State Tax Initiatives Related to Electric Industry Restructuring
The following summary describes tax provisions that have been proposed or enacted in connection with individual stateís consideration of electric industry restructuring. Certain states are considering changes in electric utility taxes to help the stateís utilities reduce their costs and be more competitive with utilities in neighboring states. Other states are focusing on the issue of revenue neutrality, or how to assure the same stream of tax revenues when electricity providers are not located in the state or are not electric utilities.
Numerous states have passed legislation calling for a task force or legislative committee to study the effect of restructuring on state and local tax revenues. Other states have enacted legislation that changes the tax code as it relates to the electric power industry.
The summary is based on articles in the trade press and copies of proposed legislation or enacted laws. The summary will be updated as events unfold, or when information regarding additional states becomes available.
Please get in touch with Diane Moody, APPA's Director of Statistical Analysis, if you have any questions. You can reach Diane by phone at (202) 467-2979, by FAX at (202) 467-2910 or by e-mail at dmoody@APPAnet.org.
Nebraska: 1996 legislation, LR 455, authorized a study of competition and restructuring issues. Phase 1, completed in 1997, included a summary of tax issues.
Nevada: An electric power restructuring bill, AB 366, was enacted in July 1997. It calls for customers to begin obtaining generation, aggregation and any other potentially competitive services from alternative suppliers no later than December 31, 1999. The Department of Taxation is required to prepare a report by January 1, 1999 on the effect of state tax policies on (1) the potential for effective retail competition in the state, and (2) the effect of retail competition on the tax revenues of state and local government. The report should also include recommendations to ensure a minimal effect on tax revenues. A second bill, SB 438, was enacted June 1999. Among other provisions, it deferred the opening of retail competition to March 2000. The bill contained no tax provisions.
New Hampshire: A tax bill (HB 602) was enacted in 1997. It repeals the stateís one percent franchise tax, and replaces it with an electricity consumption tax of $0.00055 per kilowatt-hour. The tax is imposed on the consumer. The electricity provider is required to collect the tax, but if the provider does not collect the tax, the consumer must remit the tax directly to the state.
The act becomes effective January 1, 1998 unless implementation of the stateís restructuring plan is delayed. In that event, the act becomes effective thirty days after implementation of the restructuring plan.
The act provides that the electricity consumption tax is repealed effective June 30, 2002, but it is expected that the legislature will either extend or revise the tax prior to that time. Public power customers are exempt from the tax as long as distribution remains within municipal boundaries. In addition, customers of public power systems are not subject to the tax until June 30, 2002, so in effect they will never pay the tax unless the repeal date is revised or eliminated.
House Bill 528 became effective July 1, 1997. It provides that if any municipal electric utility acquires existing generating plant, the utility must make payments in lieu of property taxes on the plant equal to the amount that would have been made by a private owner.
New Jersey: A restructuring bill (S-7, A-16) was enacted February 1999. The bill did not change the tax code, as tax issues were addressed in the 1997 bill and amended by the 1998 bill, described below.
Tax provisions as they apply to municipal utilities were revised by a bill (A-262) enacted October 1998. In regard to the 6% sales tax, municipal utilities in existence as of December 31, 1995 are not subject to the tax, except for sales outside of their municipal boundaries or within the franchise area (existing as of January 1, 1995) of another utility. In regard to the state corporate business tax, municipal utilities established before December 31, 1995 must pay the tax if they derive income from electricity sales to customers outside of their municipal boundaries or outside of their franchise area existing as of January 1, 1995. All tax provisions for municipal utilities established after December 31, 1995 remain unchanged from A-2825 (see below).
A tax bill (S-31, A-2825) was enacted July 1997. It eliminates the stateís thirteen percent gross receipts and franchise tax. Instead, retail sales of electricity are subject to the stateís six percent sales tax (sales of electricity were previously exempt from the tax), and electric utility corporations are subject to the state corporate business tax. The legislation also provides for a five-year transition period during which utilities will pay a transitional energy facilities assessment (TEFA). Ultimately utility taxes will decline by 45 percent. The billís provisions are effective January 1, 1998.
