Bill Reduces Long-Term Revenue to Schools?
Senate Bill 123 takes a little study. The proposed statutory change is simple enough: the bill would replace the 2% tax on gross receipts paid by rural electric cooperatives with a tax based on kilowatt-hours of power sold. The new rates would be 0.16 cents per kilowatt-hour of retail power and 0.08 cents per kilotwatt-hour of wholesale power. The retail rate works out to about 2% of the average consumer per-kilowatt-hour price of electricity in South Dakota.
This tax transfers money to the schools, so how do they fare? Supposedly SD 123 does not represent an immediate hit in revenue for the schools. However, the per-kilowatt tax reduces the rate at which the tax burden increases on rural electric cooperatives. Under the gross receipts tax, the coops pay more tax the moment they raise rates. SB 123 allows the coops to raise rates without necessarily paying more tax. Their tax burden increases only if they sell more power. According to the observers I have looking at this bill, that means schools will see a slower rate of increase in the tax revenue they receive from the rural electric cooperatives. SB 123 doesn't exactly stiff schools, but it reduces the extent to which schools can rely on tax revenue from the coops to cover increasing costs.
SB 123 does address a fairness issue for the coops. One analyst tells me that rural electrics have seen their gross receipts tax increase at an average of 9.7% each year over the last decade. Taxes paid by Sioux Valley Energy increased 8.3% from 2009 to 2010. For-profit utilities apparently enjoy a cap of 3% on the amount by which their gross receipts tax increases each year.* Keying the rural electric cooperatives' tax rate to the amount of power they sell rather than their rates effectively brings their tax rate increases in line with their for-profit competitors.
Even the schools may not suffer as much as one might expect. They may receive less revenue in coming years than they would under the gross receipts tax, but if they get their electricity from a rural electric cooperative, they'll also pay a little less for their electricity than they would under the status quo. How much those savings make up for the reduced revenue increases is a question for your local school business manager.
Semitangentially related: While the Legislature protects electric companies from high tax increases, it is giving smooth sailing to HB 1003, which raises the cap on farmers' property tax increases from 10% to 15%, 20%, or as much as 25%.
You are right, Cory, increase in land values and their assessments will provide sticker shock to land owners in the next few years. There will a shift in tax burden from properties with declining or modest values to farmland. For example in the Madison School District, the newly passed school bond issue will shift some of that burden to farmland. Where the major hit will come will be the capital outlay levy since that is a flat out rate of 3 mills. If your taxable value doubles which it will under farmland 5 years out, your tax bill for capital outlay will double also along with the shift in burden for the other levies. Did I say the ox got gored? As for the utility gross receipts and the fairness issue, perhaps we need to place the private utilities under the gross receipts system also. Fact check is the 9.7% increase in taxes paid by coops due to growth in higher rates or amount of power sold?
This is a pretty good bill, and is not intended to decrease tax receipts for schools, but to bring fairness to the utility tax system. If passed, Co-ops would still pay an average annual rate of 3.7% per year. Schools are facing budget challenges too, and everyone is aware of that, (well almost everyone) but REA Co-ops and schools have a long lasting realationship that includes scholarships, Touchstone Energy Student of the week, Youth tour trips to DC, Operation Roundup, 4-H sponsorship, Kids Voting, and are usually the low bidder when it comes to installing lights and poles for ball fields. (as in donation, and glad to do it.)
Under gross receipts, I would assume the 9.7% increase comes from both selling more power and selling that power at higher rates. SB 123 removes one half of that equation.