|The Preference Provides||Tax Type||Estimated Biennial Beneficiary Savings|
A public utility tax exemption for sales of electricity to businesses that use electrolysis to make chemicals.
The preference is scheduled to expire June 30, 2019.
Public Utility Tax
$1 million in the 2017-19 biennium.
|Public Policy Objective|
JLARC staff infer the public policy objectives are to:
Legislative Auditor’s Recommendation
Clarify: The Legislature should clarify the tax preference because the law no longer includes public policy objectives and the metric for jobs may not reflect current employment levels in the industry.
Commissioner Recommendation: Available in October 2017.
The Legislature originally passed this preference to:
While these goals are no longer stated in law, JLARC staff infer that they are the public policy objectives for the preference.
Public utilities do not pay public utility tax on their sales of electricity to chlor-alkali and sodium chlorate electrolytic processors. These processors use electricity to convert dissolved salt into chemicals like chlorine, sodium hydroxide, sodium chlorate, and hydrogen in a process called electrolysis.
Utilities that take the exemption must pass the savings on to the processors.
To qualify, utilities must sell electricity to processors that:
A processor that benefits from the tax preference must file an annual report with the Department of Revenue (DOR). The report must include information on employment and production levels. The processor, not the utility, must pay back any amount that DOR determines to be ineligible for the exemption.
The exemption took effect on July 1, 2004. Utilities may claim the exemption for sales of electricity through December 31, 2018. The preference expires June 30, 2019.
The Legislature passed this preference and scheduled it to expire June 30, 2011. The law included two goals:
A potential beneficiary testified that the bill could save manufacturing jobs, and that competitors in North America had similar tax incentives.
JLARC staff completed a review of this preference in 2009 and cited evidence that the public policy objectives were being met. The Legislative Auditor recommended that the Legislature continue the preference.
The Legislature consolidated statutory reporting requirements for several tax preferences. In doing so, the legislation also repealed the stated goals of this tax preference.
Electrolytic processors convert dissolved salt into chemicals. The tax preference eliminates the public utility tax on electricity used in the process.
This preference relates to two electrolysis processes: chlor-alkali and sodium chlorate. In each, an electric current passes through saltwater to create chemicals such as chlorine, sodium chlorate, sodium hydroxide, and hydrogen. Other industries use these chemicals.
Electrolysis is an energy-intensive process, and processors report that it represents most of their total electricity use. Processors measure the amount of electricity used for electrolysis separately from other electricity they use.
The preference’s value is the tax rate (3.8734 percent) times the price of the electricity used in electrolysis. The utility deducts the amount of the exemption from its tax due to the state, and reduces the total paid by the processor by the same amount.
The price of electricity can have a significant effect on the value of the tax preference. Industry representatives state that the cost of electricity represents about 50 percent of production costs, depending on the price of power.
The electricity price paid by processors varies. For example:
The Energy Information Administration (EIA) reports ranges of wholesale electricity prices in eight regional markets across the country.
|Region||Intercontinental Exchange Electricity Product Name||Weighted Avg. Price $/MWh|
|Northwest||Mid Columbia Peak||
|Southwest||Palo Verde Peak||
|Texas||ERCOT North 345KV Peak||
|Southern California||SP15 EZ Gen DA LMP Peak||
|Northern California||NP15 EZ Gen DA LMP Peak||
|Mid-Atlantic||PJM WH Real Time Peak||
|Midwest||Indiana Hub RT Peak||
|New England||Nepool MH DA LMP Peak||
The public utility tax is a tax on gross receipts of public service businesses, including those that engage in transportation, communications, and the supply of energy, natural gas, and water. Income subject to the public utility tax is exempt from the business and occupation (B&O) tax. Rates vary based on the type of business.
Electric utilities that generate, produce, or distribute electricity pay a rate of 3.8734 percent of their gross receipts. They may deduct any sales to others for resale, or sales for export outside Washington State.
The preference included two stated goals until the Legislature reorganized the reporting requirements in 2010. At that time, the stated goals were removed from statute. However, JLARC staff infer that these goals remain the public policy objectives.
The preference’s originally stated goals are to:
Jobs and production have both increased since the preference was passed in 2004. JLARC staff do not assert whether there is a causal relationship between these outcomes and the tax preference.
The processors have met the public policy objective of retaining family-wage jobs at a level that preserves at least 75 percent of the jobs that were on the payroll effective January 1, 2004.
“Family-wage” jobs are required, but not defined, in statute. For this review, JLARC staff assume “family-wage” jobs pay wages and benefits comparable to other Washington jobs. Data from the Bureau of Labor Statistics and the processors’ reports to the Department of Revenue indicate that in 2015:
There is evidence that the processors are meeting the second public policy objective as well. In 2004, one electrolytic processor operated in Washington. Today, there are two. Total production also increased.