Municipal utilities formed after December 31, 1995 are subject to the sales tax and corporate business tax. Existing municipal utilities that were not previously subject to the gross receipts and franchise tax are exempt, except they must pay the sales tax and TEFA on any sales outside of their franchise area.
The bill also provides that all electric vendors must maintain an office within the state.
New Mexico: HJM 16 passed the House in February 2000. It would require the Interim Revenue Stabilization and Tax Policy Committee to make recommendations for the 2001 legislative session on how electricity taxes should be modified to maintain state and local revenues at their current levels.
A restructuring bill (SB 428) was signed by the governor in April 1999. In regard to taxes, it requires franchise fees and gross receipts taxes to be unbundled on customers' bills. It requires competitive power suppliers to obtain a license, and as part of the licensing process agree to pay any state taxes applicable on sales to customers. It also provides that the revenue stabilization tax policy committee will recommend any needed legislative changes by January 2003.
New York: AB 11006, the 2000 budget act, was signed by the governor May 15, 2000. The act eliminates the franchise tax for electric and gas utilities, and makes electric and gas utilities subject to the general corporate income tax. The new law also lowers the tax on gross income from transmission and distribution services to 2.0% by 2005, and eliminates the tax on all other utility income by 2005. Industrial and manufacturing businesses can receive a credit on their corporate business tax for payments of the gross income tax. The temporary surcharge on the gross income tax was also eliminated. In addition, the sales tax on the transmission and distribution of electricity and gas is phased out over four years.
The governor signed SB 8115/AB 11466 on August 10, 2000. The law protects taxpayers in municipalities affected by a sale of generating assets. The municipality can keep the same assessed value to market value ratio for taxation purposes for one year after a sale, giving the municipality time to adjust its assessment methods.
In January 1999, the New York Department of Taxation & Finance announced the elimination of the sales tax exemption on the transmission and distribution of competitive power. A January 1997 opinion by the Department had ruled that as long as the transportation services were separately stated, they would not be subject to the 4 percent sales tax. The January 1999 announced overruled the 1997 opinion, and after several postponements, the exemption was finally eliminated effective April 1, 2000.
SB 3612A (formerly AB 7554) was enacted in July 1999. It provides for the state board of real property services to issue a report on property tax implications of utility plant divestitures. The report is due by January 1, 2000.
The governor's budget plan, introduced January 1999, included provisions related to electric utility taxation. The provisions that were enacted were elimination of the utility subsidiary capital tax and exemption from the imported gas tax on power generation.
The state gross income (gross receipts) tax was amended in legislation enacted August 1997. Effective October 1, 1998, the tax rate drops from 3.5 percent to 3.25 percent. Effective January 1, 2000, the tax rate drops to 2.5 percent.
North Carolina: The Study Commission on the Future of Electric Service in North Carolina has been holding public hearings across the state, but its final report has been postponed until 2000. The Commission has scheduled several studies by its consultant, Research Triangle Institute, including a study on the effect of restructuring on local and state taxation.
North Dakota: HB 1237, enacted March 1997, established an Electric Utilities Committee to study restructuring issues, and the Committee formed an Electric Industry Taxation Task Force specifically to study taxation issues. The Committee's report, issued in November 1998, included taxation proposals put forth by cooperative utilities and by investor-owned utilities in the state. The investor-owned utility proposal would impose a flat rate consumption tax on all electric sales. Existing taxes would apply in lieu of the new consumption tax. Thus no current taxpayer would pay higher taxes, and sales by out-of-state providers would be captured by the new tax. This is similar to legislation enacted in 1997 to address out-of-state coal shipments to the state's generating plants.
