SJR 91

Task Force on State and Local Taxation

September 15, 1998, Richmond

The protection of state and local tax revenues and the establishment of a "level playing field" for all suppliers of electricity continues to be the focus of the State and Local Taxation Task Force. The task force will take advantage of the extensive work performed by the 1997 SJR 91 task force, which included representatives of major restructuring stakeholders, including investor-owned utilities; electric cooperatives; power marketers and independent power producers; industrial and commercial customers; and governmental officials from the Virginia State Corporation Commission (SCC), the Office of the Attorney General, and the Department of Taxation. This year's task force membership is exclusively legislators.

Declining Block Taxation

The 1997 task force developed a unique end-user tax method that would (i) replace the gross receipts tax on electric utilities with a corporate income tax on generation activities (electric cooperatives would pay on a modified gross receipts basis) and (ii) impose a kWh-based tax on electricity consumption using a "declining block" method. This proposal taxes electricity consumption at three tax rates, with the highest for the first 2,500 kilowatt hours consumed each month; the second and lower rate on consumption between 2,501 and 50,000 kWh, and the third and lowest rate imposed on kilowatt hours consumed in excess of 50,001 per month. This method would also replace other gross receipts taxes, including the SCC special assessment and local BPOL taxes. The tax rates developed by the 1997 task force would result in a revenue shortfall of approximately $14.4 million, primarily because the proposal does not impose the consumption tax on federal, state, and local governmental entities. Senate Bills 619 and 620, drafted to embody these concepts, were introduced by Senator Watkins and carried over by the 1998 General Assembly.

The Department of Taxation provided the task force with an update on the declining block proposal, using 1996 tax information provided by the utilities. In using updated information, the proposal results in a revenue shortfall of $13.3 million. The Department of Taxation suggested several reasons for this variance. Historically, gross receipts taxes imposed on electric utilities have been a very reliable source of revenue for the Commonwealth. These taxes have been reasonably stable and growing, as kWh sales have been fairly stable and growing. The department noted that the Coal and Neighborhood Assistance Act credits have been difficult to predict in recent years and that corporate income taxes are the most volatile of the major revenue sources. In order to further analyze the proposal, Senator Watkins requested that the utilities provide the Department of Taxation with 1997 tax information, as well as historical data concerning the percentage of income derived solely from generation.

Comments on Taxation Schemes

Several members of last year's task force offered suggestions and comments on the declining block proposal generally and on the carryover bills. A representative of the SCC offered some technical amendments for consideration and also recommended that any taxation proposal should (i) define which companies are subject to the legislation, (ii) keep the SCC special assessment on a gross receipts basis to ease budgeting uncertainties, (iii) impose the corporate income tax on all utility profits (the current proposal only taxes profit derived from generation activities), and (iv) assign collection responsibility to the Department of Taxation.

Representatives of Virginia Power and American Electric Power-Virginia urged the task force to be extremely cautious with the accounting language in any proposed legislation. The task force agreed that a technical work session may be the best way to ensure that all financial accounting concerns are addressed properly.

The electric cooperatives stressed their uniqueness with regard to taxation. The electric cooperatives currently pay no federal income tax, provided they derive a vast majority of their revenue from members. Exceeding the threshold amount of revenue derived from sales to nonmembers would result in cooperatives being forced to pay federal income tax. Additionally, the cooperatives are concerned about potential for double taxation to occur, especially when electricity is purchased for resale. The electric cooperatives suggested that the task force may want to examine the tax treatment of other cooperatives (such as telephone and agricultural cooperatives).

Next Meeting

The task force will meet again on October 1, 1998, at 9:00 a.m. in House Room 4. Senator Watkins requested representative stakeholders to furnish staff with further amendments or technical corrections to the carryover legislation as soon as possible.

The Honorable John Watkins, Co-Chairman
The Honorable Chip Woodrum, Co-Chairman
Legislative Services contact: Robert A. Omberg