Untaxed Rural Electric Co-ops Waste Their Tax Advantage

May 14, 2007

In the Washington Post's lead story today, Steven Mufson shined a light on rural electric cooperatives and the power plants they operate, and the gas stations they operate, and the Dairy Queens they operate.

Rural electric co-ops pay no corporate income tax, a huge advantage over the taxable power producers they compete with. Do they use that tax advantage to help poor people afford power? That's what they were founded to do, but Mufson tells a different story.

One paragraph near the end is especially comical on the tax angle:

Glenn English [a lobbyist for rural electric co-ops] is quick to point out that taxable utilities get tax breaks to encourage wind farms or more-efficient coal plants, and that municipal utilities can sell tax-exempt bonds to raise money cheaply. English wants Congress to give the nonprofit, tax-exempt rural utilities similar incentives, such as no-interest loans.

Imagine those nasty taxable utilities using a tax break to build wind farms!!

Meanwhile, the rural electric co-ops are using their tax-exempt status to operate gas stations and Dairy Queens. Of course, no one's going to open up a taxpaying gas station or ice cream parlor next to those untaxed businesses. And those aren't the only unrelated businesses that rural electric coops venture into. They've invaded the propane market, which we've published on, again using their tax advantage to edge out taxpaying entities. And this is not a trivial amount of business: the co-ops produce more than 10 percent of the nation's electricity.

The result of all this tax-exempt business is, of course, lower tax collections, and when federal and state governments report corporate tax collections, someone will always complain, "They're not paying their share." They'd be paying more if we didn't make them compete against untaxed, government-sponsored businesses.

So why would rural electric co-ops waste time on such off-mission nonsense when poor people spend such a large share of their income on electric power? An editorial in the St. Petersburg Times explains that the basic mission was accomplished long ago.

"Last time I checked, just about everybody in America except the Unabomber had electricity and telephones," said Scott Hodge 10 years ago. [Hodge is now president of the Tax Foundation.]

Yet once Congress gives a special interest a lucrative privilege, it is difficult to take it away. Even the Bush administration called for an end to the loan-subsidy program, but then 3,000 members of rural co-ops from around the country descended on Congress.

The U.S. does not encourage the Army to develop side businesses such as supplying armed guards for corporations and private homes, nor do we encourage the Navy to use its vessels for private ferry service. Similarly, the special tax-exempt status we've granted to rural electric coops should never be used to run side businesses, and if their determination to do so means that their mission is accomplished, then expansion of that service is the last thing we need.


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