Task Force on State and Local Taxation of Electric Utilities
September 19, 1997, October 21, 1997, Richmond
The task force continued to focus on alternatives to the current gross receipts tax imposed on the sale of electricity. Following discussion of the advantages and disadvantages of various alternative taxing schemes proposed by task force members, the chairman introduced a "declining block" tax method designed to retain the current distribution of taxes among residential, commercial, and industrial users of electricity.
The task force recommends that the full joint subcommittee consider writing letters to Virginia's Congressional delegation expressing concern over the potential revenue loss to the Commonwealth and its localities as a result of electric utility restructuring. The task force also stated that Congress can assist the Commonwealth in preventing or significantly reducing this revenue loss by including specific language in any federal restructuring legislation that deems all electricity consumed within a state be considered, for tax purposes, to have been generated within that state.
The current gross receipts tax is embedded in the cost of electricity. Accordingly, all users of electricity (including local, state, and federal government users) indirectly pay this tax. Levying this form of tax also allows the State Corporation Commission (SCC), by authority contained within the Virginia Constitution, to centrally assess the real property of public service companies.
The SCC provided an update of an ongoing case involving telecommunications companies and central assessment of property belonging to service providers who are not public service companies. The outcome of this case could provide a valuable precedent for the General Assembly regarding the continued practice of centrally assessing the property owned by generators of electricity even if restructuring results in retail competition.
The task force identified several drawbacks to the continued practice of levying a gross receipts tax on the sale of electricity. Among these are the potential loss of revenue due to (i) declining prices of electricity resulting from retail competition and (ii) sales from tax exempt out-of-state providers of electricity. A tax scheme that attempts to impose a gross receipts tax on out-of-state providers of electricity would undoubtedly face challenges over the legal issue of nexus.
Corporate Income Tax
Alternatives to the gross receipts tax include the imposition of a corporate income tax, which would provide similar treatment to most generators of electricity but would not include the electric cooperatives or the municipal utilities. In a restructured environment, such a tax promotes market pricing by eliminating any guaranteed pass-through of tax costs. Task force representatives from investor owned utilities also stated that a corporate income tax is less regressive, as profits rather than gross receipts are taxed. The General Assembly will need to decide whether to continue to allow the current coal and neighborhood assistance tax credits if the gross receipts tax is abolished.
A corporate income tax imposed on the investor owned utilities within Virginia would not produce the same amount of revenue as currently collected under the gross receipts tax. Depending on the treatment of the current credits for coal and neighborhood assistance, the Department of Taxation estimates the shortfall to be between $51 and $65 million.
The task force discussed several variations of a consumption tax on the users of electricity. Such a tax could be imposed as a "stand alone" tax or in conjunction with a corporate income tax. Representatives of lower cost electricity providers and of large users of electricity stated that the current apportionment of tax burden among the different categories of users (i.e., residential, commercial, industrial) is best maintained by assessing the consumption tax on the sales price of electricity.
Such a tax requires disclosure of potentially sensitive pricing information, and a competitive market may cause significant volatility in the price of electricity. Such volatility directly affects the amount of revenue collected under this method. The task force also noted that such a method potentially requires self-reporting by consumers. Representatives of residential users prefer to base the consumption tax on actual kilowatt hour (kWh) usage. which promotes conservation, is less subject to volatility, and protects proprietary pricing information.
However, a consumption tax based on actual kWh usage results in a shift in tax burden among the user categories and causes users of less expensive electricity to pay more in taxes. Representatives of municipal utilities objected to any form of consumption tax that is directly assessed against their customers. An end user consumption tax, according to a representative from the Municipal Electric Power Association of Virginia (MEPAV), exposes municipal utility customers to double taxation and creates the undesirable precedent of directly taxing municipal services. An acceptable alternative, according to MEPAV, is to impose a tax in such a way that allows municipalities to indirectly pay a tax as a component of either the wholesale purchase price of electricity or as a component of the price of the transmission services.
The Department of Taxation, at the request of the acting chairman of the task force, developed a tax scenario designed to assess consumers based on a kWh consumption basis while retaining the current distribution of tax among user categories through the use of "declining blocks." This proposal also imposes a corporate income tax on investor owned utilities and calls for a minimum tax based on gross receipts to be assessed if a threshold level of revenue is not raised. The proposal imposes the minimum tax on electric cooperatives because their nonprofit status precludes the payment of any corporate income tax.
Under such a scheme, all users of electricity pay the same rate for usage of electricity up to 2,500 kWh, then at a lesser rate for electricity usage between 2,501 and 50,000 kWh, and at an even lower rate for usage over 50,000 kWh. The "blocks" established for this method were determined to be rough estimates for the typical residential, commercial, and industrial users in the Commonwealth.
Future meetings of the task force will focus on the potential effect of the declining block proposal on electric cooperative and municipal utility customers. The Department of Taxation will provide further analysis on taxation issues surrounding federal, state, and local government entities. If the gross receipts tax is abolished, it is likely that these entities would not be subject to any consumption taxes.
The Honorable Jackson E. Reasor, Chairman
Legislative Services contact: Rob Omberg