Task Force on State and Local Taxation of Electric Utilities
June 3, 1997, Richmond
The June 3 meeting of the tax task force continued the examination of the potential effect of electrical utility restructuring on tax revenues for the Commonwealth and its localities. This meeting focused particularly on the predicted revenue shortfalls, which will occur if out-of-state electric companies begin supplying electricity to Virginia customers and no corresponding changes are made to the current tax structure. The task force discussed potential changes to the tax structure that would maintain the current level of revenue for the Commonwealth and localities and the legal issues surrounding the taxation of out-of-state utilities supplying electricity to Virginia customers.
A representative from the public accounting firm of Deloitte & Touche briefed the task force on the highlights of a national study of tax issues relating to electric utility deregulation. This study was conducted for the National Association of Regulatory Utilities Commissioners and the National Conference of State Legislators. The speaker asserted that states will not achieve the economic benefit expected by the proponents of deregulation if the companies competing after deregulation are subject to varying tax regimes. He further explained that the economic benefits from deregulation come from having electricity provided by the lowest cost provider and that subjecting providers of electricity to different tax regimes allows the lowest taxed provider to succeed rather than the provider with the lowest cost.
The task force was reminded that the Commonwealth derives almost all of its tax revenue from electrical utilities as a result of a gross receipts tax (gross revenues of the business, with no deduction for expenses) levied against all Virginia-based investor owned utilities. This gross receipts tax is not imposed on out-of-state providers. Localities receive a majority of their tax revenues from electrical utilities through property taxes and a consumer utility tax. Out-of-state providers are not subject to these two taxes either.
Data presented to the task force suggested that the current tax structure allows out-of-state companies marketing electricity in Virginia to realize cost savings of nine percent as a result of avoiding the tax liability presently incurred by Virginia utilities. Additionally, the task force was informed that Virginia and its localities could face a projected revenue loss of $100 million due to a combination of declining electricity prices, lower property tax base, and an increased market share for tax advantaged out-of-state providers.
Representatives from American Electric Power and Virginia Power urged the task force to recommend amending the tax structure to create a "level playing field" for all participants seeking to market electricity in Virginia. They urged the task force to consider proposals that (i) preserve the current level of revenue received by the Commonwealth and its localities and (ii) do not provide tax advantages for out-of-state providers at the expense of in-state utilities.
These Virginia utilities suggested achieving this goal by abolishing the gross receipts tax and replacing it with a corporate net income tax. While such a change may result in decrease in revenues, such shortfalls could be made up with revenue from a tax applicable to all end-users. This would not discriminate against either Virginia or out-of-state utilities and, according to proponents, will not result in an increased tax liability for end-users because they presently pay these taxes indirectly through the current regulated rates.
A representative from the Attorney General's office presented analysis on the legal issues related to taxing out-of-state utilities. Any tax levied by the Commonwealth on an out-of-state electric utility must not violate the constitutional protections afforded by the due process clause and the commerce clause. While courts tend to be more flexible when reviewing tax schemes involving regulated industries, a degree of contact must exist between the entity being taxed and the state levying the tax. This contact, or "nexus," will determine whether a state may levy taxes against out-of-state utilities.
Several members of the task force expressed concern over the tax scheme created in Pennsylvania as a result of electric utility deregulation. This scheme expanded the gross receipts tax so that both local and out-of-state suppliers of electricity in Pennsylvania are subject to this tax. Critics of the Pennsylvania plan stated that this scheme would result in expensive and time-consuming litigation over whether a proper "nexus' exists. The unresolved legal issues were promoted as another justification for the replacement of the gross receipts tax with a combination corporate income tax and end-user tax.
Representatives of Virginia's localities discussed the potential loss of revenue caused by electricity deregulation. A consumer utility tax, imposed by localities at varying rates, is currently collected by Virginia's utilities and paid back to localities. There are currently no provisions that would require out-of-state utilities to either collect this tax or pay the resulting revenue back to localities. This tax source generated over $170 million in revenue for localities in 1995. These representatives also expressed concern over the potential loss of revenue from property taxes collected against utilities that may result from deregulation.
The task force expressed the need to begin breaking down electricity bills in order to determine the median tax per kilowatt unit of electricity under the current tax scheme. Staff was directed to begin working with taxation staff within the Division of Legislative Services and the finance committees of the General Assembly to provide more feasibility data to the task force at its next meeting on July 15 in Richmond.
The Honorable Jackson E. Reasor, Chairman
Legislative Services contact: Arlen K. Bolstad