Paying a Fair Share

One of great mysteries of Greg Gianforte’s gubernatorial campaign is how on earth he thinks he’s

going to get elected by promising to get rid of the business equipment tax. After all, every voter in Montana who owns property   - a home, a commercial building, farm or ranch land, a forest tract – pays property taxes. And while we may not be particularly happy about it when we’re writing the check, most of us recognize that property taxes go to pay for essential local services like schools, or the fire and police departments, or the upkeep on parks, or street maintenance.  We all know we benefit from those services and we all have to pay our fair share of the cost of providing them. But now along comes Gianforte saying, “Hold on a second: It’s all right for all you other suckers to pick up the tab, but when it comes to big companies with a pile of business equipment, well, that’s a different matter.”

Of course Gianforte doesn’t enunciate his position in quite those terms. On the contrary, he needs to convince us that we all have a stake in letting those big companies off the hook. Here, from his website, is the argument, such as it is:

One Montana business person told me that he invested in a single piece of equipment that created 20 high wage jobs.  His reward?  A $300,000 business equipment tax bill over 10 years.  If we want Montana small businesses to grow and succeed, why would we punish job creators for purchasing more equipment to hire more Montanans?

The Business Equipment Tax is one of the most regressive taxes on the books in Montana.  It is an annual tax on all the equipment job creators own.  Hotel owners even have to pay it on every fork and spoon they own—EVERY YEAR!  It hits farmers, manufacturers, construction, oil/gas and high tech hard; basically any business that invests to create jobs is currently incentivized to invest elsewhere.  It chases off investment and jobs.  Most states don’t have a tax like this.  Also, because equipment value is self-reported, the tax is prone to being under-reported.  I am committed to eliminating the business equipment tax over 4 years as revenue from other sources grows.  Any reduction in the business equipment tax must also provide relief to counties that depend on these tax revenues today.

So there you have it: The reason we should give large corporations a pass on the taxes all the rest of us have to pay is that if we don’t, they’ll take their business elsewhere. Republicans have been saying this kind of thing since Reagan was president, and it’s weird that Gianforte, who’s supposed to be an outsider who knows how to get things done, can’t come up with a fresher idea. What’s even weirder is that he doesn’t seem to realize that in recent legislative sessions the business equipment tax has already been hacked to bits. Sixty percent of Montana businesses – the small guys – don’t pay it all. And for the somewhat larger guys, the rate has been cut in half.* We even have – get this! – the sixth best business tax climate of any state in the country. And so while Gianforte constantly bemoans the current state of Montana’s economy, his prescription for fixing it is to do even more of what we have already been doing for the past decade.**

Gianforte has a prodigious capacity to overlook evidence and rely instead on a choice anecdote, no matter how implausible, fabricated or inapt it may be. After all, this is a guy who ignores everything known about human life expectancy and forms his notions about when you should be able to retire based on the ancient myth of a 600 year old boat builder. He says he knows that the business equipment tax is keeping companies out of Montana because somebody at Facebook told him so, but the narrative is made up out of whole cloth. And now he cites, as evidence of the tax’s destructive impact on investment, the story of a company that invested and payed the tax!

Gianforte wants you to believe that when companies invest in new plant and equipment, they invariably create more jobs. That’s why you should pay property taxes and big companies shouldn’t have to – one of those new jobs may be yours, or your neighbor's, or your kid's. He trades here on the misconception that businesses are always “job creators.” They are, of course, but if hiring people is creating jobs, then laying people off is destroying jobs, and that happens all the time. The fact is that hundreds of thousands of people lose jobs every week; here's the chart showing weekly new unemployment claims since 2000:

Properly managed businesses eliminate jobs all the time; indeed, reducing labor costs (which is a more attractive way of saying laying people off) is often taken to be a sign of efficient management. And while lowering the cost of capital, which is what happens when the business equipment tax is cut, may well encourage investment, new plant and equipment coming on line can displace workers rather than leading to new hiring. Consider the mechanization of agriculture: When farmers replaced steam threshers and mule teams with combines and tractors, thousands of people lost their jobs.

Now obviously, all those combines crawling across the land were a good thing, even if they did put a lot of people out of work. They dramatically increased agricultural productivity and output. Investment in plant and equipment contributes importantly to the growth of employment and economic activity, but firms do not build new factories or buy new machines and computers because they are itching to create jobs. They buy that stuff in order to produce more efficiently, lower costs, improve product quality and ultimately make more money.  Business equipment is not being taxed to “punish job creators.” It’s being taxed, like all other property, because is enhances the ability of its owners to generate income and pay a fair share of the costs of government services from which they benefit.

* Given these changes in its structure, it’s a mystery how Gianforte concludes that the business equipment tax is “one of the most regressive on the books in Montana.” A regressive tax is one that falls disproportionately on low income individuals and households, and it’s hard to imagine that those are the folks that own the large businesses paying the business equipment tax.

