The Division of Consumer Counsel, Office of the Attorney General ("Consumer Counsel"), presents these comments on behalf of consumers to the Task Force on State and Local Taxation (SJR 91) ("Task Force"). Consumer Counsel is charged with representing the interests of the people as consumers; part of this responsibility entails making recommendations to the Governor and General Assembly concerning legislation that is necessary to promote and protect those interests. (See Va. Code § 2.1-133.1.) These limited comments respond to questions presented by the Task Force as a means of collecting information for the preparation of its final report.
Modifying the Current Taxation Scheme. Based upon the work of the Task Force, and its predecessor in SJR 259, there appears to be wide consensus that the current taxation scheme for electric utilities will need to be modified if the General Assembly makes the policy decision to allow retail competition. The goals of any new taxation scheme should include: (1) revenue neutrality for the Commonwealth and her localities; (2) equitable treatment for consumers (e.g., smaller customers should not shoulder a disproportionate tax burden); and (3) a level playing field for competitors.
In addition, any new tax structure must satisfy constitutional considerations. For example, there must be appropriate contact by an out-of-state company with the Commonwealth, and the Commonwealth must have an interest in regulating the out-of-state company (i.e., nexus). Under the Commerce Clause, the tax cannot discriminate against or unduly burden interstate commerce, thereby impeding free trade in the national marketplace. The tax also may violate the Commerce Clause if it favors in-state over out-of-state entities. Furthermore, the tax must satisfy apportionment issues; there must be a reasonable relation between the tax and the services rendered, with the goal of avoiding multiple state taxation.
Replacing the Gross Receipts Tax. One option for modifying the current taxation scheme, which was provided by Dr. Robert T. Benton of the Department of Taxation, involves replacing the current gross receipts tax with both: (1) a corporate income tax; and (2) a consumption tax. (See, e.g., Department of Taxation Comments (Sept. 15, 1998).) By utilizing both a corporate income tax and a consumption tax, the overall consumption tax rate falls as the corporate income tax revenues are reflected. Under this scenario, the overall tax burden is spread over more stakeholders, and the resulting tax burden on consumers is less than when a stand-alone consumption tax is used to replace revenues from the gross receipts tax. Moreover, by assessing the tax on consumption rather than company revenues, tax revenues are apt to be more stable, particularly if prices decline. Consumption also is likely to increase over time, leading to increased collection of tax revenues.
However, the Industry Profile provided by Dr. Benton suggests that tax subsidies currently flow from residential consumers to commercial and industrial consumers. (Id.) The percentage of gross receipts taxes paid by residential consumers is greater than their percentage of kWh usage. The Industry Profile for 1996 shows that residential consumers provided 47.7% of gross receipts taxes - while only accounting for 39.6% of kWh usage. Conversely, commercial and industrial consumers provided only 26.6% and 12.8% of gross receipts taxes, respectively - while accounting for 28.9% and 20.6% of kWh sales.
Consequently, the greatest tax burden currently is shouldered by those who may have the fewest options in a restructured environment. For example, it has been suggested that larger consumers likely will receive the largest savings. Fortunately, a tax assessment based upon consumption rather than price is independent of any price advantages that some consumers or consumer classes may gain over others; everyone pays according to actual consumption. Any new taxation scheme should equitably allocate the tax burden among customer classes and, at a minimum, should prevent further shifting of the tax burden to smaller customers.
Assessing the Corporate Income Tax. The Staff of the State Corporation Commission ("SCC") has noted that the corporate income tax currently proposed by the Task Force only applies to profits derived from generation activities. Conversely, the current gross receipts tax is not so limited; for example, a utility's gross receipts include revenues for providing distribution services. Furthermore, utilities currently provide - and likely will increasingly provide - unregulated services (such as behind-the-meter services) in competition with companies that currently are subject to the corporate income tax. Consequently, the SCC has properly recommended that the corporate income tax be imposed on all utility profits - as opposed to only generation-related profits.
Educating Consumers on Utility Taxes. Currently, a utility's gross receipts taxes are included in its bundled electric rate assessed to consumers. The gross receipts tax portion of the bundled rate is not itemized on a customer's bill. As a result, many consumers likely are not acutely aware of the current utility tax structure. However, this awareness will change when, under retail choice, an itemized consumption tax begins appearing on a customer's bill.
This has the possibility of creating significant customer confusion and misunderstanding. A consumer easily could conclude, erroneously, that the consumption tax represents a new, additional tax that did not exist prior to retail competition. It has been suggested that to help protect against this potential misunderstanding, the General Assembly should consider requiring utilities to itemize current taxes on their bills for a certain period prior to implementing retail competition. What seems ultimately apparent is that, regardless of the timing of such itemization, retail competition will highlight the existence of taxes currently "hidden" in the price of electricity.
Consumer Counsel appreciates this opportunity to comment on behalf of consumers. In sum, any new taxation scheme should be carefully crafted to: (1) satisfy constitutional requirements; (2) provide revenue neutrality for the Commonwealth and her localities; (3) assure equitable treatment for consumers; and (4) establish a level playing field for competitors.
October 9, 1998