The Disaster Tax

This past summer seven Wisconsin electric cooperatives were hit by storms that interrupted electric service to large numbers—from almost one-third to more than half—of their members. Flooding, tornados, and straight-line winds caused the outages.

Each WECA member cooperative has its own line crews that perform routine construction and maintenance and restore service when the system is damaged. Sometimes damage is so severe or widespread, it can’t be repaired in a timely manner without help from other cooperatives.

In this column, I’ve previously discussed Wisconsin’s ROPE (Restoration of Power in an Emergency) program, which coordinates deployment of crews for mutual assistance. ROPE works very well as a valuable backstop for members served by this state’s rural electric co-ops, but it’s not as if nothing ever impedes its efficient operation. One example has been playing out in the Wisconsin Legislature during recent months.
A cooperative is responsible for payroll taxes for its employees during power restoration just as it is at any other time. But under Wisconsin law, when another cooperative renders assistance through ROPE, the cooperative receiving help has to pay not only its own normal payroll taxes, but is also responsible for state sales tax on the wages paid and materials—which have already been taxed once—used by the responding co-op.

This is nonsensical in more than one way: The cooperative giving aid is not acting as a for-profit vendor, and imposing a tax penalty on extra effort to get people’s lights back on is simply an annoyance. Moreover, when a storm is bad enough to warrant a federal disaster declaration, it makes no sense that Federal Emergency Management Agency (FEMA) funds should be diverted to pay state sales tax. That this is already understood may be presumed, given that FEMA pays no sales tax on damage-
repair services for municipal utilities.

Fortunately, State Representative Romaine Quinn of Rice Lake and Senator Jerry Petrowski of Marathon agreed that the existing policy is illogical. With 17 co-sponsors, they introduced Assembly Bill 583 to create a sales and use tax exemption for services furnished by one electric cooperative or telecommunications utility to another under an emergency declaration. But here we see that “how a bill becomes law” has a pretty thin connection with the textbook illustrations of little stick figures shaking hands.

All was well for A.B. 583 until the Wisconsin Department of Revenue (DOR) produced the required fiscal estimate. Having served as a Wisconsin legislator for 16 years, I’ve probably seen every reason why a bill might be rejected and high on the list is the proposal appearing so expensive that legislators won’t support it. The DOR fiscal estimate was based on a six-year period with six state- and federally-declared disasters. It cited $154 million in costs to state, federal, and local governments to restore publicly owned facilities during that period.
The catch is that the reference isn’t to electric cooperatives, and state, federal and local governments are already sales-tax exempt. So the DOR’s number relates to expenditures from which it would never have collected sales tax anyway, assumes 70 percent of those costs would be tax-exempt, and further assumes 10 percent of the work would be contracted between one electric cooperative or telecom utility and another, yielding an estimated annual sales tax revenue reduction of $90,000.

In reality, total sales tax reduction from the proposed electric co-op exemption in 2017—an expensive year—would have been slightly more than $13,000. Averaged over the past three years, foregone sales tax collections would have been $7,300 annually, less than one-twelfth the DOR estimate.
A basic concept for electric cooperatives is to price their energy as close as possible to the cost of providing service, at the lowest prudent rate; thus they need to be lean operations. Maintaining a big enough payroll to handle any emergency without outside help would scuttle that idea overnight. We’ll keep working to pass A.B. 583 and make Wisconsin tax policy reflect that reality.