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A new report by Institute for Policy Studies (IPS) finds that the U.S. government is failing to meet clean energy goals due in part to opposition from public utility companies, which account for a third of U.S. greenhouse gas emissions. What’s more, federal and state tax policies that create inefficient business incentives lie at the heart of the problem.
The combined pretax income of 40 profitable public utility companies was $42.95 billion in 2015; however, these companies paid only $1.6 billion in federal and state corporate income taxes. From 2008 to 2012, these 40 utility companies had an effective tax rate of 2.9 percent, the lowest of any industry. The statutory federal tax rate on corporations is 35 percent. If utility companies paid the same effective federal rate as the retail sector, 29.6 percent, and paid the full state rates, the federal and state governments would have a total of $14.06 billion in additional revenue.
How do utility companies get away with paying a single-digit tax rate? Among other tax breaks, the most lucrative loophole utility companies use is accelerated depreciation. This tax break allows companies to deduct the cost of certain capital investments (such as on equipment) from their taxes at a rate faster than those investments depreciate in value. To wit, the 23 utilities companies that paid no federal taxes in 2015 received a combined total of $11.5 billion in tax benefits from depreciation. American taxpayers, on the other hand, are effectively taxed twice on their energy consumption: once at the end of the month when they pay their utility bills, and again to pay for the tax breaks utility companies receive annually. The tax policy problems highlighted by utility companies are just a few of the many problems with our corporate tax structure. Immediate and drastic action is needed to reform our corporate tax code to incentivize public utilities and other companies to work in the interests of the American public.
The ultimate goal of IPS and other environmental advocates is to overcome utility companies’ opposition to clean energy practices. Part of the challenge is that utility companies and their surrogates claim they do not have the funds to invest in clean technology, yet they are among the most profitable and undertaxed corporations in the country.
Rather than letting utilities get away with not paying their fair share, lawmakers should end or reform costly and ineffective tax breaks, such as accelerated depreciation, that allow utility and other companies to pay low tax rates. More broadly, utilities, and all corporations, should be required to report the taxes they pay in each state in which they operate in addition to their federal taxes.
Aaron Mendelson, a CTJ intern, contributed to this report.