Monday, April 26, 2010

Is the Energy Tax a Job Killer?

On March 15, the County Executive proposed increasing the energy tax by 39.6%. On March 25, he proposed increasing it by 63.7% because of threatened downgrades to the county’s bonds by credit rating agencies. On April 22, he proposed doubling it to compensate for a $168 million revenue writedown. The tax is politically convenient since the vast majority of it falls on business consumers. But is this any way to encourage the creation of badly needed jobs?

The energy tax is structured to fall disproportionately on businesses. Currently, residential customers pay $0.005224 per kilowatt of electricity and $0.044986 per therm of heating fuel per year. Business customers pay $0.013843 per kilowatt of electricity and $0.119214 per therm of heating fuel per year. So businesses pay 2.65 times the rates of residential customers and account for 72.8% of all revenues the tax takes in.

The Executive’s March 25 proposal would have hiked rates 63.7%, pushing up the average residential bill by $62 per year and the average non-residential bill by $1,539. The total revenue raised by the tax would have increased from $132 million in FY 2010 to $217 million in FY 2011. (The tax raised just $26.1 million in FY 2003, so it would be increasing by more than eight times in eight years.)

In a hearing about that tax hike last Tuesday, Pepco representative Charles Washington presented data on what that would mean. Washington testified:

As demonstrated below using actual randomly selected commercial accounts, this increase will have a real impact on County businesses. One restaurant in Silver Spring will see an increase of over $3,000 a year. A hotel in Bethesda will see a tax increase of approximately $41,000 a year. The County’s successful Biotech companies will see increases of hundreds of thousands of dollars of year, with at least one projected to see an increase of over half a million dollars.

Washington also said this:

The County’s Fuel/Energy increases since 2003 have always disproportionally impacted commercial customers. However, this proposed increase crosses a notable threshold. Pepco, a distribution company, collects approximately $88.6 million in distribution revenues from commercial customers in Montgomery County. As illustrated below, if the County Executive's proposal is approved, the County would collect over $130 million from those same customers. In essence, the County will be collecting more from the energy tax than Pepco collects as a power delivery company to maintain and operate our electric system.

That’s right, business customers will be paying more to the government for their electricity than to Pepco!

At the same hearing, a representative from Suburban Hospital testified that her facility would pay more than $200,000 in extra taxes from the proposal. The Washington Adventist system and Holy Cross Hospital, each of which are bigger than Suburban, would presumably pay hundreds of thousands each. The plight of the hospitals is quite dire since the rates they charge to patients are set by the state and they cannot simply pass on the increases. The hospitals are likely to take the extra costs out of charitable care services provided to the poor. These same poor people will be suffering from huge county budget cuts.

Since the hearing, the County Executive has revised his proposal to double the energy tax. So all of the above data on tax increases must be increased by half to be current. That means the biotech company cited by Pepco would be paying over $750,000 in extra taxes every year.

The proposed tax hikes are occurring in the context of significant economic decline in the county. Employment has fallen from a peak of 472,567 in December 2006 to 443,022 in September 2009 (the most recent month available from the Bureau of Labor Statistics), a drop of 6.3%. The county’s unemployment rate was 5.9% in February 2010, up from 2.5% in April 2008. Income tax revenue is down by 13% in FY 2010 and net taxable income has declined by massive amounts at the bottom and top ends of the income distribution.

Furthermore, the tax hike threatens to exacerbate the county’s increasing competitiveness gap with Fairfax. If the county doubles its energy tax, its consumers will be paying over $260 million per year in FY 2011. Fairfax, which is a slightly larger county, plans to collect $50 million in energy taxes in FY 2011. So Montgomery’s businesses could be paying five times more in energy taxes than their competitors in Fairfax.

Given the county’s nearly billion dollar deficit and the colossal cuts planned for public services, it makes sense that the county would consider some tax component in its deficit reduction package. In any other year, the council would probably break the property tax charter limit, thereby enacting a small tax increase spread across a large number of payers. But this is an election year and the county leaders do not want a powerful symbolic issue like a charter limit break to be a major story close to election time. So the resulting energy tax hike is both large and narrowly targeted: at the people who create jobs.

In his last State of the County address, the County Executive said, “There may be nothing more important to the well-being of our community than protecting, creating, and attracting jobs…” His planned $4 million subsidy for Costco is allegedly intended to further job creation. He is supporting an initiative by Council President Nancy Floreen to create a Montgomery Business Development Corporation, again to encourage job creation. But none of this means anything if the county’s marquee employers face hundreds of thousands of dollars in fresh tax increases while small businesses suffer yet another threat to their eroding bottom lines.

It is always important to evaluate a politician’s words against a politician’s deeds. Remember this the next time an elected official claims to favor this tax hike while also discussing the need for more jobs.