Steve Freese, President and CEO
It’s rare in today’s political climate that members of Congress from both parties come together on anything short of a national emergency or disaster, and sometimes they don’t come together even then. But once in a blue moon there’s near-unanimous support for fixing the unintended consequences of a congressional mistake, and right now the moon is looking at least bluish.
In 2017 Congress reformed the Internal Revenue Code, enacting tax cuts for most Americans. One provision that went the opposite direction applied federal taxation to land or grants given to for-profit companies by state and local governments seeking to attract economic expansion. An unintended consequence jeopardizes the not-for-profit status of U.S. electric cooperatives. Tax committee staffers on both sides of the aisle in both houses say this wasn’t their intention but it’s the result when certain circumstances arise.
Like most of America’s 900 electric cooperatives, Wisconsin’s co-ops were formed as not-for-profit tax-exempt organizations and must follow IRS Code Section 501c (12) in order to retain that status. A key provision is that the co-op must receive at least 85 percent of all its income from the members—the so-called “85-15 rule.”
That never used to be a problem. But with the 2017 code revisions, state or federal broadband grants, Federal Emergency Management Agency (FEMA) assistance, and Wisconsin Disaster Fund payments aiding storm recovery—formerly treated as capital—are now considered non-member income.
Wisconsin co-ops have received various grants from federal, state, and local governments to help provide services to their members. Grants for renewable energy development, economic development, energy efficiency and conservation, storm recovery, and rural broadband initiatives will fall by the wayside if loss of its tax exempt status is the price a co-op pays for accepting one of these grants.
In one three-day period this past summer, 17 tornados struck Wisconsin. Wisconsin Disaster Fund payments and FEMA dollars were authorized to assist restoration of vital services. Three Wisconsin electric co-ops had a half million to two million dollars in damage. They’re watching very closely so as not to exceed the 15 percent threshold for non-member income. An ice storm this winter could cost them their not-for-profit status if the law isn’t changed before the end of this year.
Funding to help repair and replace an ice-damaged submarine power cable has ensnared the members of Washington Island Electric Cooperative—they number fewer than 1,000—in the tax change. The assistance exceeds the 15 percent threshold, and not-for-profit status may be lost for two to three years.
The inadvertent creation of this tax penalty means co-ops will have to decide whether they can afford to accept disaster assistance. Member-owners are likely to face higher rates whichever path their co-op chooses.
Fortunately, remedial legislation is gathering momentum. Every member of Wisconsin’s House delegation—Reps. Steil, Pocan, Kind, Moore, Grothman, Gallagher, Duffy (since resigned due to family health issues), and Sensenbrenner—is co-sponsoring H.R. 2147 to preserve co-op tax-exempt status. A Senate companion bill (S. 1032) had nearly 40 co-sponsors including Wisconsin Senators Baldwin and Johnson. A clear majority in the House had signed on as co-sponsors.
Congress needs to act in the next few weeks to protect electric cooperatives’ tax-exempt status, so important to their safe delivery of reliable electricity at a price as close as possible to the cost of providing service. Constituent requests can tip the scales toward success. Thank Senators Baldwin and Johnson and your House member for their support.