** The problem here is not just with the logic. Montana’s economy, and the state’s budget, are actually performing well. But as Dave Parker, at the Big Sky Political Analysis blog, points out, Gianforte is relying on the wrong data to get to the opposite conclusion. He’s got to do that, of course; otherwise, what would he run on? 

Budgeting by Area Code

Last week Greg Gianforte announced something he’s calling his “406 Tax Relief” plan.  Strip away the spin, and what this scheme amounts to is the elimination, over 4 years, of the business equipment tax, and a reduction of the top marginal income tax rate from 6.9 to 6 percent. Together, those two tax cuts would eat up about $200 million a year in revenue, which Gianforte plans to pay for by freezing state spending. So: 4 years, 0 increase in state spending, and 6 percent and there you have it: a budget plan inspired by an area code!

Not surprisingly, there’s no guarantee at all that this thing will work. Gianforte admits that his freeze on spending can happen only after we make some badly needed but unspecified investments in education, job training and infrastructure. Oh, and then we also have to account for the effects of inflation and population growth. Nobody knows how much all those things are going to cost us nor if, after coughing up $200 million a year in tax cuts, we’ll have the revenue to cover it, but Gianforte blandly assures us that “technology should help us generate some efficiencies elsewhere.” If that doesn’t work, we’ll probably just have to do what they’re doing in Kansas right now, in the aftermath of big tax cuts, and that’s to slash funding for essential programs. You know, things like schools, or health care, or highway safety. This is Reaganism at its finest: cut taxes first and ask questions later.|

It may seem that a budget plan like this is a complete mess, but believe it or not, for Gianforte it actually represents a modicum of progress. For the last couple of months, Gianforte was running around the state touting these same tax cuts, but was planning to pay for them by using up the cash reserves the state keeps in the bank in case of a budget emergency. As I pointed out in an earlier post, there were two big flies in that ointment. For one thing, Gianforte grossly overestimated the reserves he would have to work with. And more to the point, you simply can’t pay for permanent tax cuts with cash reserves, because the cuts are forever but the reserves are gone - spent down to zero - in a year or so. What’re you going to do then?  No, budget arithmetic pretty much dictates that if you have to balance the budget and you want to cut taxes, you’ll have to cut spending as well.  And with this new tax plan, Gianforte is reluctantly acknowledging that painful reality.

Gianforte may have the budget math down, but he’s still in the dark when it comes to budget policy. Every other year the legislature and the governor, Republicans and Democrats, get together in Helena to hammer out a biennial budget. It’s a difficult, contentious and wrenching process. There are all sorts of ways we can use tax dollars, and there’s not enough of those dollars to do everything we should or would like to do. So coming up with a budget requires some thoughtful weighing of the alternatives. And what Gianforte is proposing – to first and foremost cut taxes and then let the chips fall where they may – is about as far from thoughtful as you can get. But then what can you expect from a guy who actually relies on an area code to get his budgetary priorities lined up?

Finding a Well Planned Path

Here, by way of a "guest post," is a letter to legislators from Tom Schneider, a former member of the Public Service Commission. Tom asks whether or not it's a good idea - for either tax or rate payers - for Northwestern Energy to buy the coal-fired power plants at Colstrip, presumably to prevent what is otherwise their likely closure. For me, the critical concern here is that we not, by locking ourselves into the Colstrip plants now, tie our hands when, some day in the future, we need to put in place an efficient, cost effective policy to cut carbon emissions. And I don't think that day is very far off. But here's Tom's take:

April 9, 2016

Dear Legislators:

I served as a Montana Public Service Commissioner from 1977-1984 and again from 2003-2006. I am deeply concerned about the rash of proposals and media flurry regarding Colstrip’s future, particularly the suggestion that NorthWestern Energy (NorthWestern) purchase a larger portion of the Colstrip plant. There are enormous economic and environmental risks associated with these coal plants. As a former Commissioner I understand what it takes to plan energy systems. I understand about protecting consumers from risks. And these proposals are absolutely heading in the wrong direction. NorthWestern’s purchase of any additional portion of Colstrip could very well put Montana ratepayers and taxpayers at risk.

The ownership structure of the Colstrip plant is complex (see table at the end of this letter). The two older units, 1 & 2 are owned by Puget Sound Energy (PSE) and Talen Energy. PSE is a regulated utility and Talen Energy is an unregulated power provider. (Talen took control of PPL’s share of Colstrip and its operating obligations last year when PPL spun off all of its unregulated assets, including Colstrip, into a new company named Talen Energy.) Recent red flags raised by regulators, financial analysts, and the owners should not be ignored. The Washington Utilities and Transportation Commission (WUTC), the entity that regulates PSE, expressed concern after it reviewed the economic viability of the two older units, 1 & 2. An analysis by NorthWestern showed significant financial liability associated with purchasing PPL’s coal plants, and particularly Units 1 & 2. Independent financial analysts who review Talen, have increasingly expressed concern regarding the significant and mounting liabilities associated with the plants. The conclusions of all three is that the older two units of Colstrip are increasingly uneconomic.

