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Report: Replacing Utility Property Taxes In Minnesota With Revenues from a Carbon-Based Tax

| Written by John Farrell | No Comments | Updated on Nov 5, 1998 The content that follows was originally published on the Institute for Local Self-Reliance website at

This policy brief by David Morris and John Bailey from November 1998, looked at potential changes to utility property taxes in Minnesota. The state was re-examining the utility tax structure in light of the restructuring of electricity occurring throughout the country.  The rationale for this re-examination is that if Minnesota were to deregulate its electricity sector, customers would be able to buy electricity from any supplier. If taxes were imposed on in-state power plants but not on out-of-state suppliers, it would result in a competitive disadvantage to in-state generators.

Total property taxes paid by utilities were $235 million in 1997, equivalent to about 0.46
cents per kWh if paid equally by all electricity customers in the state.  Utility property tax revenues provide a not insubstantial percentage of money to local governments. This is especially true for those counties which are host to power plants.  In 1995 Goodhue County, for example, received 48 percent of its revenue from utility property taxes.  Itasca County received 33 percent, Sherburne 37 percent and Wright 27 percent. Franchise fees imposed by municipalities range from 1-8 percent of utility gross revenues and generate 5 percent of total muncipal revenue in cities like Albert Lea, Moorhead, and West St. Paul.

States that have already restructured their electric regulatory systems to allow for retail customer choice of electricity suppliers have also restructured their utility tax system (see Appendix).  Most have proposed to replace property taxes with a flat kilowatt-hour charge on the distribution of electricity. Some have eliminated local franchise fees and state utility income taxes and substituted a charge on electricity to make up the difference.  Such a replacement tax or fee on the distribution system allows local governments to receive the same revenue they did before restructuring. Such changes in utility taxation avoids the in- state/out-of-state differential that could occur if the current locality-based tax system had continued.

Recently, Minnesota’s investor-owned utilities have been trying to change the way local governments assess property tax on electric generating equipment and transmission lines. The proposals would replace some or all of the utility property taxes with a charge on electricity use. The latest form of the legislation focused only on eliminating the personal property tax on utility generation equipment (known as attached machinery).  This component represents about $82 million of the total property taxes paid by electric utilities. The legislation had provisions for replacement revenues for local taxing districts through charges on electricity usage until year 2009, when the fees would be phased-out completely.

If the personal property tax on electric utilities’ generation equipment were replaced by a carbon tax, the tax would come to about $6.70 per ton of carbon emitted ($1.83 per ton of carbon dioxide).  If the franchise fee were also replaced, the carbon tax would rise to $9.00 per ton. In 1997 the PUC adopted a range of environmental externality values of $0.30 to $3.10 per ton (1995 dollars) of carbon dioxide emissions.

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About John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power. More

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