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Tax Group Says Florida Electric Choice Initiative Would Cause Loss Of State & Local Revenue Of Up To $1.3 Billion Annually

February 22, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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Florida TaxWatch released a report in which the group estimated that the introduction of retail electric choice under a proposed ballot initiative in Florida, "has the potential to cause a loss of state and local revenue ranging from $426 million to $1.368 billion in 2026, the expected first full year of implementation."

"Florida TaxWatch analysis finds that, unless very significant increases in the price of electricity for Floridians result, adoption of the proposed constitutional amendment will have a negative impact on state and local government revenues. These impacts have the potential to be relatively large. Of course, the Legislature and local governments can change the tax structure in an attempt to offset any revenue loss, but that road is fraught with peril," Florida TaxWatch said

Florida TaxWatch estimated the potential loss under a variety of different scenarios and assumptions (such as the going-forward value of franchise fees, generation property valuations, ability to collect taxes on out-of-state suppliers) regarding various categories of taxes

Florida TaxWatch estimated that the estimated loss of revenue, across both state and local taxes, ranges from $426 million to $426 million to $1.368 billion in 2026 (with an $897 million decrease under a "middle" scenario). Using 2018 data, the loss of tax revenue in 2018 had choice been introduced during such time is estimated by Florida TaxWatch to range from $353 million to $1.2 billion.

"The electricity industry is a very important source of revenue for Florida’s state and local governments. Multiple taxes and fees are levied against the sale of electricity and the operations of utilities. Providing electricity to Florida’s citizens and businesses raises $4.4 billion annually in taxes and fees for Florida governments (not including $2.8 billion from the sales of electricity by municipal-owned utilities). Most of the tax and fee revenue is provided by private utilities. Florida’s IOUs pay or collect approximately $3.6 billion annually in franchise fees and public services, property, income, gross receipts, and sales and use taxes," Florida TaxWatch said

"More than one-half of that revenue goes to local governments. This revenue is especially critical for municipalities where the public service tax on electricity is by far the largest municipal non-ad valorem tax source -- its nearly $800 million in annual revenues exceed discretionary sales tax and communications services tax revenue combined," Florida TaxWatch said

"Charter counties collect an additional $260 million in public services taxes. Similarly, the nearly $600 million in electric franchise fees collected by municipalities represents their largest permit and fee revenue source, more than double that of all impact fees combined. Counties collect another $160 million in electricity franchise fees. Schools are also big beneficiaries of utilities taxes. Approximately 40 percent of property taxes statewide go to school districts and the gross receipts tax funds construction, renovation, and maintenance of educational capital facilities," Florida TaxWatch said

Regarding franchise fees, and their value, in a restructured environment, Florida TaxWatch said, "Franchise fees could be restructured, such as being based on the value of energy distributed through a facility, but will franchises be as valuable as they are now? Surely not---while ostensibly payment of fair rent for the use of public rights of way, the true value to utilities is the granting of the right to be the exclusive seller. In a competitive marketplace, that value is lost. Even if franchise fees can be retained in some form, significant revenue losses are a distinct possibly. Moreover, since franchise fees can be included in the base for sales, gross receipts and public service tax levies, any reduction in franchise fees could impact those taxes as well."

"The proposed utility constitutional amendment would likely reduce property tax revenues. If deregulation and the required divestiture of generation property result in more out-of-state generation of electricity, there would likely be corresponding loss in in-state generation property, reducing Florida’s property tax base," Florida TaxWatch said

"A much more significant reduction in Florida’s property tax base could result from the forced divestiture of generating facilities. This would be due in part to the IOUs stranded costs, which is largely the amounts by which the book values of utility generation assets exceed their market values. Sales of IOU property at below book value would reduce the appraised and taxable values of those properties. If the required divestitures were to result in 'fire sale' prices, this will further reduce the selling price and thus the appraised and taxable values of IOU property," Florida TaxWatch said

"The state’s gross receipts law will have to change under deregulation. A significant potential revenue impact arises because the gross receipts tax is levied on the receipts of electricity distribution companies. Currently, since services are bundled under one company, tax is levied on both the charge for distribution and the charge for the electricity. Under the proposed amendment (and current statutory law) the distribution company would only be liable for the tax, while the receipts of the generators and the marketers would not be taxed. This would have to be addressed or a significant portion of the tax base (up to two-thirds) could be compromised," Florida TaxWatch said

Florida TaxWatch's report also addresses estimated impacts on the local public service tax, sales tax (state & local), and corporate income tax (state).

