Use taxes on electricity look more and more likely as states look for ways to make up for loss of other tax revenue from deregulation

Use taxes on electricity look more and more likely as states look for ways to make up for loss of other tax revenue from deregulation

November 01, 1998 | By Keith Martin in Washington, DC

The idea of imposing use taxes is often part of a plan to cut property taxes on regulated utilities and put them on an equal footing with independent generators. A Minnesota study last summer found that property taxes on just two utilities in 1995 would have dropped from $222 million to $35 million if utility property was assessed the same as other taxpayers. Ohio utilities proposed at the end of August to cut utility property taxes but make up the revenue by imposing an electricity use tax on a cents-per-kWh basis. The tax would be paid by consumers, but be collected by electric distribution companies.

LOOK FOR A SHOWDOWN NEXT YEAR BETWEEN IOUs AND MUNICIPAL UTILITIES over whether munis can serve customers outside municipal boundaries and still retain the tax exemption on their debt.

Municipal utilities expect to suffer erosion in their customer bases due to deregulation. This makes it hard to make debt service payments unless they try to replace the revenue from lost customers by expanding the areas they serve. Most municipal facilities are financed with tax-exempt debt. However, the tax exemption is threatened if they expand.

Senator Gorton (R.-Wash.) said September 30 that he will make a major push next year for a bill that has the backing of municipalities. The bill would allow expansion without the loss of tax exemption on existing debt, as long as a utility foregoes the right to issue any additional bonds to finance generating plants. It could continue to finance its transmission and distribution lines, and certain pollution control equipment, in the tax-exempt market. The Clinton administration supports a version of the Gorton bill.

Meanwhile, IOU’s are backing a bill by Senator Murkowski (R.-Alaska) that would let munis that expand keep existing tax-exempt debt, but only on two conditions. They would have to forego any future tax-exempt borrowing to finance generating plants. They would also have to repay their outstanding debt at the earliest redemption date allowed under the bonds. For bonds issued since November 1997, redemption would have to occur within 10 years at the latest.

Murkowski chairs the Senate Energy Committee. However, neither senator is on the tax-writing committee where the issue will ultimately be decided.

Keith Martin