Treasury Department can be of invaluable help and should be frequently consulted, both as to the scope of the exemptions provided and as to the relationship of business activities to exempt functions. More intelligent and enlightened guide lines for administration of the statute could be established, with perhaps less reliance on a legalistic approach to the problem of characterizing the multitude of activities conducted by organizations claiming tax exemption. Guidance of this kind should help the Treasury Department not only to bestow tax exemption on worthy activities but also to carry out a vigorous enforcement of the statute so as to eliminate abuses deriving from essentially commercial activities. There can be little doubt that there exists a need for a stronger administration of the present law and that it is to the interest of all legitimate tax-exempt organizations to support an enlightened but forceful application of these tax principles.

BUSINESS INCOME OF EXEMPT ORGANIZATIONS— TAX EQUALIZATION-ELECTRIC UTILITY SERVICE

ORGANIZATIONS

E. Roy Gilpin, Reid & Priest, New York, N.Y.

This statement is submitted by E. Roy Gilpin, a member of the law firm of Reid & Priest, pursuant to an invitation by the chairman of the Committee on Ways and Means to participate in the present study of constructive reform of the Federal tax system. The invitation was extended at the suggestion of Mr. D. S. Kennedy, chairman of the Special Tax Policy Committee of the Edison Electric Institute. The author has consulted with this organization in preparation of this

statement.

Under existing law no Federal taxes are imposed on agencies of the Federal, State, and municipal governments and cooperatives engaged in the business of and receiving revenues from rendering electric utility service. The purpose of this statement is to explore the subject of removing this exemption to the end that there may be imposed upon these exempt organizations, as nearly as possible, the same Federal tax burden in respect of their electric service business as now is imposed upon the taxpaying companies engaged in the same business.

The rendition of electric utility service by a governmental or other nontaxpaying organization is not a governmental function. It is a proprietary, i.e., a business function performed in competition with taxpaying enterprises engaged in precisely the same business. Therefore Federal tax equalization among all electric utility service enterprises is commended to this committee as directly in furtherance of its objectives to equalize the Federal tax burden and infuse equity and fairness into the Federal tax system.

Tax inequality in the electric utility service area with resulting losses of revenue to the Federal Government derives from the fact that Government-owned and Government-subsidized electric utility service organizations are exempt from payment of Federal income taxes.1 The result is the consumers of electricity furnished by Government-sponsored operations do not carry their full burden of Federal taxes as compared with their fully taxed counterparts, the consumers of electricity furnished by investor-owned electric utility companies upon which are imposed taxes of every description including the high Federal income tax.

In all businesses, the cost of making the product or rendering the service is included in the price to the customer, Federal taxes are a major item of such cost and are included in the charges for electricity to the customers of investor-owned companies. On the other hand, Government-sponsored electricity suppliers do not collect equivalent

1 These organizations also pay little or no State or local taxes, but this factor of their operation is not considered as within the scope of this presentation.

Federal taxes from their customers. Thus the price of electricity for these preferred Americans is considerably less than for customers of investor-owned electric companies. When this tax fact is stated, some people may ask: "Why should the Government pay taxes to itself?" This question only clouds the issue. The Government never pays taxes. Only people pay the cost of Government through income (and other) taxes, including income taxes contained in the price of things or services they buy. It is manifestly clear that customers of Government and other nontaxed power enterprises, in the rates which they pay for electric utility service, are simply not paying an equivalent share of the cost of Federal Government in their electric bills as are the customers of investor-owned electric companies. This is sharp and clear tax inequality among the vast number of citizens, individual and corporate, who are America's electric utility customers.

Ownership in the electric utility industry is divided generally among investor-owned electric companies, Federal, State, and municipal government operations and rural electric cooperatives. As of December 31, 1958, investor-owned electric companies constituted about threequarters of the electric utility business of this country and Federal, State, municipality, and cooperative oragnizatitons accounted for about the remaining 25 percent.

Federal income taxes for the electric utility industry amounted to over $1 billion for the year 1958, all paid by the investor-owned electric companies.

Averaged on a countrywide basis, a customer of an investor-owned electric company pays about 13 cents in Federal income taxes out of every dollar of his electric bill. A customer of a Government power operation or an electric cooperative, on the other hand, pays little or nothing in Federal income taxes.

This tax disparity among users of electricity continues year after year and threatens to become more pronounced. As Government power operations expand, as they continue so to do, the untaxed group will increase at the expense of all of the country's taxpayers including the fully taxed investor-owned electric companies and their customers.

It is suggested that in the industry here considered where two groups of America's electric customers, distinguishable only by the source of their electricity, bear unequal tax burdens there is precisely the type of tax inequality which deserves the attention of this committee.

DISCUSSION

A brief review of the location, operations, peculiarities, and general characteristics of the nontaxpaying utility systems is essential as background in understanding the problem. The first query is:

What are the untaxed electric utility operations in this country? They may be grouped as follows:

Federal Government agencies.

State government agencies (public utility districts, power authorities and the like).

