Task Force on State and Local Taxation of Electric Utilities
August 5 and 11, 1997, Richmond
Rural electric cooperatives and municipal electric systems presented their views on how restructuring the electricity market to allow retail competition would affect the state and local revenue derived from these providers of electric service. Additionally, the Department of Taxation, relying on data furnished by Virginia's power suppliers, described the potential effect on general fund revenues if the gross receipts tax on the sale of electricity were replaced by alternative taxing mechanisms. Members of the task force also presented their views on an appropriate plan for utility taxation in a restructured market.
Rural Electric Cooperatives
Rural electric cooperatives currently provide electrical service to about 15 percent of Virginia's population. More than 85 percent of the cooperatives' retail electric sales are to residential and small commercial consumers, and a representative for the cooperatives explained that the lower density associated with such a rural service territory results in a higher cost of service than that of investor-owned utilities or municipal utilities.
Rural electric cooperatives, for state tax purposes, are subject to the same tax treatment as investor-owned utilities. However, Section 501 (c) (12) of the Internal Revenue Code provides a federal tax exemption for cooperatives, provided that the cooperative allocates any margins (revenues in excess of costs) back to cooperative consumers. Electric cooperatives do pay federal tax on unrelated business income and taxable subsidiary earnings.
Municipal electric systems are the smallest segment of the utility industry in Virginia. The 15 municipal electric systems in Virginia serve only five percent of the population, and only two percent of the electric energy sold by municipals is self-generated. State and local government revenue requirements are included in rates charged by municipal electric systems in the same way that taxes are included in investor-owned utility rates. Additionally, municipal electric systems may make contribution payments and payments in lieu of taxes. Such contribution and in lieu payments by municipal electric systems to localities amounted to over $21 million in 1996.
Department of Taxation
The Department of Taxation, using financial data provided by Virginia's electric suppliers, developed comparative figures focusing on two options for maintaining the approximately $94 million currently received from gross receipt taxes. These options were (i) replacing the gross receipts tax with a per-kilowatt-hour consumption tax or (ii) replacing the gross receipts tax with a corporate net income tax combined with a per-kilowatt-hour consumption tax.
The first option, at current levels of electricity consumption, would require a tax of 11¢ per hundred kilowatt hours of electricity usage to maintain the current level of revenue derived from the gross receipts tax. The second option, combining a corporate income tax with a consumption tax, would require a consumption tax rate of 7.7¢ per hundred kilowatt hours of electricity usage to maintain revenue neutrality.
These calculations assume (i) continued allowance of a coal tax and neighborhood assistance tax credits, (ii) electricity is tangible property, (iii) all retail sales are subject to a consumption tax, and (iv) that the information provided to the Department of Taxation by Virginia electric utilities was correct and consistent with Virginia law.
The industry profile presented by the Department of Taxation indicates the following levels of overall electricity usage:
Residential...................39.4% Commercial....................29.1% Industrial....................20.7% Public authority and other....10.8%
The percentage of current gross receipts tax paid by these categories is as follows:
Residential...................47.6% Commercial....................26.8% Industrial....................13.0% Public authority and other....12.6%
Attorney General's Office Analysis
A representative from the Division of Consumer Counsel of the Attorney General's office presented comments on behalf of the citizens as consumers and noted that if the gross receipts taxes were apportioned on a straight per-kilowatt-hour basis, the following changes would result: (i) residential consumers would pay 17.25 percent ($8,854,789) less annually in gross receipts taxes than they paid as part of their bundled rates; (ii) public authority and other consumers would pay 14.2 percent less ($1,920,499); (iii) industrial customers would pay 58.7 percent more ($8,246,417); and (iv) commercial customers would pay approximately 8.77 percent more ($2,528,868).
The representative from the Attorney General's office further explained that the current customer classifications may be an inaccurate means of providing an equitable method for tax burdens, particularly because each electric utility has its own classifications of customers, which may have different intra- and extra-class characteristics from the classifications of other utilities.
All members of the task force were given the opportunity to respond to the Department of Taxation presentation and to recommend or present alternatives to the two options outlined by the department.
Comments on Taxation Options
American Electric Power-Virginia (AEP) and ALERT, a coalition representing residential, industrial and commercial consumers, recognized the shift of tax burden resulting from a consumption tax based on kilowatt hours and recommended establishing alternative tax structures. AEP recommended imposing an "ad valorem" tax, possibly in combination with a corporate income tax. Such a scheme, according to AEP, would result in a minimal change in tax basis, no change in tax rate, no appreciable changes in tax responsibility between customer classes or between electric providers in the state, and achieves a "level playing field" for out-of-state purchases.
ALERT recommended a combination of corporate income tax and a sales and use tax in order to provide revenue neutrality to the state and avoid cost shifting between classes of consumers. ALERT also suggested that any change to the tax structure include "true up" mechanisms whereby adjustments can be made to the tax structure based on the levels of sales or consumption. ALERT emphasized that it did not want the loss of tax revenue to get in the way of the enormous benefits that the citizens of Virginia can enjoy as a result of retail competition in the electricity market.
The Virginia Municipal League and the Municipal Electric Power Association of Virginia (MEPAV) shared concerns over any proposed taxing schemes subjecting local governments or municipal utilities to state taxes. MEPAV proposed that any recommended alternative tax plan be applied universally and in such a manner as to eliminate any advantages for out-of-state suppliers selling directly to Virginia retail customers or municipal utilities.
The rural electric cooperatives, independent power producers, and Virginia Citizens Consumer Council all endorsed a consumption tax based on usage (kilowatt hours) in combination with a corporate income tax. The electric cooperatives stressed that any tax restructuring plan should recognize the federal tax exempt status of cooperatives.
Virginia Power, responsible for 75 percent of the taxes paid by electricity providers in the Commonwealth, declined to recommend or endorse any specific tax policy at this time. A representative from Virginia Power stated that the utility prefers to focus on stranded cost recovery and eliminating disparity between Virginia and out-of-state electric providers.
The task force will brief the joint subcommittee at the latter's September 25 meeting on its findings and recommendations.
The Honorable Jackson E. Reasor, Chairman
Legislative Services contact: Rob Omberg