3/29/99

KUFM / KGPR

T. M. Power

Paying Attention to Who Pays Taxes

When it comes to tax policy, some commentators claim that it really doesn’t matter who the tax is levied on; consumers ultimately have to pay the tax anyway. From this point of view, the levying of taxes on businesses is simply a way of hiding a tax that is being imposed on consumers. If this is true, the more honest thing to do would be to collect all taxes as sales taxes or simply as a head tax, a tax just on the privilege of existing, that all individuals had to pay. Margaret Thatcher actually tried to implement that type of tax during the 1980s, sparking a spirited tax rebellion in Great Britain.

Although these types of assertions about the incidence of taxes masquerade as hard-nosed economic reality, they are nothing of the sort. Although taxes most certainly can be shifted as economic actors seek to dodge the tax bullet, the burden of taxation does not fall uniformly on consumers or individual citizens.

Consider one of the most recent debates in the legislature: the taxation of electric generating equipment. Last year, a Pennsylvania electric company was the high bidder to purchase Montana Power’s generating plants. Assumedly the purchasing firm carefully analyzed the cost of generating electricity from those facilities, the market price it could sell the electricity for, and made a bid that would assure its stockholders a reasonable profit. In analyzing the costs it would face, the bidder certainly took into account the taxes that it would have to pay in Montana just as it took into account what it would have to pay its workers, what it would have to pay for coal, etc. On the basis of that business analysis, it made an offer to Montana Power and that offer was accepted.

Now that Pennsylvania electric utility is lobbying the legislature to cut in half the property taxes it has to pay on those generating facilities. When it was pointed out that that would put a serious dent in the state budget, it proposed a electric consumption tax on all Montanans to make up the difference. If consumers were paying the tax anyway, why would we care how it was collected?

Well, Montanans weren’t paying much of that tax. Montanans were not paying any of the tax on Montana Power’s share of Colstrip 4 which was committed to serving customers on the west coast. Either Montana Power’s stockholders were paying the tax if competitive forces were not allowing them to pass it on to west coast electric consumers or Los Angeles consumers were paying the tax. The same can be said about the property taxes on the half of Colstrip 1 and 2 and two-thirds of Colstrip 3 and 4 owned by west coast utilities and used for their customers. Then there is the Noxon Rapid and Cabinet Gorge facilities owned by Washington Water Power for their out-of-state customers. Montana residents were now being asked to pick up all those taxes previously paid by out-of-state electric customers or the stockholders of those out-of-state utilities. Nice present for our legislature to dump on us!

The big beneficiary of such a deal would have been Pennsylvania Power and Light’s stockholders and the other out-of-state utilities who own electric generating equipment in the state. PP&L bid for the plants on the basis of what the taxes were at the time and then turned around and asked for the taxes to be cut in half. The net impact of that would be to significantly increase the value of the plants above what they had to pay for them. A windfall gain to the stockholders of the company. A straight forward transfer of money out of each and every Montana family’s budget into the pockets of the new owners of Montana Power’s plants. Nice deal if you can get it.

Fortunately citizens, mobilized by the state’s rural electric cooperatives, saw that shell game for what it was and blocked that shifting of the tax burden. What the legislature has now approved is somewhat better. Instead of a tax on the consumption of electricity, it will be a tax on wholesale electric transactions. That way folks in Los Angeles and elsewhere on the west coast buying Montana electricity will pay their share just a folks in Montana who use electricity will pay theirs.

We do not tax businesses just because we are looking for a way to hide taxes. We tax businesses because businesses, like individual citizens, make use of the services that the government provides. Economic activity cannot take place in a world without basic infrastructure, without courts, without protection of property, without an educated citizenry, with air and water poisoned, etc. Taxes, as the US Supreme Court has said several times, are the price we pay to live in a civilized society. Since businesses make use of and benefit from public services, we ask them to pay their share of the costs. They then are free to shift the costs of those services wherever market conditions allow, just as they are free to try to shift their labor or fuel or other costs wherever they can to protect their profits. Just as we would not try to exempt businesses from paying their workers or their energy bills, we should not exempt them from paying their share of taxes. A rational economy requires business taxes just as it requires any other price that reflects the cost of resources and services being used.

Next time someone says there is no use taxing businesses because you and I have to pay those taxes in the end anyway, clutch your purse or wallet tightly. Someone is about to try to steal some of your money.