State and Local Electric Utility Taxes: Evolutionary Taxation of a Deregulating Monopoly
Howe, Edward T., Reeb, Donald J., The American Journal of Economics and Sociology
Competitive forces emerging nationally across the electric utility sector - as a result of actual and anticipated deregulatory activity - have forced the industry, various governmental units, and the general public to consider a number of important issues. One major concern is the extent to which state and local taxes imposed on investor-owned firms, the major firms in the industry, will affect their competitive position relative to independent electric power producers, rural electric cooperatives, and publicly owned electricity providers. A second concern is the possible revenue loss to state and local governments, especially school districts (National Conference of State Legislatures, 1996:19). State and local electric utility taxes have accounted for about 2.5 percent of total state and local taxes collected nationally in each of the last several years, with notably higher percentages evident in many of the larger states. Thus, any significant loss of tax revenue could have important financial consequences for several states and localities.
All applicable federal, state, and local taxes and fees are viewed as part of allowable operating expenses under state regulation. These allowable operating expenses are included in the electric rates charged to various industrial, commercial, and residential customers. Since electric utility bills generally do not indicate these tax obligations, the general public is largely unaware of the tax burden. These taxes mainly help finance state and local general fund expenditures.
This article briefly surveys the historical evolution of the electric utility industry and the concomitant imposition of taxes by state governments (excluding Nebraska, which is mainly served by public power districts) and the District of Columbia on the electric operations of investor-owned firms. State and local property taxation (the largest and only local tax considered) has existed since the formation of the industry, but the array of state-specialized and general business taxes enacted over time under state regulation has not been generally appreciated. Given this background, the most recent state and local tax changes are noted. These tax changes are intended to help make investor-owned firms become more competitive as the industry evolves toward a more deregulatory environment. Accordingly, the following taxes are excluded from the historical analysis: federal corporate income taxes; federal and state social security taxes; federal and state unemployment insurance taxes; state regulatory fees; and certain local taxes and fees (mainly any local supplements to state levies).
Historical Development of State and Local Taxation
The commercial development of the electric utility industry began in 1882 with the nearly simultaneous operations of a generating station by Thomas A. Edison in New York City and a hydroelectric facility in Appleton, Wisconsin. Construction of commercial electric facilities spread rapidly, mainly in large urban areas, as the perceived advantages of electricity eclipsed lighting with gas. Local, but not necessarily exclusive, governmental franchises in a particular area allowed emerging investor-owned or municipal utilities to use the streets with local control over service, operating expenses, and rates. As hundreds of companies emerged, municipal and business corruption in franchise awards and the need to control industry growth resulted in state regulation by the early twentieth century. Massachusetts (1887), Georgia (1907), New York (1907), and Wisconsin (1907) pioneered the state regulatory movement (Edison Electric Institute, 1992: 14-15). Continued growth and technical advances allowed the industry to achieve economies of scale and, over later decades, eventual consolidation of the fragmented industry. The Federal Power Commission, which became the Federal Energy Regulatory Commission in 1977, began regulating interstate wholesale electricity sales in 1935. …