealth.

    Testimony from Persons Interested in Recycling

    Over the course of 2014, the Commission heard from several recycling businesses and interested persons on the state of industrial recycling in Virginia. Mr. Michael Benedetto, President of TFC Recycling, testified that each year, Americans create 251 million tons of trash, 135 million tons of which end up in landfills and incinerators. He noted that according to the Institute for Local Self-Reliance, one job is created for every 10,000 tons of solid waste that goes to landfills. However, that same 10,000 tons of solid waste, if recycled and not deposited in a landfill, can create 10 recycling jobs or 75 materials reuse jobs. Mr. Benedetto suggested that more recycling processing centers in rural areas of the Commonwealth would grow the Commonwealth's recycling industry.

    Mr. Mike Sullivan, Director of New Product Development for Hilex Poly Co., LLC, spoke to the members of the Commission about recycling activities related to plastic bags. Plastic bags are 100 percent reusable and recyclable. Nine out of 10 people reuse plastic bags. Across the United States, Hilex Poly has placed in service 30,000 recycling bins and has collected over 1 billion pounds of recyclable materials. Hilex Poly collects plastic bags, cleans them, repelletizes the bags, and manufactures new plastic bags from the pellets. Mr. Sullivan stated that the best means to control pollution from plastic bags is education and recycling. Educational and other programs supported by Hilex Poly to promote recycling include retailer take-back programs and drop-off sites, school system initiatives, online marketing and consumer education, advertising campaigns, and public-private partnerships.

    Mr. Mike L. Locher, a Partner with Dixon Hughes Goodman, proposed several changes to Virginia's recyclable materials income tax credit under § 58.1-439.7 of the Code of Virginia. The objective of the changes was to make the tax credit more attractive to recyclers, which can lead to greater investment in modern machinery and equipment integral to recycling and an increase in the amount of industrial recycling in the Commonwealth. The most significant changes proposed by Mr. Locher were to (i) extend the sunset date of the credit from January 1, 2015, to at least January 1, 2018, (ii) increase the tax credit from 10 percent to 20 percent of the purchase price paid for machinery and equipment that is integral to recycling and used in facilities that manufacture, process, or compound goods from recyclable materials, and (iii) either eliminate or increase the annual limitation on tax credits allowed to each taxpayer, which is currently 40 percent of the individual's or corporation's Virginia income tax liability for the year.

    Mr. Tim Lee, President of the Virginia Recycling Association, spoke to the Commission about incentives to promote recycling in the Commonwealth. These incentives could include market-based environmental incentives; incentives for diverting waste, including low-interest loans and technical assistance; tax-based recycling incentives; financial or other support to established recycling companies seeking to expand; and incentives for producing goods from recovered or recyclable materials. Mr. Lee mentioned that the annual economic impact to Virginia from recycling is 7,800 jobs, $433.9 million in wages, $49.8 million in state and local taxes, and more than $1.3 billion in economic activity.

    Legislation Endorsed by the Commission

    After receiving a status update and incentive proposals relating to industrial recycling in the Commonwealth, the Commission concluded its study of industrial recycling in the Commonwealth by endorsing legislation that would make several changes to Virginia's recyclable materials income tax credit (§ 58.1-439.7 of the Code of Virginia). The legislation for consideration by the 2015 General Assembly included the following proposed changes:

    (1) Extending the sunset date of the credit from January 1, 2015, to January 1, 2020;

    (2) Increasing the tax credit from 10 percent to 20 percent of the purchase price paid for machinery and equipment that is integral to recycling and used in facilities that manufacture, process, or compound goods from recyclable materials;

    (3) Providing that qualifying machinery and equipment must be used predominantly in or on the premises of manufacturing facilities or plant units. The statute currently requires qualifying machinery and equipment to be used exclusively in or on such manufacturing facilities or plant units;

    (4) Limiting the documentation necessary to validate the purchase price of qualifying machinery and equipment. Under this change, the taxpayer would be required to submit only receipts and invoices to validate the purchase price. The statute currently requires a taxpayer to submit purchase receipts, invoices, and "such other documentation as may be necessary" to confirm the purchase price paid for qualifying machinery and equipment;

    (5) Providing that the tax credit cannot be denied based solely on an unrelated person's use of any goods or tangible personal property produced by the qualifying machinery and equipment;

    (6) Clarifying that no tax credit may be issued for machinery and equipment unless the machinery and equipment manufacture, process, compound, or produce tangible personal property from recyclable materials;

    (7) Requiring taxpayers to apply to the Department of Environmental Quality for the tax credit. This would change the administration of the tax credit from the Department of Taxation to the Department of Environmental Quality. Currently, the Department of Taxation administers the tax credit program and the Department of Environmental Quality's involvement is limited to determining whether machinery and equipment is integral to the recycling process; and

    (8) Capping the aggregate amount of credits that may be issued to all taxpayers in a fiscal year at $3 million. Each taxpayer with qualifying machinery and equipment would receive a prorated credit if credits are oversubscribed. Currently, there is no aggregate cap on the amount of credits allowed each year.

    Delegate Daniel Marshall introduced this legislative proposal for consideration by the General Assembly as House Bill No. 1554 (2015). Senator Frank Wager introduced this legislative proposal for consideration by the General Assembly as Senate Bill No.1205 (2015).

    Supporting Documents

    Presentations and other supporting documents related to the Commission's study of the economic and environmental benefits of the use of recycled material in the manufacturing process in Virginia may be viewed or downloaded via the Commission's website: http://dls.virginia.gov/commissions/mdc.htm