The hidden tax in New York’s energy bills
Reducing energy taxes—starting with the Gross Receipts Tax—will pay off in new growth, particularly for the Upstate economy
The connection between tax policy and energy costs is moving to the forefront of the public debate in New York:
- High energy costs in New York State are
a key impediment to the state’s economic
growth.
- And those high costs, in turn, are heavily
impacted by the state and local taxes hidden
away in each customer’s utility bill.
- Energy costs are a particularly important
problem for the Upstate economy—in
part because Upstate is heavily dependent
upon manufacturing.
- Key components of the energy tax burden
include the state’s gross receipts
tax; sales taxes; local property taxes; and
local gross receipts taxes.
- Repeal of the state gross receipts tax is the fastest, most direct single step New York can take to reduce the high cost of energy.
Energy costs in New York State are just plain too high.
Residential ratepayers know it. Leaders of nonprofit organizations, from hospitals to universities to libraries, know it, too.
Most importantly—and, potentially, most damaging to New Yorkers—business owners and managers are painfully aware of it.
Industrial companies in New York paid utilities an average 6.5 cents per kilowatt-hour of electricity in 1999. That was 41 percent higher than the national average.
Utility rates for commercial customers are even higher, and even further out of line. The average rate in New York was 11.4 cents, more than 50 percent above average.
Then there’s natural gas. Again, New Yorkers pay far more for this key commodity than do businesses and individuals in other states—some 44 percent more than the national average.
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There’s a common element in the high prices New Yorkers pay for both electricity and natural gas: the gross receipts tax imposed by Albany.
Overall, businesses and individuals pay some $3.4 billion in state and local taxes through their electric and natural gas bills. The gross receipts tax, or GRT, is the biggest single element of that tax bill, aside from the local property taxes utilities pay to hundreds of school districts and municipalities. Thus, as state leaders consider ways to further improve New York’s business climate, repealing the GRT is the fastest, most direct action Governor Pataki and the Legislature can take to reduce our high energy costs.
Reducing energy taxes, starting with repeal of the GRT, will benefit all New Yorkers. Every utility customer pays the tax. Homeowners and renters who pay their own electric and gas bills pay the GRT directly; every tenant whose rent includes utilities pays the cost indirectly. The tax is one reason that residential electrical costs are higher in New York than elsewhere. At 13.7 cents per kilowatt-hour in 1999, the cost here was nearly two-thirds higher than the national average, according to the Edison Electric Institute, an industry association.
To be sure, New York’s energy utilities are reducing rates. The average cost per kilowatt-hour, for all customers, has declined from around 12 cents several years ago to roughly 11 cents, according to the Public Service Commission. The PSC projects a slight further decline, to 10.7 cents, by 2002.
As shown in Table 1, however, New York has a long way to go to reach the level of most competing states. In fact, we need significant further reductions just to get back to where this state’s rates were a decade or so ago.
In 1988, the average commercial rate in New York was 9.26 cents per kilowatt-hour, according to the New York State Energy Research and Development Authority. By 1997, that figure had risen by nearly a third, to 12.2 cents. Residential and industrial rates also rose. (NYSERDA’s figures for costs per kilowatt-hour differ slightly from EEI’s because of different measurement methods.)
Commercial and industrial consumers of electricity used 68 percent of the state’s total electrical load in 1997, according to NYSERDA. Residential use accounted for 30 percent of the total, and transportation 2 percent.
| TABLE 1 | |||
Average
Utility Rates For Electricity, 1999 |
|||
| State | Commercial | Industrial | Residential |
|---|---|---|---|
| Hawaii New York New Hampshire Vermont Maine |
11.87 11.42 11.24 11.24 10.59 |
8.89 6.52 9.36 8.21 6.8 |
13.4 13.71 13.53 12.77 13.2 |
| Connecticut New Jersey California Rhode Island Massachusetts |
9.9 9.79 9.66 9.17 8.72 |
7.71 7.65 6.15 7.89 7.5 |
11.79 11.4 10.93 10.81 10.27 |
| Arizona Michigan Iowa Ohio Illinois |
7.94 7.9 7.72 7.7 7.62 |
6.27 5.11 3.8 4.62 5.21 |
9.25 8.76 8.49 8.87 9.13 |
| New Mexico Delaware Maryland South Dakota Pennsylvania |
7.52 6.84 6.84 6.73 6.68 |
4.4 4.42 4.13 4.71 4.52 |
8.21 9.21 8.43 7.82 8.02 |
| Nevada Georgia Minnesota Alabama Texas |
6.67 6.62 6.56 6.48 6.44 |
5.04 4.13 4.51 3.91 4.02 |
7.14 7.42 7.78 7.16 7.72 |
| Louisiana Florida North Dakota Mississippi South Carolina |
6.43 6.4 6.32 6.13 6.12 |
4.03 4.65 4.5 4.25 3.82 |
7.01 7.79 6.27 7.12 7.51 |
| Montana North Carolina Missouri Wisconsin Kansas |
6.01 5.98 5.91 5.9 5.89 |
4.19 4.51 4.58 3.88 4.47 |
6.64 7.58 7.17 7.33 7.28 |
| Washington Arkansas West Virginia Indiana Colorado |
5.86 5.67 5.53 5.52 5.44 |
4.21 4.43 3.8 3.85 4.28 |
5.8 7.82 6.23 6.59 7.53 |
| Oklahoma Utah Oregon Tennessee Wyoming Virginia Kentucky Idaho |
5.37 5.12 5.05 5.03 4.97 4.94 4.69 4.21 |
3.55 3.16 3.56 3.64 3.21 3.68 3.33 2.86 |
6.33 6.22 6.01 4.97 6.1 5.82 4.86 5.33 |
| U.S. avg. N.Y.S. above avg. |
7.41 54% |
4.63 41% |
8.48 62% |
Source: Edison Electric Institute; Alaska and Nebraska not available. |
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The economic impact
The high cost of energy is a key reason New York State’s economy has lagged behind the national pace of growth for more than a decade. Now, the downstate region is creating new jobs at or above the U.S. average, but most of Upstate continues to lag. One likely reason: the more important role energy plays in the Upstate economy.