SB 2389, enacted March 1999, authorizes a study on territorial issues. The Electric Industry Competition Committee was subsequently established to conduct the study and to also consider restructuring issues. In December 1999, the committee heard reports on the effect of retail choice on taxation.
Ohio: The 1999 restructuring act (see below for further details) allows municipalities to impose a local income tax. HB 483, introduced in the 2000 session, establishes uniform filing requirements and standards for calculating electric utilitiesí income tax base for the purposes of computing municipal income taxes.
Restructuring legislation, Substitute Senate Bill 3, was enacted July 1999. Tax provisions of the legislation make changes to property, income, and excise taxes, as well as establish a new per kilowatt-hour tax. In regard to property taxes, the law lowers the assessment rate on electric utility generation assets from 88% of true value to 25% of true value. The law eliminates the 4.75% public utility excise tax on electric utility revenues and makes electric utilities subject to the corporate franchise (income) tax; in addition, municipalities that assess a local income tax can now apply the tax to electric utilities. The legislation also imposes a new sliding scale per kilowatt-hour tax on electric distribution companies. Municipal utilities can transfer to the city's general fund the per kilowatt-hour tax collected from customers inside the city limits. Large commercial and industrial customers can elect to self-assess the per kilowatt-hour tax at specified rates.
Two tax bills were passed in the 1999 session. HB 384 increases the Ohio coal tax credit from $1 to $3 per ton. The credit is taken again the public utility excise tax on gross receipts until April 30, 2001, and against the corporation franchise tax from that date until January 1, 2005. HB 27 allows certain peaking plants to be eligible for tax abatements under the enterprise zone program.
Oklahoma: SB 500, enacted April 1997, provides for customer choice as of July 1, 2002, but leaves most of the details to a series of four studies. The act requires that the Oklahoma Tax Commission consider how restructuring of the electric utility industry will affect the tax revenues of the state and its political subdivisions. Specifically the study will look at the feasibility of establishing a uniform consumption tax. The tax commissionís report is due by December 31, 1998. If a uniform tax policy has not been established by July 1, 2002, customer choice will be postponed until a tax policy is implemented.
A second bill, SB 888, was enacted June 10, 1998. It gives the Joint Electric Utility Task Force, made up of selected members of the legislature, jurisdiction over the tax issues study, postpones the due date to October 1, 1999, and requires a fair and equitable uniform tax policy by July 1, 2002. A new section of the law requires that all retail electric service distributors providing service within a municipality, collect and remit to the local government all applicable municipal taxes on electricity. The Joint Task Forceís October 1999 report supports the concept of a uniform consumption fee and lists several issues for further study.
Two restructuring bills (SB 220 and HB 2514) passed in 2000, but the conference version (substitute SB 220) ultimately failed. The bills would have replaced property and gross receipts taxes with a per kilowatt-hour tax on generation (.22 mills), transmission (.22 mills), and distribution (1.36 mills). Public power systems would not be subject to this tax, but any public power system that opts in to retail choice would collect a tax of 1.8 mills per kWh.
Oregon: State restructuring legislation, SB 1149, was signed by the governor July 23, 1999. In regard to taxes, the bill allows cities to collect a privilege tax on a per kilowatt-hour basis rather than on a percent of revenue basis. Similarly, a city that owns or operates a municipally owned electric utility and is required under Oregon law to collect from the utility 3 percent of the utility's gross operating revenue, can instead collect the payment on a per kilowatt-hour basis.
HB 2050 was passed by the House in Senate in July 1999, but the bill was vetoed by the governor. The bill would have exempted intangible personal property from taxation for centrally assessed utility companies, thereby lowering their tax burden. Utilities have been working on this issue for 5 years, and the governor also vetoed the 1997 version of the bill.
Pennsylvania: SB 2 (Act 23) was signed by the governor on May 24, 2000. The law phases out the capital stock and franchise tax between 2000 and 2008. It also limits the amount of the Public Utility Realty Tax during a transition period, 1999 to 2001.