The WUTC has not only expressed concern regarding the two older units’ economic viability[i] but recently completed an analysis of PSE’s remediation obligations for units 1 & 2.[ii] PSE and UTC analyses provide a glimpse into the hefty price tag that Montana ratepayers and/or taxpayers could shoulder if ownership is transferred to NorthWestern.[iii] In its remediation analysis, largely based on data provided by PSE, the WUTC determined that the preliminary estimate of environmental remediation and decommissioning costs for units 1 & 2 would be $134 million to $195 million (the report said that the law contains no decommissioning requirements). The report said that these costs would increase the longer the plant stayed open. If either PSE’s or Talen’s share of Colstrip were to shift to NorthWestern, Montana ratepayers could be on the hook for those costs. 

Financial analysts have also issued warnings to Talen Energy about Colstrip continuing to be a highly risky investment. UBS, an international financial firm, was PPL’s financial advisor when it tried to sell all of its generation assets to NorthWestern, including the Colstrip plant.[iv] UBS issued a report on March 7, 2016, in which it called Colstrip a “money-losing” asset for Talen. It said that Talen should find a way to monetize its ownership in the plant.  This declining valuation is reflected in Talen’s property taxes to the State of Montana and local governments. In the last three years PPL and Talen have written down the value of its interest in Colstrip by 87%, meaning its share of Colstrip 1, 2, and 3 has no real value.

Ultimately, NorthWestern has already determined that purchasing any portion of Colstrip would be a risky investment. In 2013, when it purchased the hydroelectric dams from PPL, its own analysis showed that also purchasing PPL’s share of the Colstrip plant would be a major liability. At that time, NorthWestern assigned a negative $340 million value to PPL coal plants and a negative $127 million value to Colstrip units 1 and 2 specifically.[v] Since 2013, the liabilities have only increased.

In its most recent planning document submitted to the Montana Public Service Commission, NorthWestern acknowledges it does not need the additional power. That means the intent of this proposal is probably for NorthWestern to purchase additional power to serve large industrial customers that are currently buying power on the open market and likely contracting for power with Talen (because that information is proprietary it is impossible to know for certain where Montana’s industrial customers get their power). If the large industrial customers, who sought deregulation and embraced the market, believe that the Colstrip plant has value then they ought to acquire the plants themselves. This negative value means that Talen and PSE might even have to pay NorthWestern (or the large industrials) to take these plants off their hands – an absurd result.

It is likely that NorthWestern would only consider buying an additional interest in Colstrip if the state of Montana and taxpayers and/or ratepayers subsidize the financial and environmental liabilities. That scenario would be disastrous. Montana taxpayers and ratepayers should not foot the bill. Instead of placing an additional and hefty burden on Montana businesses and families, Montanans should be working on prudent Montana energy solutions. Planning a different energy future will take time and resources. It will require detailed assessments of remediation obligations, worker and community responsibilities, reliability and transmission studies, contracts, and more. Considerable progress was being made in Montana prior to the unprecedented action of the U.S. Supreme Court to stay the Environmental Protection Agency’s Clean Power Plan. The positive Montana momentum has been slowed and the uncertainties magnified. The delay has sidetracked productive efforts with a rash of half-baked ideas and political theatre from major political candidates of both parties.

Montana deserves better. We need real Montana solutions, not false hope. The workers and the community of Colstrip deserve our focused attention. Utilities need certainty. Consumers need to be protected. We don’t need to be distracted from the important challenges before us. The market is determining Colstrip’s fate. Concerns about the economic, public health, and environmental impacts of climate change are helping to drive the market. Our job is to help Montana have a thoughtful and well planned path to a cleaner, more affordable energy system. Montana has a responsibility to build a better energy future. We must not squander that opportunity.

Sincerely,

Thomas J. Schneider

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Colstrip Ownership Structure

Owner	Unit 1	Unit 2	Unit 3	Unit 4
Puget Sound Energy	50%	50%	25%	25%
Talen Energy	50%	50%	30%*
Portland General Electric			20%	20%
NorthWestern Energy				30%*
Avista			15%	15%
Pacificorp			10%	10%

*Talen Energy and NorthWestern Energy have an agreement to share the output of units 3 & 4.

Endnotes

[i] Washington Utilities and Transportation Commission Comments on Puget Sound Energy’s Cosltrip Study, Docket UE-120767, Feb. 6, 2014.

[ii] WUTC, “Investigation Report. Investigation of coal-fired generation unit decommissioning and remediation costs.” UE-151500, Feb. 2016

[iii] Puget Sound Energy’s 2013 and 2015, Electric and Natural Gas Integrated Resource Plans.

[iv] NorthWestern Energy, Application for Approval to Purchase and Operate PPL Montana’s Electricity Supply Rates, for Approval of Issuance of Securities to Complete the Purchase, and for Related Relief, Testimony and Exhibits, Docket No. D2013.12.85, December 2013.

[v] Ibid. And NorthWestern Energy Submittal to Public Servic Commission, Project Mustang Valuation Spreadsheet, “PSC-066 Mustang Valuation – 2032 Case - 6-24-13.”