In passing a record $1.5 billion tax increase this year, Connecticut officials didn’t want to overburden the state’s businesses and residents.
So, they decided to stick it to Massachusetts. And Rhode Island. And Vermont. And New Hampshire. And Maine. Basically, the whole of New England.
In a conclusion Connecticut officials anticipated, regional power grid administrator ISO New England said 75 percent the costs of the state’s recently passed $58.4 million tax on power plants will be borne by the five other New England states.
The tax on electricity generators already put state officials in hot water with Connecticut power plant operators, particularly Dominion Energy’s nuclear Millstone Power Station in Waterford. Now, the rest of New England is angry at Connecticut, especially Massachusetts since its ratepayers will bear 46 percent of the $58.4 million tax.
“We are considering our options going forward,” Massachusetts Attorney General Martha Coakley said. “We are concerned that a potential $58 million increase in wholesale electric prices will be passed on to customers, including an estimated $26 million to Massachusetts ratepayers.”
Filing a lawsuit always is an option.
Even in creating the tax on electric generation — the first of its kind in the country — Connecticut’s tax officials weren’t 100 percent sure it would have a positive effect on the state or the region, said Ben Barnes, secretary of the Connecticut Office of Policy and Management, who is Gov. Dannel Malloy’s chief budget guru.
The electric generation tax is set to expire in two years. The tax, which assesses $2.50 for every megawatt generated, is supposed to be paid by Connecticut power plants; but the ISO New England report released in June figures those costs will be passed onto the ratepayers through the electricity market.
“After a couple of years, we will be able to make a decision to see if the tax is a positive part of the state tax structure,” Barnes said. “If it is true that it is a tax 100 percent passed onto the consumer, then it might make sense not to renew the tax.”
When the tax was first proposed in February, Barnes and his budget team pointed out that the power plants who would pay the tax sell most of their electricity out of state, so even if it was passed onto the electric ratepayer, most of the burden wouldn’t fall on residential ratepayers.
The electric generation tax passed as part of a much larger $1.5 billion revenue package that also included income tax increases and elimination of sales tax exemptions. Members of the Connecticut General Assembly proposed other versions of the electricity tax — including one as high as $340 million — but Malloy’s original proposed $58.4 million eventually was approved.
Because all power generated in New England is pooled and distributed under the ISO model, if power plants choose to pass their costs onto ratepayers, there’s no way those costs can be limited strictly to Connecticut ratepayers.
The ISO New England report estimates the tax will increase wholesale electricity prices by 1 percent throughout the region. Massachusetts, which uses 46 percent of the region’s power, will bear the brunt of the tax costs. Next is Connecticut at 25 percent; followed by Maine and New Hampshire each at 9 percent, then Rhode Island at 6 percent; and finally Vermont at 5 percent.
But the costs of the tax may not be felt immediately, and the brunt may come a few years down the road.
The report by ISO is contingent on the power plants being able to pass the costs of the tax onto the consumer, which will be difficult to do immediately.
The nuclear Millstone Power Station will pay the majority of the tax at $38 million. Dominion, which owns Millstone, sells the power generated by the plant three years in advance to a hedge fund that, in turn, sells it to the electricity market in New England.
While this model provides Dominion with a steady source of revenue and frees it from the fluctuations of the electricity market, passing on increased costs such as the Connecticut tax is very difficult, said Ken Holt, Dominion spokesman.
The tax will eat into the company’s bottom line until it can pass the costs on sometime in the future.
“Any business costs are passed onto consumers in some way,” Holt said.
This cost delay may save Connecticut from any legal action posed by the rest of New England, Barnes said. At $58.4 million split among the six states, the costs aren’t high enough to make legal action worthwhile, especially because the tax expires in two years and the power plants can’t pass the costs on immediately.
Even in a legal battle, Connecticut would have an upper hand, Barnes said, because the state isn’t taxing out-of-state residents directly. Connecticut is taxing power plants that are passing the costs onto out-of-state residents.
“States attempt to export their tax burdens all the time,” Barnes said.
Companies that sell products in more than one state — East Hartford aerospace manufacturer Pratt & Whitney, for example — pass on the costs of the state corporate taxes to out-of-state customers.
State hotel taxes tend to be much higher than regular sales taxes, because hotel taxes mostly fall to out-of-state residents. The costs of insurance premium taxes are usually passed onto out-of-state residents, Barnes said.
So, even though 75 percent of the costs of the electric generators tax will fall to ratepayers outside of Connecticut, the state feels it is on firm ground implementing the measure.
“Its impact on the marketplace is moderate,” Barnes said. “We are aware some of the costs might fall on other states.”
Massachusetts Attorney General Martha Coakley
