Testimony before the Arizona House Ways and Means Committee Addressing the Tax on Coal
John Nothdurft, Director of Government Relations, The Heartland Institute
Wednesday, February 14, 2018
Chairwomanman Ugenti-Rita and members of the committee, thank you for giving me the opportunity to submit testimony on this important issue.
My name is John Nothdurft, I am the director of government relations at The Heartland Institute, a 34-year-old national nonprofit research and education organization. Heartland’s mission is to discover, develop, and promote free-market solutions to social and economic problems. The Heartland Institute is the only national think tank that focuses on state-based solutions in all 50 states.
Let me start by saying there is currently no free market for electricity in Arizona. This is made clear in a series of four Policy Studies recently produced by The Heartland Institute that document the reasons for and the effects of the premature retirement of coal-fired electricity power plants, including the Navajo Generating System (NGS). As the authors of one of those studies notes, “Governments have long been picking winners and losers through cost-of-service and ‘just and reasonable’ rate regulation as well as regulations on pollutants such as sulfur dioxide and particulate matter. State and national governments also massively subsidize renewable energy sources, and many states mandate that utilities use costly and less reliable renewable energy. The results for consumers and the economy are wasteful investments and higher prices.”
Taxation is just one of many factors that affect energy markets. Arizona’s transaction privilege tax, which is similar to a gross receipts tax, was designed in a way that’s dissimilar to how other states tax raw materials used to produce energy—such as coal, natural gas, and other fossil fuels. Sound tax policy generally abides by four basic principles: It is applied to a broad base; kept at a competitive, low rate; it is non-distorting; and rate-setting and the regulatory process is completely transparent to the state’s citizens. Arizona’s transaction privilege tax fails on at least three, if not all four, of these principles. Ideally, a state would consider rescinding such a tax altogether, but there is a good argument the best thing for taxpayers and ratepayers would be for the tax on coal to be eliminated as a first step toward restoring a freer energy market.
According to the U.S. Energy Information Administration, 31 percent of Arizona’s electricity generation comes from coal, but this would significantly decrease if NGS is closed. This is a significant problem, since the cost of coal electricity is much cheaper than other forms of electricity—especially wind and solar, which are heavily subsidized and yet remain more expensive.
Heartland’s studies concluded coal-plant closures, including the closure of the Navajo Generating Station, are being driven primarily by three non-market-related factors: “1) Obama-era Environmental Protection Agency (EPA) regulations on carbon dioxide (CO2) and other emissions; 2) national and state government policies that mandate the use and subsidize the producers of renewable energy sources; and 3) competition for electricity generation from low-cost natural gas.”
Without legislative action that changes the way energy sources are taxed and regulated, Arizona’s Navajo Generating Station will surely close its doors, likely resulting in higher electricity prices that stifle economic growth. The people of Arizona deserve better than California-style energy policies. Creating arbitrary incentives and disincentives that urge the market to switch from cost-effective sources of electricity to more-expensive forms will add additional burdens on Arizona businesses and greatly increase costs for consumers, harming seniors on fixed incomes and lower-income people the most. Tim Benson, Policy Analyst for The Heartland Institute also writes that closing Navajo will cause “serious economic harm to the Navajo Nation, which receives nearly half of its revenue from NGS royalties and, according to the U.S. Census Bureau, has a 42 percent poverty rate and an unemployment rate greater than 20 percent. Nearly half of Navajo households have an income below $25,000, and only one in five Navajo adults hold a full-time job.”
In conclusion, the proposal offered here today is a good first step toward eliminating a burdensome and duplicative tax on an already heavily taxed and regulated commodity. Ultimately, Arizona should consider eliminating all policies that favor one form of electricity over another. This includes renewable mandates, all energy subsidies, and every king of double taxation imposed on energy sources.
Thank you for your time, and I am happy to answer any questions.