In recent years in particular, the cost of state energy taxes has hit Upstate businesses and individuals much harder than those in the metropolitan region. That’s clear from calculations of the energy tax burden relative to the economy both Upstate and Downstate, made by the Governor’s Office of Economic Affairs.
In the mid-1970s, the Downstate energy tax burden amounted to $2.66 per $1,000 of the region’s gross product, those calculations show. The comparable figure Upstate was $2.94, about 10 percent higher. By 1983, the year state leaders created the petroleum business tax, the energy tax burden Upstate was more than 50 percent above that of Downstate. The tax burden had risen in both areas—but much more so in Upstate. And in 1996, the cost of energy taxes in comparison to the Upstate economy—at nearly $6 per $1,000 of economic activity—was more than double what it had been in 1975. By then, the Upstate energy tax drain on economic output was more than double Downstate’s.
Why has the Upstate cost spiked up, while the Downstate cost has risen moderately?
The mix of industries in different regions of the state is one factor. While manufacturing companies still provide more than 400,000 jobs Downstate, the sector’s share of overall employment is much greater Upstate. North and west of Westchester and Rockland counties, industrial jobs make up 19.3 percent of the private-sector total—double the proportion of Downstate.
Another part of the answer is demographic. Upstate, passenger transportation is overwhelmingly via automobile, while dependence on mass transit makes New York City more energy-efficient. The city also has a much higher proportion of multi-unit residential buildings, which use relatively less energy than single- or two-family homes.
Upstate’s heavier dependence on energy inevitably means that any increase in energy taxes hits that region proportionately more than Downstate. And over the past two decades, as detailed on Page 5, Albany imposed a series of costly tax increases on energy.
All of that explains why, as Governor Pataki has pointed out, the GRT is especially costly to Upstate New York. “The high cost of energy is a drain on the Upstate economy,” the Governor said in his 2000 State of the State Address. “When you look at all the taxes imposed that hurt jobs, those on energy affect upstate the most.”
Energy consumers in Upstate pay 42 percent of the tax, even though the region accounts for only 27 percent of statewide economic activity, according to the Governor’s Chief Economist, Stephen Kagann.
This is not to say, of course, that the GRT doesn’t hurt the Downstate region as well. Simply because a majority of the state’s population and economic activity is in the New York City metropolitan area, the majority of the tax—more than 57 percent—is paid there. As of 1997, Downstate businesses, residents and other ratepayers sent $468 million in GRT payments to the state treasury, while the Upstate figure was $343 million, according to Kagann.
That the GRT hurts all New Yorkers is reflected in the widespread praise given to Senate Majority Leader Joseph L. Bruno, when he first proposed repealing the GRT this past December, and to Governor Pataki when he included the proposal in his Executive Budget.
“Plowing that money back into business would help create more jobs,” the New York Daily News editorialized. One result, the newspaper pointed out, would be “more income tax revenues for the state.”
The Buffalo News called repeal of the GRT “a proposal that should be met with cheers, especially in Western New York. This tax has helped to depress the state and regional economy for too long.”
A bit of history
Too long, indeed. New York State’s gross receipts tax—actually two different taxes, Sections 186 and 186-a of Article 9 of the Tax Law—dates back decades.
As was true with many parts of the state tax code, the GRT was increased periodically with little or no regard for what impact the higher cost might have on businesses and individuals in New York.
In 1990 and 1991, as New York suffered through a lengthy recession that depressed state revenues, then-Governor Cuomo and the Legislature imposed major tax increases on utilities and their customers as part of wide-ranging initiatives to pay for higher spending. (Most of the proceeds from the GRT are deposited into the state’s General Fund.) A 15 percent surcharge was applied to the GRT, along with other business taxes, in 1990. And in 1991, the rate of the Section 186-a tax was increased from 3 to 3.5 percent. Along with the Section 186 tax, imposed at a rate of .75 percent, the 1991 increase brought the total to 4.25 percent.
Other tax increases in the 1980s and 1990s also hit New Yorkers’ utility bills.
