Utilities Pay Up

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  • Here’s why the utilities industry pays the lowest federal tax rate of any business sector.
  • We can afford climate action. The problem is policies that prioritize corporate profits over ordinary families.

This post is an excerpt from a new report by the Institute for Policy Studies. Read it here.

The power sector is responsible for a third of U.S. greenhouse gas emissions, making it the country’s single largest contributor to climate pollution. In 2015, the Environmental Protection Agency released a Clean Power Plan (CPP) aimed at curbing these emissions, with specific state-by-state goals. Power companies and industry associations promptly went on the attack. Opponents filed lawsuits to block the plan and in February 2016 the U.S. Supreme Court issued an injunction halting implementation until a lower court rules on the case.

Utility industry opponents of the CPP say they’re looking out for the public interest. They claim the EPA’s rules will be expensive for ratepayers and detrimental to the overall economy. And yet if these firms were truly interested in what’s best for ratepayers, they would be investing much more in energy efficiency, the cheapest and fastest route to reducing carbon emissions.

Utilities are required by law to invest in “demand-side” energy efficiency at the consumer end, but the patchwork of state and federal programs have not gone nearly far enough to mitigate climate change and move the country towards a clean energy future. Most of these efforts also require home and building owners to invest significant up-front capital and so low-income households often cannot participate. And since such programs potentially reduce utilities’ profits by reducing energy demand, the firms have had little incentive to do more.

At the same time, the utilities sector has been undercutting the potential for strong public investment in job-creating, climate change-reducing efficiency programs. Our nation’s utilities companies have become expert tax dodgers at the federal and state levels. Despite strong profit levels and their status as regulated monopolies with fixed rates of return, these firms have used loopholes to contribute next to nothing to public coffers.

Because utilities are regulated, they have the good fortune of having their corporate taxes built in to the rates set by regulators. Thus, utilities collect taxes at the full rate from customers, but then are allowed to use loopholes to delay paying those taxes. In effect, this means customers are paying twice — once as ratepayers through the taxes in their monthly utilities bills and a second time as taxpayers when they have to make up for public service funding gaps because utilities are not paying their fair share of taxes.

While the Clean Power Plan remains tied up in the courts, climate threats compel us to find ways to reduce carbon emissions quickly. One strategy policymakers should consider is denying utilities costly and ineffective tax breaks, with revenue invested in demand-side energy efficiency programs that create good jobs and reduce energy bills for low-income families.

In a new report, the Institute for Policy Studies calculates how much additional revenue would be available for investment in energy efficiency if utilities paid their fair share of taxes.

Utilities Are Even Better at Tax-Dodging than Multinationals

—The utilities industry pays the lowest effective federal tax rate of any business sector. Of the 40 U.S. publicly held utilities companies that were profitable in 2015, 23 paid no federal income taxes and 16 paid no state taxes.

—The most extreme example of utilities tax-dodging in 2015 was Southern Company, a fierce Clean Power Plan opponent, which reaped $210 million in federal and state tax refunds, despite $3.6 billion in pre-tax income.

—The industry’s low IRS bills are largely due to depreciation tax breaks. According to Citizens for Tax Justice, the 23 profitable utilities that paid no federal taxes in 2015 reported $11.5 billion in benefits from special tax rules that allow corporations like utilities to write off the cost of their investments far faster than they wear out.

Revenue Potential from Fair Taxation of Utilities Companies

—It would be reasonable to expect utilities to pay at least as high a tax rate as retailers, which are similarly tethered to U.S. communities. If the 40 profitable utilities had paid the average rate retailers pay, they would’ve paid more than $11.7 billion in additional federal taxes. At the state level, if these firms had paid the statutory rate, they would’ve paid an estimated additional $2.3 billion—for a total of $14.1 billion in additional federal and state revenue.

Energy Efficiency Costs that Could be Covered by Fairly Taxing Utilities

—The $14.1 billion in extra revenue that could have been generated through fair taxation is nearly double the amount state governments and utilities spent on energy efficiency in 2015. It would be enough to create more than 88,000 energy efficiency jobs or weatherize homes for up to 3 million low-income families.

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We can afford a clean environment and sustainable jobs. The problem is misguided policies that prioritize corporate profits over the interests of ordinary families, especially low-income people of color.

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies. She serves on the Investment Subcommittee of the U.S. State Department’s Advisory Committee on International Economic Policy. Scott Klinger is a former IPS associate fellow and the current GASB No.77 Activation Coordinator at Good Jobs First. Janet Redman directs the Climate Policy Program at the Institute for Policy Studies.