Property taxes and the dinner table.

• Author: Vance, Dawn
• Position: Case study of electric utility regulation on property taxes

THE ISSUE

Many states that have moved forward with customer choice legislation have realized, too late, the damaging effect such action can have on property tax revenues that flow into the coffers of the schools, cities and counties. Utilities have traditionally been good tax collectors for local jurisdictions as they own extensive property, and the tax has been hidden in utility rates.

Competition is expected to bring new suppliers into the arena who may not own facilities and would, therefore, not pay property tax. Owners of existing facilities would continue to pay taxes with presumably less revenue if the new suppliers are successful at poaching customers. Furthermore, there are no guarantees that incumbent utilities would be granted the right to collect property tax costs in their delivery rates, which could create an unfair advantage to outside competitors. This property tax dilemma was addressed in Iowa through passage of legislation in 1998, in advance of consideration of any customer choice legislation. Similar dilemmas exist in many other states according to studies prepared by Deloite and Touche and Arthur Anderson. The National Conference of State Legislatures has also convened efforts to educate themselves about the tax pitfalls of electric industry restructuring.

This article will explain Iowa's existing taxation approach, and the replacement system that addresses general revenue needs and utility and cooperative specific requirements in a more competitive operating environment.

THE CENTRAL ASSESSMENT SYSTEM

As with many property tax systems, Iowa's general approach is to value specific property in some fashion, thus enabling local taxing jurisdictions to apply tax levies against the valuations. Once the property values are known, simple multiplication is all that is required to let local jurisdictions know how much they can budget for, or if the levy is set appropriately. This system seems simple on the surface, but the process of valuing property in Iowa is complex; making changes to the system complex as well.

Distribution cooperatives' property valuation historically was based on 25% of original cost of operating plant for rural facilities. Urban distribution facilities were assessed at 100% of original cost. Generation and transmission cooperatives' facilities were assessed at 100% of book value. We learned that, on average, Iowa co-ops have paid about the same amount of property tax per kWh as investor-owned utilities. This indicates that what may have appeared to be a 75% discount, was really more of a rural equalizer.

Municipal utilities only paid property taxes on jointly owned facilities and facilities outside of the municipal's boundary. That assessment was based on book value, like the G&Ts. No taxes are paid on property within corporate limits. Some municipal utilities make transfer payments to the local government which is an indirect form of taxation handled locally.

The Iowa Department of Revenue and Finance (IDRF) has been valuing IOUs using a three-part formula, weighted so only 10% of the final valuation was related to actual property values. The other 90% was based on a combination of income and an analysis of the stock and debt of the utility. This valuation method was the driving force behind changing the tax system. If the IOU financial condition were to degrade and/or income were to go down, the company's assessed value would decline, resulting in less tax revenues. Both scenarios are possible as the electric market is restructured. Additionally, these IOU calculated...