A Presentation to the SJR 91 Taxation Task Force
Dr. Robert T. Benton
Assistant Commissioner
Office of Fiscal Research
Department of Taxation
September 15, 1998
Current taxation of electric utilities
Gross Receipts Tax
* State rate is two percent of gross receipts
* Special SCC tax imposed at 0.1%, although the maximum allowed by law is 0.2%
* Local taxes are also based on gross receipts
1995 GRT revenues 1996 GRT revenues
(millions) (millions)
State (net of credits & ODEC adjustment) $93.9 $90.2
SCC $5.4 $5.4
Local (estimated at 25% of the State) $26.9 $27.1
Total $126.2 $122.7
Tax issues associated with a restructured industry
Two major issues. . .
* Equity to utility companies of a tax based on gross receipts rather than net income* Gross receipts is not a measure of a firm's profitability
* Inability of the Commonwealth to impose this tax on firms without nexus
* Physical presence in Virginia is required for this tax to be imposed
* This is not a problem now, when only firms certified by the SCC have access to the marketplace. Deregulation could put local electricity providers at a competitive disadvantage if outside firms are not subject to this tax
Last year the Task Force looked at two alternatives to a gross receipts based tax. . .
PROS * Investor owned utilities (IOUs) already pay a federal corporate income tax* Virginia conforms to the federal corporate income tax, so the filing burden is reasonable
CONS * Cooperative and Municipal electricity providers are exempt from the federal tax* Provides significantly less revenue than the gross receipts tax
How did the Task Force get to last year's proposal. . .PROS * Consumers of electricity today are paying the gross receipts tax; it is fully passed through in rates* Tax imposed on those who are actually using the power, and acts as a demand-side management tool
* In theory, can set the rates to collect the same revenue as the gross receipts tax
CONS * Probably can't impose a separately stated consumption tax on the federal, state or local government* A price based consumption tax might require generating companies to expose sensitive pricing information
* It's a "new" tax imposed directly on consumers of power. This may have the appearance of being a tax increase instead of a replacement.
The Task Force last year established certain initial criteria that it thought would be appropriate for designing the tax structure that would affect the electric utility industry in a restructured environment
* Electric utilities should be subject to the corporate income tax, the same as any other unregulated companyWith these goals in mind, we examined several alternative approaches to designing a tax structure that met these criteria. Following is a brief summary of three of the proposals discussed in detail last year, followed by an update of the final proposal using data for Tax Year 1996, as well as a discussion of several issues that have arisen as we now look at two years worth of data.* A consumption tax should be imposed based on kWh usage
* The relative tax burden should be kept the same between classes after restructuring as it is now
* Any proposal should be revenue neutral to the Commonwealth
A Quick Review. . .
Kilowatt hour sales
Total kWh Sales Percent
(Millions) of KwH sales
Residential 33,824.9 39.4%
Commercial 24,907.5 29.1%
Industrial 17,729.5 20.7%
Public Authority & Other* 9,288.4 10.8%
Total 85,750.2 100.0%
Gross Receipts from Electricity Sales
Total Dollar Sales Percent
(Millions) of Gross Receipts
Residential $2,537.2 47.6%
Commercial $1,425.5 26.8%
Industrial $ 695.2 13.0%
Public Authority & Other* $ 670.4 12.6%
Total $5,328.2 100.0%
*Other includes public street and highway lighting, and irrigation sales.
First Task Force proposal. . .
Establishing the revenue requirement
1995 State Gross receipts $107.8 million Coal and Neighborhood Assistance Act Credits $13.7 million Net Gross receipts $93.9 million Estimated Corporate Income Tax $28.3 million Alternative Minimum Tax (at .645% of Gross Receipts) $2.0 million Revenue Required by Consumption Tax $63.7 millionKeeping the relative burdens the same requires. . .
Share of Gross Receipts Revenue Required
Residential 47.6% $30.3
Commercial 26.8% $17.1
Industrial 13.0% $8.3
Public Authority & Other 12.6% $8.0
Total 100.0% $63.7
This is impossible to maintain with a single flat consumption tax rate, but could be approximated for the four groups with a three tiered declining block tax structure. This resulted in the following consumption tax rates:
kWh per Month Tax Rate 0-2,500 .095¢ 2,501-50,000 .058¢ 50,001 + .044¢This proposal suffered from a few potential drawbacks. . .