State restructuring legislation was enacted in December 1996. The act includes provisions for maintaining revenue neutrality. Effective January 1, 1999 there will be a gross receipts tax on distribution companies and generation suppliers. Municipal and cooperative utilities are subject to the tax to the extent that they sell electricity outside of their service territory. The secretary of revenue shall determine the tax rate based on the difference between the 1995-1996 fiscal tax revenue base and the taxes actually paid in the fiscal year ending June 1998.
Other sections of the act require that entities - including brokers, marketers, aggregators, and municipal or cooperative utilities providing service outside their territory - that supply electric generation in Pennsylvania must obtain a license from the state commission. One condition of obtaining a license is to certify to the commission that the entity will pay the new gross receipts tax as well as other specified Pennsylvania taxes. If an electric generation supplier fails to pay the gross receipts tax, the tax will be paid by the distribution utility. However, if the distribution utility becomes liable for state taxes not paid by an electric generation supplier, the supplier must indemnify the distribution company for the liability.
Rhode Island: Restructuring legislation was enacted in August 1996. In regard to taxes, it provides that the Retail Electric Licensing Commission make recommendations on tax issues to the legislature by January 1, 1997.
A second bill, H 6288, enacted in July 1997, requires all energy suppliers (for example, independent power producers) to pay the four percent gross receipts tax that is currently paid only by electric utilities. Similarly, the bill clarifies that the manufacturer's exemption from the property tax does not apply to non-regulated power producers. Thus both electric utilities and non-regulated power producers are subject to the property tax.
Tennessee: HB 1722, enacted June 1999, provides that exempt wholesale generators and power marketers do not have to pay the three percent gross receipts tax on electricity sales. Currently only investor-owned utilities pay this tax.
Texas: Restructuring legislation, SB 7, was signed by the governor in June 1999. In regard to tax issues, the bill provides that any shortfall in school funding caused by a decrease in electric utility property appraisals will be compensated for by a transfer from the electric utility system benefit fund. The system benefit fund is to be financed by a nonbypassable charge per megawatt-hour set by the Public Utility Commission. The act also clarifies who is responsible for paying the state's sales and gross receipts taxes. In addition, franchise taxes collected by cities are converted from percent of revenue to per kilowatt-hour charges.
The Senate Interim Committee on Electric Utility Restructuring conducted six statewide hearings on electric restructuring, including tax issues, in 1998. Its report, issued January 1999, described issues, but did not include any recommendations. The House Interim Committee on State Affairs held hearings in 1998, and issued a report on the tax implications of restructuring in November 1998. The report concluded that electric utility restructuring could have a large effect on the tax base, and consequently any legislation should also restructure taxes. Issues that need to be studied include: the effect of potential property tax cuts on school funding, and how to maintain bond ratings for cities and other political subdivisions; how to encourage the construction of new generating plants and provide incentives for pollution control and renewable energy; and how to reduce the tax burden on low-income residential customers.
Utah: 1995 legislation created a separate gross receipts tax for electric utilities. This was part of a package that lowered the electric utilitiesí property tax rates. 1996 legislation lowered the gross receipts tax rate. Only Intermountain Power Agency and PacifiCorp pay this tax.
The Municipal Energy Sales and Use Tax Law was enacted in 1996, to be effective July 1, 1997. The purpose of the law is to ensure that municipalities receive a steady stream of franchise fee revenue regardless of the energy supplier.
The legislation allows municipalities to impose an energy sales and use tax of up to 6 percent on the delivered value of electricity. (This is a separate tax from any local sales tax imposed under state sales tax provisions.) Exemptions include sales for resale and sales for use outside the municipality. If the energy supplier already pays the municipality a franchise fee that is itemized on the consumerís bill, the energy supplier can apply the franchise fee as a credit against the energy sales and use tax owed. All municipalities, including those that provide electric service, may impose this tax.