Florida TaxWatch said that its estimate was "complicated" by various factors

For example, "many of the taxes are dependent on the price of electricity and/or the market value of real assets, both of which are difficult to forecast far into the future," the group noted

Furthermore, "there are some technical and legal issues that are unclear at this time – since the proposal does not specify the rules and regulations that will govern the destructured system but instead requires the Legislature to create them by June 1, 2023, the resulting revenue of the applicable tax laws and their application must be based on current law and assumptions of likely amendments thereto. It is likely some revenue sources will have to be restructured or new revenue sources implemented, but the response by future Florida Legislatures and local governments is unknown," Florida TaxWatch said

Regarding the decrease in revenues estimated under the report, Florida TaxWatch said that such decreases arise from a variety of factors, as follows

"There are multiple factors resulting from a deregulated electricity market besides price that can impact revenues. These include the migration of energy generation outside of the state, the loss of property tax values of electricity assets, the need to distribute tax burden among more (and no longer similar) companies, tax and fee bases that might no longer be appropriate, and the revenues and profits of electricity providers. In addition to these factors, there are two issues that will significantly affect public revenues in a destructured system that must be addressed first. One is the stranded costs associated with the change from the current system; the second is the state’s ability to exercise jurisdiction over new providers in the collection of taxes," Florida TaxWatch said

Regarding state’s ability to exercise jurisdiction over new providers in the collection of taxes, Florida TaxWatch said, "The introduction of competition is likely to attract new electricity suppliers, some of which may be located outside Florida. Whether these out-of-state suppliers may be held responsible for paying or collecting Florida taxes depends on whether “nexus” can be established. 'Nexus' refers to the authority of a state to levy taxes on any out-of-state seller, historically based on physical presence (e.g., an out-of-state provider has sufficient physical property, employees or other assets in the state that would justify taxation). 'Physical presence' generally means there is a continuous and regular presence of employees or the presence of an office or other place of business within the taxing state."

"Several taxes ... could be affected by nexus. Nexus issues arise when federal and state laws prohibit either taxing companies that have no physical presence (nexus) in the state or requiring them to collect taxes from purchasers on behalf of the government. This issue has received a lot of attention for many years in relation to the collection of sales and use taxes by remote sellers with no nexus in the state that sell products to residents of the state. Several U.S. Supreme Court decisions have held that companies with no nexus were not required to collect and remit to the state any tax from purchasers. Mail order and phone sales have made this an issue for a very long time, but the explosion of Internet shopping has made this a serious revenue concern for many states, with Florida likely losing out on hundreds of millions of dollars of sales and use taxes annually. These taxes are legally due from the purchasers, but if the seller is not required to collect the tax, it is largely up to the purchaser to voluntarily pay the tax to the state," Florida TaxWatch said

"A recent Supreme Court decision (Wayfair vs. North Dakota) threw out the physical presence requirement; however, the Court cautioned that complying with a state’s tax law could not overburden an out-of-state seller. While this decision may pave the way for Florida to start collecting some of this missing sales and use tax revenue, the Legislature will have to take steps to facilitate such collections and Florida’s resulting taxing scheme would have to pass constitutional muster. As this report discusses the various taxes on electricity, nexus will be a recurring issue. Since IOUs paid or remitted nearly $1.8 billion in these taxes in 2018, even a small percentage loss of these taxes due to nexus issues would constitute a significant negative fiscal impact for state and local governments," Florida TaxWatch said

Florida TaxWatch said in its report that, "Under Florida’s current system, the retail price of electricity for consumers (Residential, Commercial, and Industrial) is below the national average. TaxWatch analysis of data compiled and provided by the U.S. Department of Energy’s Information Administration (EIA) shows that Florida’s residential rates are the lowest of the ten largest states in the country. Furthermore, the analysis shows that for the twenty years between 1997 and 2017, increases in retail electric prices in states with deregulated electricity markets and regulated states were about the same, and that the prices (per kilowatt-hour) for Residential, Commercial, and Industrial customers in regulated electricity markets (like Florida) are lower than the prices for Residential, Commercial, and Industrial customers in deregulated electricity markets."

See the Florida TaxWatch report here

Florida TaxWatch describes itself as, "an independent, nonpartisan, nonprofit taxpayer research institute & government watchdog."

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