In 1983, Governor Cuomo and the Legislature created the petroleum business tax (PBT) on all businesses engaged in producing, refining or importing petroleum products for sale in the state. It consolidated and increased previously existing taxes on various types of petroleum products. Because petroleum is a significant source of fuel for electrical generation in New York, utility customers saw the new tax factored into their bills. The petroleum business tax imposes a total cost of roughly $1 billion statewide now, with part of that paid through utility bills.
(It wasn’t only state government adding taxes to our utility costs in recent decades. Numerous local governments around the state now impose their own, local gross receipts taxes on utility bills, adding tens of millions of dollars to the cost of energy taxes on businesses and individuals.)
Utility customers also directly support the operating budgets of the state Department of Public Service, which regulates the industry; the Energy Research and Development Authority; and several other agencies. These costs add more than $70 million a year to energy and telecommunications bills.
All told, state-imposed taxes on utility ratepayers more than doubled from 1982, the year before the PBT was imposed, through 1994. That year, utility tax payments to Albany reached an all-time high of nearly $1.4 billion, according to the Governor’s Office of Economic Affairs. In the years since, that burden has declined, as the chart on page 4 shows. The progress started in 1994, with legislation to phase out the 15 percent corporate tax surcharge over four years.
According to the Energy Association of New York State, the GRT cost of $800 million represented about 62 percent of total state taxes on utility bills as of 1997. That year, at the initiative of Senator Bruno, Governor Pataki and the Legislature enacted a phased, 1-percent reduction in the GRT. The change took full effect January 1 of this year, providing total taxpayer savings estimated at $400 million for energy and telecommunications users combined.
Progress—but not enough
Still, the cost of energy in the Empire State is too high. And our heavy energy taxes are still a major part of the problem.
Even after the tax reductions of the past five years, combined state and local taxes and fees make up an estimated 17 cents of every retail customer dollar paid to the state’s utilities. That tax burden is roughly twice the national average for state and local taxes on utility bills.
New Yorkers’ utility bills remain the single biggest source of hidden taxes imposed by Albany. And the GRT still stands as the major part of the state’s overall tax burden on utilities. Repealing it, as quickly as possible, is the single most direct step state government can take to reduce the cost of energy for New York businesses and individuals.
Most businesses, in New York and elsewhere, pay taxes on their net income, or profits. But energy and telecommunications utilities in New York pay tax based on their gross receipts (hence the name of the tax)—in other words, their total sales.
That means utility customers literally pay taxes on taxes. For instance, Consolidated Edison, Niagara Mohawk Power Corp. and other utilities pay hundreds of millions of dollars in local property taxes. Those local taxes are a cost of doing business which must be reflected in ratepayer bills. Because the total receipts from those bills are subject to the GRT, customers pay the 3.25 percent GRT on every dollar of property tax paid by their utility. The same goes for other taxes the utility pays (that is, other taxes their customers pay through their utility bills).
The GRT was created and collected for decades during an era when utility companies were monopolies. Now, the industry is restructuring—with the blessing of the state Public Service Commission—into a competitive industry. Traditional utility companies will be competing with non-utilities in marketing electrical, natural gas and energy-related services to customers. That means the very structure of the GRT, and not only its cost, is a problem.
Proposals for reform
In December, Senate Majority Leader Bruno announced that he and the Senate Republican conference will make repealing the GRT a top priority in this year’s legislative session. Senator Bruno has indicated his legislation will call for phasing out the tax over three years.
Governor Pataki’s 2000 Executive Budget also calls for a phaseout, ending in 2005. Both his and the Senate proposals would have utility companies pay tax on their profits, similar to other corporations in the state. The Governor’s proposal recognizes the importance of manufacturing companies to New York, and Upstate in particular, by making the entire GRT savings for manufacturers retroactive to January 1 of this year. That step would provide immediate savings, totaling some $38 million a year, to the employers that anchor the Upstate economy.
Special recognition for industrial utility customers makes sense for additional reasons. In fact, like those in virtually every state, New York’s electrical utilities typically charge manufacturers less than other customers. There are two main reasons.
First, industrial customers buy huge amounts of power—so economies of scale make it less expensive per unit to deliver the electricity to them.
Second, manufacturers have much greater ability to acquire electrical power from non-utility sources. They have always had the option of building their own power plants; in the emerging marketplace, they are the customers most sought by the utilities’ new competitors. And the large purchases that manufacturers represent means that other customers suffer when they leave the utility grid. When that happens, any fixed costs—and all utilities have huge fixed costs, in their distribution networks and elsewhere—are borne by a smaller customer base.
In addition to Governor Pataki and the Senate Majority, the Assembly Republican conference has proposed eliminating the GRT, as have some members of the Assembly Majority. Speaker Silver, Senator Bruno and the Governor all agreed in 1997 to reduce the GRT—showing the broad, bipartisan concern about this tax.
New York State’s leaders have done much in recent years to reverse the tide of government-imposed costs hidden in our energy bills. That progress is part of the reason our economy is growing again. Doing more to reduce energy costs will bring still more new growth to the Empire State.
February 2000