The Electrical Deregulation and Customer Choice Task Force has made a two-year study of restructuring issues. It heard testimony on several tax issues, such as: how reduced electric prices would affect taxes, how stranded costs could reduce the value of assets subject to property tax, and the state's collection capability for out-of-state providers. The Task Force's November 1998 report concluded that consideration of restructuring in the legislature should be deferred as it is not now in the best interests of Utah, and that the subject should continue to be studied and monitored. In regard to tax issues, the report recommended that tax implications be examined as part of the development of a specific restructuring plan. Potential tax issues include: should restructuring be revenue neutral; revenue implications for state and local government; and the state's ability to collect taxes (nexus).
Virginia: Senate bill 163, approved by the Governor April 8, 2000, amends the 1999 tax provisions to provide that net metering customer-generators pay the tax on the net amount of electricity. The bill also made some adjustments to the per kWh consumption tax provisions enacted in April 1999.
Senate bill 1286 was signed by the governor in April 1999. Effective January 2001, an electric utility consumption tax replaces the state license tax, local license tax and special regulatory revenue tax. The tax is assessed on consumers on a monthly basis in kWh blocks, as follows: $0.00155 per kWh on the first 2,500 kWhs; $0.00099 per kWh for sales between 2,500 and up to 50,000 kWhs; and $0.00075 per kWh on sales greater than 50,000 kWhs. The tax is added as a separate line on consumers' bills. The tax is also collected by municipal utilities except they have the option of paying it to their transmission provider rather than assessing it directly on the customer. Municipal utilities operating in locations that do not charge a local license tax do not have to pay the license tax portion of the new consumption tax.
In addition, the law also makes electric suppliers subject to the state corporate income tax, and provides that the State Corporation Commission will centrally assess real and personal property of electricity suppliers. It also provides that the existing local consumer utility tax, which is now based on revenue, can instead be assessed on kilowatt-hours consumed.
Senate bill 1269 was signed by the governor in March 1999. The bill provides additional details on the implementation of retail wheeling, but does not address tax issues.
HB 1172 was enacted in April 1998. It sets a timetable for transition to retail competition and the deregulation of generation, but leaves most details, including possible changes in taxation, to future legislation.
Washington: In December 1999, the Department of Revenue completed a study, which was requested by the legislature, on taxation of the electricity industry to determine whether current state and local tax codes operate effectively in the changing environment. The study concluded that the potential state and local revenue loss if consumers purchase electricity from an out-of-state provider, ranges from $5 to $20 million annually. The study also considered options for taxation changes that would avoid revenue loss and promote competitive neutrality, but did not make any recommendations.
West Virginia: In March 2000 the legislature passed HCR 27 which approves the Public Service Commissionís restructuring plan. However, the resolution does not allow the plan to take effect until tax changes are made. The PSC will propose tax legislation which the legislature will consider in its 2001 session.
In March 1998 the legislature enacted HB 4277 which authorizes the state public service commission to develop a deregulation plan if the PSC finds that retail choice is in the public interest. Included in the public interest principles are preserving tax revenues for state and local government, no shifting of the tax burden, and a tax system that does not place any competitor at a disadvantage.
The state business and occupation privilege tax was revised effective June, 1995. For the first time municipal utilities are required to pay the tax. The tax is calculated based on $22.78 per kilowatt of "taxable generating capacity" and 0.19 cents per kWh sold to consumers. (Lower charges apply for sales to large industry and there is a discount for installed scrubbers.) The tax also applies to any person engaging within the state in the business of generating electricity for sale, or in the business of selling electricity to consumers. The per kW portion of the tax applies to sales of power generated within the state by the taxpayer. The per kWh portion applies to sales to consumers in the state of power that is not generated in the state by the taxpayer. A taxpayer can receive a credit applied to the per kWh portion of the tax for any power generation tax paid by the taxpayer to the state in which the power was generated.
Wyoming: In December 1999, the Legislatureís Joint Revenue Interim Committee considered, but did not approve, an excise tax on electricity generation.
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