You’re paying taxes, so why aren’t energy companies?
By David Cay Johnston
The views expressed are his own.
In a competitive market, economists argue endlessly about who bears the burden of corporate income tax. Is it owners, who get a smaller net return? Or workers, who make less? Or suppliers, who get lower prices? Or customers, who pay higher prices?
In one sector of the U.S. economy, however, the answer is clear-cut. Corporate-owned utilities (mostly electric and natural gas) and pipeline partnerships, all of them legal monopolies, pass their income tax burdens on to customers.
Now a study, released last week, provides powerful new evidence that these two industries convert corporate income taxes from a burden to a benefit.
The study was prepared by Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Both are foundation-backed nonprofits that say the tax system favors the rich and corporations over most Americans.
Utilities charge prices, known as rates, set by political appointees who regulate the industry. Embedded in those rates are generous sums to cover corporate income and all other taxes. Pacific Gas & Electric, the northern California utility, was awarded $431 million to pay 2007 corporate income taxes, a final decision by the California Public Utilities Commission shows. Similar amounts were approved, or are in the process of final approval, for each subsequent year.
But in the three years from 2008 through 2010, PG&E’s corporate parent did not pay roughly $1.7 billion in federal income taxes on $4.8 billion of profits, the expected sum based on the federal 35 percent corporate income tax rate. Instead, PG&E collected more than $1 billion in refunds, thanks in good part to a 2008 increase in accelerated depreciation, which lets companies defer taxes into the future, the study showed.
Brian Hertzog, PG&E’s Washington director of corporate relations, said that the rules that let the company defer paying taxes into the future mean it can use that money immediately to help pay for new plant and equipment. He said this costs much less than borrowing in the markets and thus benefits customers.
Hertzog has a point. When customers pay their monthly bills they loan money to PG&E at zero interest, which is a lot cheaper than borrowing in the markets. But that is neither capitalism nor market economics.
The market chooses to invest and sets a price for credit. The regulatory and tax systems force captive customers to make interest-free loans to utilities, denying the customers the use of their money for other purposes, including paying down their own debt, which may be at much higher interest rates than the savings from using that money to finance utility projects.
Forcing captive customers to extend interest-free credit to utilities strikes me as a subtle form of legalized theft.
PG&E’s roughly $2.7 billion swing from burden to benefit is not unique. The 26 large utilities studied paid an average rate of just 3.7 percent over the three years, a 10th of the 35 percent statutory U.S. tax rate. Half of the 26 corporate-owned utilities analyzed got money back from the government, thanks to deferrals and tax benefits from tax shelters in non-utility operations. Just four paid corporate income tax of more than 10 percent.
The trophy for turning the burden of taxes into a benefit goes not to General Electric, whose skillful use of tax law and lobbying for tax breaks is famous, but to Pepco Holdings, which owns the monopoly electric utility in and around the U.S. capital. Pepco’s three-year tax rate? Minus 57.6 percent. GE’s was only minus 45.3 percent. Pepco says it pays all of its taxes as required by law. For sure that’s true.
Here’s the irony. Pepco’s biggest customer, by far, is the federal government. So, federal taxpayers and other customers paid electric rates to Pepco that assumed about $309 million in corporate tax payments would flow to the Treasury, only to see $508 million of their taxes flow to Pepco as refunds. Ouch.
The roughly $817 million tax benefit Pepco enjoyed — from taxes it collected but did not turn over combined with refunds — almost equaled the $882 million in profits Pepco’s corporate parent reported during the same period.
This is an old story at Pepco Holdings. In the six years preceding the study, 2002 through 2007, Pepco Holdings reported pretax profits of $949.2 million. Its cash paid for taxes was negative $116.4 million, my analysis shows. Cash paid for income taxes is a simpler measure than the painstakingly detailed examination in the Citizens for Tax Justice study. Cash paid also tends to understate reality.
Pipelines have an even juicier deal. Under the 1986 Tax Reform Act they are exempt from paying corporate income taxes if organized as partnerships. However, under a rule from the era of President George W. Bush, federal regulators let them collect the corporate income tax anyway. That IS legalized theft.
How do utilities and pipelines convert the burden of corporate income taxes into a benefit, whether temporary or permanent? Easy as 1, 2, 3.
- Political appointees on regulatory boards, many of whom come from and return to the utility and pipeline industries, require customers to pay the utilities’ corporate income taxes measured as if the utilities were stand-alone companies filing their own tax returns.
- Most utilities do not stand alone, but are subsidiaries of holding companies.
- Each holding company files a tax return that consolidates its utility and non-utility businesses, allowing it to capture some of the utility taxes as additional assets or as profits.
The result is little or none of the tax that customers are forced to pay actually gets to government.
Here are two questions to ask about this costly state of affairs: Why have you not heard about this from anti-tax politicians and organizations that insist they are trying to ease your burdens? Who will put an end to this forced transfer of wealth from utility and pipeline customers to the companies’ shareholders?