- Report Published -
|Local Taxation of Public Service Corporation Property|
|Joint Legislative Audit and Review Commission|
|SJR 309 (Regular Session, 1993)|
|Public service corporations, as defined in the Code of Virginia, include gas, heat, power, pipeline, electric light, water supply, telephone and telegraph, railroad, and certificated motor vehicle carder companies. The Constitution of Virginia reserves real and personal property, including all PSC property except rolling stock, for local taxation only. Accordingly, local governments levy property taxes on PSC property located within their jurisdictions and collect the resulting revenues.|
Senate Joint Resolution 309, passed by the 1993 Session of the Virginia General Assembly, directed the Joint Legislative Audit and Review Commission (JLARC) to study the taxation of PSC property in Virginia. The resolution instructed JLARC to examine: (1) the range of local property tax rates on PSCs across localities, (2) the effect of local property tax rates on PSC utility rates, (3) the relationship between local property tax rates and the value of PSC property, (4) alternative methods of PSC taxation, and (5) the effects of modifying the methods of taxing PSCs and distributing those revenues.
This report reviews the current policy of taxing PSC property, specifically addressing the five issues identified in the study resolution. The report examines the processes by which PSC facilities are sited and rates are set, discussing in particular the impact of local property tax rates on these processes. The report also analyzes the impact of two alternative PSC property tax allocation methods on Virginia's localities. From these analyses, JLARC staff have concluded that a change to the current process of taxing PSC property is not warranted at this time.
Site-Based Taxation of PSC Property In Virginia, PSC property is assessed by the State but taxed locally. Two State agencies are responsible for annually assessing PSC property. The Department of Taxation (TAX) appraises the property of railroads and interstate pipeline transmission companies. The State Corporation Commission (SCC) appraises all other PSCs' property.
To appraise PSC property, the SCC and TAX utilize the inventory and summation method, which values specific categories of a PSCs' property - such as buildings, land and improvements, overhead lines, and meters - within each locality. These valuations are then summed to form the tax base of the PSC within a particular tax jurisdiction. Consequently, the taxable values of PSC property are determined on a 100 percent "situs" basis.
To some, the current site-based policy benefits particular localities at the expense of others. Specifically, concern has centered on some rural localities that generate a substantial portion of their total local revenue through PSC property tax revenues. Since a significant amount of PSC operating revenue is derived from services rendered outside the jurisdiction where the property is located, citizens of localities with large populations likely provide a significant proportion of the revenue used to pay the property tax levies in other localities. The issue then can be articulated as one of highly populated localities "subsidizing" a perceived lower tax burden for residents of localities with a significant presence of PSC property. Concerns have also been raised that PSCs specifically locate their major facilities in low tax localities in order to increase their profits. JLARC staff found these concerns to be largely unwarranted.
Local Tax Rates Have Limited Influence on Siting of PSC Facilities
A review of the regulatory processes PSCs must follow revealed that local governments and their tax rates have relatively little influence on where PSCs locate their facilities. Other factors - such as the presence of water, the need to locate in either a sparsely or heavily populated area (depending on the type of facility), the cost and availability of land, and the willingness of local citizens to have a facility in their area -- typically outweigh a utility's interest in siting a plant in a jurisdiction with low property tax rates. Furthermore, the rate-setting process allows PSCs to recover 100 percent of federal, State, and local taxes imposed on them, and therefore does not directly impact the level of profit authorized for each PSC. As such, PSC property is located in localities with relatively high tax rates as well as localities with relatively low rates. The taxes paid, however, do directly impact the rates charged to customers. Thus, it is likely that utilities situated in high-tax localities are allowed to charge their customers higher rates than if the utilities were located in low-tax localities.
Presence of PSC Property Does Not Have Major Impact on Local Tax Effort
JLARC staff examined in detail the taxation practices of localities with a significant reliance on PSC revenues. The results indicate that while these localities enjoy an economic advantage, there is generally not a pattern of low tax effort significantly different from the taxation practices of similar localities. In other words, factors other than reliance on PSC property tax revenues appear to explain why some localities have lower property tax rates than other localities. Further, localities with a heavy reliance on PSC property tax revenues are not alone in benefiting from a unique revenue source. Other localities in Virginia also benefit from similar locality-unique resources, such as historic sites, coal, and the seashore. The results of this analysis, therefore, indicate that localities with a heavy reliance on PSC property tax revenues are not maintaining inappropriately low tax rates.
Usage-Based Proposals Have a Substantial Negative Fiscal Impact on Bath, Louisa, and Surry Counties and a Marginal Effect on Most Other Localities
A survey of other states' methods of taxing PSC property revealed that in most states, as in Virginia, PSC property tax revenue is distributed based on the location of PSC property. A few states, however, do distribute PSC property tax revenue based on measures or proxies of usage of utility services.
To illustrate the impact in Virginia of usage-based distribution of PSC property tax revenues, JLARC staff constructed two alternative methods of taxing PSC property. These approaches "collect" local PSC property tax revenues into a special fund and distribute those revenues across localities based on population. Population is used as a proxy for usage of PSC services. Analysis indicates that these usage-based alternatives would have a substantial negative fiscal impact on Bath, Louisa, and Surry Counties. In contrast, most local governments would experience marginal gains in their local revenue.
As a result of the changes in revenue received by each locality, State aid formulas that take into consideration local ability to pay would also be affected. JLARC staff estimated the impact of the alternative methods on the largest State aid program -funding for the educational Standards of Quality. In general, Louisa and Surry Counties would receive significant increases in State aid for primary and secondary education, while most other localities would receive marginal decreases in educational aid. Other State aid programs, such as for cooperative health departments, would also be affected by the alternative distribution methods.
Aside from the loss or gain of local PSC property tax revenue and State aid, the usage-based methods would have a number of unintended consequences, such as:
• reducing local funding for education provided by some localities,
• potentially jeopardizing the ability of some localities to service their debt,
• increasing utility rates for some PSC customers, and
• making it more difficult to site a PSC facility in a locality, since there would be little revenue incentive to do so.
The Current Policy Should Not Be Changed
The property tax is local governments' primary source of revenue and is constitutionally guaranteed to local governments. As such, it is likely that implementation of the alternative approaches would require a constitutional amendment. Such a change to one of the basic tenets of Virginia tax policy does not appear appropriate, given the negative effect it would have on a few localities and the marginal positive effect it would have on most localities. This review, therefore, has led to the conclusion that a change to Virginia's method of taxing PSC property is not warranted at this time.
Recommendation. The current policy of local taxation of public service corporation property should not be changed at this time.