Municipal governments engaged in the electric utility business. Electric cooperative corporations (financed largely by borrowings from the Rural Electrification Administration (REA)).

Federal agencies

The Federal Government is the largest single producer of electric energy in the country. Federal projects account for more than 70 percent of the power produced by the Federal income tax exempt segment of the industry. These Federal projects pay no Federal in

come taxes.

More than 99 percent of the installed capacity of Federal electric power projects producing energy for sale is located in seven principal networks. These are

(1) Those centered around the Columbia River under the Bonneville Power Administration;

(2) Those in the Central Valley of California on the Sacramento and San Joaquin Rivers;

(3) Those on the lower Colorado River centered about Hoover Dam:

(4) The Missouri River developments;

(5) The cluster under the jurisdiction of the Southwestern Power Administration;

(6) The Tennessee and Cumberland Rivers developments, the Tennessee Valley Authority; and

(7) A few along the South Atlantic area under the Southeastern Power Administration.

The Federal Government through its power projects supplies practically all the electric utility power in Tennessee and is a major supplier in Alabama, Mississippi, Washington, Oregon, Montana, California, Arizona, and Nevada. During 1957, it produced electric utility energy in 26 States and sold it in these and 3 other States.

Federal power generation has soared in the last quarter century. In 1933 the installed capacity of Federal power projects was less than 1 percent of the capacity of all electric utilities in the country. By mid-1958 the Federal Government had invested some $5 billion in power facilities and had become the largest single producer of electric power. Federal projects now under construction and authorized will, when all are completed, reach a total capacity of approximately 35 million kilowatts at an additional cost of $10 billion, almost double the mid-1958 capacity of 19.8 million kilowatts. Upon completion these additional Federal non-income-tax-paying electric properties will consist of at least 168 hydroelectric plants, 17 steam-electric plants, and approximately 30,000 circuit miles of transmission lines. Except in the case of TVA practically all revenues from the sale of electric energy by Federal agencies are paid into the Federal Treasury and such amounts generally have not been sufficient to cover operating expenses, interest on investment, and statutory provisions for return of capital. Therefore no part of such revenues may be looked upon as a payment to the Treasury in lieu of taxes. The TVA has largely retained its earnings and has made periodic repayment of a part of capital appropriations. The end result is that customers of electricity from Federal projects pay rates for such power which do not include the Federal tax expense element of cost while customers of investor-owned electric utility companies pay rates which of necessity must comprehend this substantial cost factor.

State and municipal government agencies

These agencies, variously termed public power districts, public utility districts, power authorities, etc., serve approximately 10 percent of the revenue-paying customers of the electric industry. There are approximately 1,900 municipalities and 55 various other State agencies presently engaged in the electric power business. Organized under State laws they do not pay any Federal income or other Federal taxes. These organizations enjoy a dual tax exemption position since, in addition to immunity from all kinds of Federal taxation, they issue debt securities, the interest upon which under existing Federal law is exempt from Federal income tax in the hands of the holders thereof. Thus, both the customers and the security holders of the State and municipal power authorities and agencies enjoy complete tax immunity in respect of the electric utility service business of these enterprises. These untaxed public bodies have many privileges besides their escape from Federal income taxes and their relative immunity from State and local taxes. But their Federal tax advantage with resulting discrimination among America's electric customers is the point of interest of this study.3

Electric cooperative corporations

Another major segment of untaxed electric utility operations consists of the rural electric cooperative corporations. There are 946 of such corporations which conduct their operations with funds borrowed from the U.S. Treasury through the REA. They pay no Federal taxes; they receive a subsidized interest rate of 2 percent on Federal loans and at this extremely low rate of interest can borrow up to and even beyond the full capital cost of their properties; and they are the beneficiaries of free administrative assistance from the Federal Rural Electrification Administration. Federal loans to electric cooperative-type borrowers through June 30, 1959, aggregated $3,675,426,700.

The cooperatives had combined electric operating revenues in the calendar year 1957 amounting to $503,547,000 and reported a “net margin" or profit of $66,649,000. If the cooperatives had paid Federal taxes at the average of the investor-owned electric utility companies, which is equivalent to 13.8 percent of their gross electric revenues, the cooperatives on a comparable gross revenue basis would have paid $69,489,500 to the Federal Government. Curiously enough this sum is slightly greater than the amount which the cooperatives term their "net margin." Again there is shifted to customers of fully taxed investor-owned electric utility companies the tax burden escaped by the customers who pay tax-free electric bills.

General

OPERATIONS OF NONTAXPAYING POWER AGENCIES

In general, tax discrimination is but one facet of the economic milieu in which Federal and State government-owned proprietary operations enjoy such discriminatory advantages as (1) freedom from Federal

2 Sec. 103, Internal Revenue Code of 1954.

3 Some State and municipal authorities in the power business make payments in lieu of State and local taxes, but the average payment is less than 3 cents of each dollar of operating revenue, as compared with 9 cents for the taxpaying investor-owned companies. 4 "REA Annual Statistical Report for 1957," p. XVII.