* It assumed that Public Authorities could be taxedWe ran the numbers again, assuming that the Public Authorities were not subject to the consumption tax, but that state revenues remained constant, and came up with the following tax rates:* It didn't address the SCC and the local BPOL tax
* It imposed an alternative minimum tax on Co-ops which may be difficult to administer
Second Task Force Proposal. . .
kWh per Month Tax Rate 0-2,500 .102¢ 2,501-50,000 .067¢ 50,001 + .050¢But these rates mean that residential, commercial and industrial customers are picking up the revenue slack because the government can't be taxed. While it is certainly true that each of these groups are paying less tax under this proposal than their share of the gross receipts tax, it is also true that the relative amount of tax each customer class is paying would change.
Third Task Force proposal. . .
Presented at the January 8, 1998 Meeting
Features of this proposal:
* The Commonwealth would forego the $14.4 million in revenues that would be collected if the consumption tax could be imposed on public authorities
* Replaces all gross receipts taxes (state, SCC at the maximum 0.2% rate, and the local BPOL)
* Imposes a net corporate income tax on the generation of electricity only
* Imposes a declining block kWh based consumption tax designed to keep the relative burdens between the residential, commercial and industrial classes equal
State Gross Receipts Tax $93.9 SCC Special Tax @ 0.2% $10.8 Local Gross Receipts Tax $26.9 Total $131.6
Net Corporate Income Tax on Generation $17.5
Consumption Tax
Residential Class $54.3
Commercial Class $30.6
Industrial Class $14.8
Total Consumption Tax $99.7
Total $117.21
Keeping the Burdens the Same as in 1995. . .
Gross Receipts -
Class 1995 Total Revenue
Residential 47.6% $54.3
Commercial 26.8% $30.6
Industrial 13.0% $14.8
Public Authority 12.6% $14.4
Total 100.0% $114.1
Generates These Rates. . .
Consumption Tax Rates2 kWh per month Tax Rate 0 - 2,500 .161 ¢/kWh 2,501- 50,000 .105 ¢/kWh 50,001 + .079 ¢/kWhWhat do the 1996 Numbers Tell Us?
Kilowatt hour sales
Total kWh Sales Percent
(Millions) of kWh sales
Residential 34,860.4 39.6%
Commercial 25,457.6 28.9%
Industrial 18,118.0 20.6%
Public Authority & Other* 9,634.7 10.9%
Total 88,070.7 100.0%
Gross Receipts from Electricity Sales
Total Dollar Sales Percent
(Millions) of Gross Receipts
Residential $2,537.7 47.7%
Commercial $1,417.5 26.6%
Industrial $ 679.1 12.8%
Public Authority & Other* $ 686.3 12.9%
Total $5,320.7 100.0%
*Other includes public street and highway lighting, and irrigation sales.
Updating the third Task Force proposal using 1996 data. . .
State Gross Receipts Tax $121.2 ODEC Refund ($12.7) Actual State Gross Receipts Tax $108.5 Less Coal and NAA Credits ($18.1) SCC Special Tax @ 0.2% $10.8 Local Gross Receipts Tax $27.1 Total $128.3
Net Corporate Income Tax on Generation $12.5
Consumption Tax
Residential Class $55.3
Commercial Class $30.8
Industrial Class $14.8
Total Consumption Tax $100.9
Total $113.43
Following the same process as last year, the rates required to generate these revenues are:
kWh per month 1995 Rates 1996 Rates 0 - 2,500 .161 ¢/kWh .159 ¢/kWh 2,501- 50,000 .105 ¢/kWh .103 ¢/kWh 50,001 + .079 ¢/kWh .078 ¢/kWhWhat are the differences between 1995 and 1996?
If this consumption tax had been imposed at the 1995 rates for calendar year 1996, there would have been a revenue shortfall of only $13.3, rather than the expected $14.9 million. Why the variance?
Gross receipts 0.6% kWh Sales 2.7% Coal and NAA Credits 31.9% Net Corporate Income Tax (before credits) (15.5%) Net Corporate Income Tax (after credits) (31.5%)
* Historically, gross receipts taxes imposed on electric utilities have been a very reliable source of revenues for the state. These taxes have been reasonably stable and growing.1This proposal produces a revenue shortfall of $14.4 million, which is the amount of revenue that would be generated by the Public Authority and Other category, if they were subject to the consumption tax.* kWh sales are fairly stable and growing.
* Coal and Neighborhood Assistance Act credits have been difficult to predict in recent years.
* Corporate income taxes are the most volatile of the major revenue sources.