The Governor's Special Committee to Study State Franchise and License Taxes Applicable to Public Service Corporations in Virginia was established by House Joint Resolution 285. As stated in the resolution, public service corporations in Virginia pay a state franchise or license tax measured by each public service corporation's gross receipts. In recent years receipts from the tax have increased significantly as a result of the general inflation and the mushrooming of energy costs. In that the burden of these taxes falls, to a large extent, on the final user, the Special Committee was established for the expressed purpose of studying the present tax structure of the State's taxation of public service corporations as measured by their gross receipts.

COMMITIEE COMPOSITION AND WORK

The Committee consisted of:

Mr. James T. Mathews, Chairman; retired merchandising executive,

Dr. John L. Knapp, Vice-Chairman, Research Director, Economic Studies Center, Tayloe-Murphy Institute, Colgate Darden Graduate School of Business Administration, University of Virginia,

Dr. Huey J. Battle, Director, Bureau of Economic Research and Development, Virginia State College,

Ms. Barbara M. Hanson, Past-State Chairman, Consumer Affairs Federation of Women's Clubs (Resigned September 26, 1975, to accept full-time employment),

Mr. B. D. Johnson, Executive Manager; Accounting and Control, Virginia Electric and Power Company,

Mr. Lee B. Younger, Director, Public Service Taxation Division, State Corporation Commission,

Dr. Paul M. Zeis, Director of Research, Norfolk and Western Railway Company.

The Committee staff included:

Miss Jill M. Pope, Legislative Research Associate, and Mr. E. M. Miller, Jr., Staff Attorney, both of the Division of Legislative Services,

Dr. Charles J. Gallagher and Dr. George E. Hoffer, both of the Economics Department, Virginia Commonwealth University.

Reports reviewed by this Committee are available for examination at the State Library and the Division of Legislative Services. Appendix A lists the material reviewed by the Committee. Appendix B includes all tables referred to in this report. For further analysis the reader is referred to the documents listed in Appendix A. Because of the importance that the Committee attaches to the concept of the final incidence of the state franchise and local consumer utility taxes, the consultant's report on this subject is included in Appendix C.

AREAS OF RESEARCH

Areas of research were to include the appropriateness of the tax structure in terms of (1) existing and future economic conditions; (2) the state taxation of other Virginia corporations; and (3) the extent to which the burden of the tax is shifted to the consumer. The Committee solicited testimony from representatives of the consumer sector, the public utilities and the various modes of transportation.

In order to understand and recommend changes in the method of taxing public service corporations based on gross receipts, the total tax structure had to be researched. An interstate comparison of public service corporation taxation requires more than information on state gross receipts tax rates. Such a comparison might show that a state may have a high gross receipts tax rate compared to Virginia's rate; however, further investigation might show that Virginia levies higher taxes on the particular firm and the services it sells at the local level. Thus, the information gathered must reflect the total tax structure. The same reasoning applies to comparisons of public service corporations and other firms in Virginia; the total taxes paid on the goods and services produced and sold by each firm must be reviewed. Because of the need to understand the total tax structure, the Special Committee has given broad interpretation to the legislative mandate.

GUIDELINES

In fulfilling the mandate, the Special Committee established several guidelines. These guidelines are:

(1) that the total taxes levied on the services of public service corporations should compare equitably with the taxes levied on the goods and services produced and sold in other sectors of the economy,

(2) that the tax levies on the services of different public service corporations should compare equitably with each other,

(3) that the Virginia tax levies on the services of public service corporations should compare equitably with those levied in comparable states,

(4) that Virginia state and local tax revenues should not be impaired significantly by any recommendations of the Special Committee, and

(5) that taxes should be visible, wherever possible. That is, to the fullest extent possible, consumers should be aware of the taxes that they are paying.

PUBLIC SERVICE CORPORATIONS

Public service corporations in this report are divided into two categories: public utilities and railroads. Public utilities include electric companies, gas distribution firms, telephone and telegraph companies, and water companies. While all public service corporations pay State franchise taxes, division of the study is warranted on the grounds of tax incidence, which is a result of differences in the competitive environment in which the firms operate. Unlike the public utilities which face limited competition for their services, railroads face competition from motor trucks over a broad range of their business.

REPORT OUTLINE

Public Utilities

In studying state franchise taxation of public utilities, the report concentrates on tax incidence, that is, who finally pays the tax. It is noted that while state franchise (gross receipts) taxes are levied on the public utility, these taxes are passed forward to the consumer via a higher rate structure than what would exist in their absence. The public utilities examined are those which are subject to state franchise taxation and include electric companies, gas distribution firms, telephone companies, telegraph companies, and water companies. Telegraph and water companies, because of their relatively small size, are treated only in summary fashion.

The tax structure and taxes imposed on public utility services at the local level are detailed. Particular attention is given to the local consumer utility taxes which have become prevalent throughout the Commonwealth. The burdens borne by sector are measured by comparing each utility sector in the Commonwealth with the burdens borne by ordinary enterprises in Virginia, with other public utilities, and with similar public utilities in neighboring states.

Transportation

Railroads are treated separately in this study because the Committee feels that the incidence of the franchise tax on railroads is different from that of other public service corporations. While public utilities are able to shift the franchise tax forward to the consumer, railroads have more difficulty in doing so because of the competition that they face from motor trucks.

Otherwise, the report examines the. taxation of railroads in a manner similar to public utilities. In addition to state franchise taxation and rolling stock taxation, the report reviews local property taxation.- The tax burdens borne by railroads operating in the Commonwealth are compared over an extended period of time using three measures with the burdens borne by the same carriers in ten other states in which they operate.

State and local tax burdens borne by railroads are compared with those borne by for-hire motor carriers. For-hire(*1) motor carrier tax contributions are divided into (1) user charges and (2) general taxes. The motor carrier user taxes per mile are compared with their estimated allocated cost per mile. Private motor truck user tax payments and estimated cost allocations were not considered because of data unavailability.
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(*1) This calculation is based on C & P data furnished by O. O. Ashworth at C & P's Washington Office.