Continuing the preference would allow electrolytic processors to continue to buy electricity at reduced cost. To the extent that this benefit allows them to maintain employment and remain competitive, the public policy objectives would continue to be met.
Tax preferences have direct beneficiaries (entities whose state tax liabilities are directly affected) and indirect beneficiaries (entities that may receive benefits from the preference, but are not the primary recipient of the benefit).
Direct beneficiaries are the utilities that claim the tax preference by deducting the exempted amount from their gross electricity sales. They may claim the preference only if they pass the tax savings on to electrolytic processors. The two direct beneficiaries, Grant PUD and Cowlitz PUD, authorized JLARC staff to identify them.
Electrolytic processors are indirect beneficiaries of the preference because the utilities must pass on the savings. Because they receive the benefit of the tax preference, the processors must submit annual reports to the Department of Revenue. As of 2015, two processors reported that they benefited from the tax preference:
The tax preference resulted in estimated beneficiary savings of $667,000 in Fiscal Year 2015. JLARC staff estimate the electrolytic processors’ savings will be $1 million in the 2017-19 Biennium. The electrolytic processors shared historic savings amounts with JLARC staff and authorized their disclosure.
|Biennium||Fiscal Year||Total Exempt Sales||Total Estimated Beneficiary Savings|
|2019 (half year)||
According to their 2015 annual reports, employment at the beneficiaries totals 106. This equates to 2015 beneficiary savings of $6,300 per job.
Repealing the tax preference would lead to a 3.8734 percent increase in the cost of the electricity used by the processors for electrolysis. It is unclear how this cost increase would impact employment and production.
JLARC staff reviewed how other states with electrolytic processors treat the taxes on electricity. Each provides some type of tax relief for electricity used in electrolysis.
Seven states have a specific exemption for electricity used in electrolysis
Eight other states have broader exemptions or lower tax rates for electricity
Exemptions—Sales to electrolytic processing businesses. (Expires June 30, 2019.)
(1) For the purposes of this section:
(a) "Chlor-alkali electrolytic processing business" means a person who is engaged in a business that uses more than ten average megawatts of electricity per month in a chlor-alkali electrolytic process to split the electrochemical bonds of sodium chloride and water to make chlorine and sodium hydroxide. A "chlor-alkali electrolytic processing business" does not include direct service industrial customers or their subsidiaries that contract for the purchase of power from the Bonneville power administration as of June 10, 2004.
(b) "Sodium chlorate electrolytic processing business" means a person who is engaged in a business that uses more than ten average megawatts of electricity per month in a sodium chlorate electrolytic process to split the electrochemical bonds of sodium chloride and water to make sodium chlorate and hydrogen. A "sodium chlorate electrolytic processing business" does not include direct service industrial customers or their subsidiaries that contract for the purchase of power from the Bonneville power administration as of June 10, 2004.
(2) Effective July 1, 2004, the tax levied under this chapter does not apply to sales of electricity made by a light and power business to a chlor-alkali electrolytic processing business or a sodium chlorate electrolytic processing business for the electrolytic process if the contract for sale of electricity to the business contains the following terms:
(a) The electricity to be used in the electrolytic process is separately metered from the electricity used for general operations of the business;
(b) The price charged for the electricity used in the electrolytic process will be reduced by an amount equal to the tax exemption available to the light and power business under this section; and
(c) Disallowance of all or part of the exemption under this section is a breach of contract and the damages to be paid by the chlor-alkali electrolytic processing business or the sodium chlorate electrolytic processing business are the amount of the tax exemption disallowed.
(3) The exemption provided for in this section does not apply to amounts received from the remarketing or resale of electricity originally obtained by contract for the electrolytic process.
(4) In order to claim an exemption under this section, the chlor-alkali electrolytic processing business or the sodium chlorate electrolytic processing business must provide the light and power business with an exemption certificate in a form and manner prescribed by the department.
(5) A person receiving the benefit of the exemption provided in this section must file a complete annual report with the department under RCW 82.32.534.
(6)(a) This section does not apply to sales of electricity made after December 31, 2018.
(b) This section expires June 30, 2019.
[ 2010 c 114 § 133; 2009 c 434 § 1; 2004 c 240 § 1.]
The tax preference is making electricity less expensive for electrolytic processors. While the preference is lowering the price of electricity to processors, the Legislature repealed the public policy objectives in 2010 when it made other statutory changes.
The Legislature should clarify the tax preference because the law no longer includes public policy objectives and the metric for jobs may not reflect current employment levels in the industry.
The Legislative Auditor’s guidance document for drafting performance statements provides a framework for identifying policy objectives and linking these to performance metrics.
Legislation required: Yes (preference expires on June 30, 2019).
Fiscal impact: Depends on legislative action.
Available December 2017.
Available December 2017.
If applicable, will be available December 2017.