Public utility tax exemption for businesses that use electrolysis to make chemicals

Purpose

The Legislature originally passed this preference to:

• Retain family-wage jobs in the electrolytic processing industry.
• Continue electrolytic production in Washington.

While these goals are no longer stated in law, JLARC staff infer that they are the public policy objectives for the preference.

Preference provides public utility tax exemption on sales of electricity to electrolytic processors

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.

Statute sets eligibility criteria and reporting requirements

To qualify, utilities must sell electricity to processors that:

• Use an average of more than 10 megawatts of electricity per month.
• Meter the electricity used in electrolysis separately from the electricity used for general operations of the business.
• Are not a direct service industrial customer of the Bonneville Power Administration as of June 10, 2004.

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.

Exemption scheduled to expire in June 2019

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.

Since 2004, the Legislature has changed the goals and expiration date, but not the preference itself

2004: Preference enacted through June 30, 2011

The Legislature passed this preference and scheduled it to expire June 30, 2011.  The law included two goals:

1. Keep at least 75 percent of the family-wage jobs that existed on January 1, 2004.
2. Allow electrolytic processors to continue production through 2011 so that they could preserve and create new jobs when energy costs fell.

A potential beneficiary testified that the bill could save manufacturing jobs, and that competitors in North America had similar tax incentives.

2009: Legislature extended preference and amended goals, Legislative Auditor recommended continuation

The Legislature:

• Extended the expiration date of the preference to June 30, 2019.  The extension allowed utilities to claim the exemption for sales of electricity through December 31, 2018.
• Amended the second goal by removing a reference to falling energy prices and clarifying that the goal was to maintain industry competitiveness.

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.

2010: Statutory reorganization repealed stated goals

The Legislature consolidated statutory reporting requirements for several tax preferences.  In doing so, the legislation also repealed the stated goals of this tax preference.

Electrolysis is an energy-intensive process to produce chemicals used by other industries

Electrolytic processors convert dissolved salt into chemicals.  The tax preference eliminates the public utility tax on electricity used in the process.

Electrolysis produces chlorine, hydrogen, and sodium hydroxide

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.

• Uses of chlorine and sodium chlorate include bleaching pulp and paper, treating wastewater, sanitizing municipal water supplies and swimming pools, and producing other chemicals.
• Sodium hydroxide has many uses in the pulp and paper industry, water treatment, and soap production.
• Hydrogen can be used as a combustible fuel or to produce hydrochloric acid and ammonia.  Hydrogen also helps to convert liquids into solids for use in food (e.g., hydrogenated vegetable oil).

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 value of the tax preference depends on electricity price

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 preference’s value varies based on the price of electricity

The electricity price paid by processors varies.  For example:

• AkzoNobel is a processor that purchases electricity from Grant PUD. The PUD produces hydropower from its own dams and sets its own price. The price has remained relatively stable over the past 12 years.
• Another processor, Westlake Chemical, purchases its electricity from Cowlitz PUD. This PUD sells electricity at the mid-Columbia wholesale market price. This price has fluctuated in the past 12 years.

Electricity costs in the Pacific Northwest are relatively low

The Energy Information Administration (EIA) reports ranges of wholesale electricity prices in eight regional markets across the country.

The public utility tax

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.

JLARC staff infer that the originally stated goals are still the public policy objectives

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.

Inferred objectives: Retain family-wage jobs and continue electrolytic processing

The preference’s originally stated goals are to:

1. Retain family-wage jobs (at least 75 percent of the jobs that were on the payroll for electrolytic processors in January 1, 2004).
2. Allow the electrolytic processors to continue production in Washington so that the industries will remain competitive and be positioned to preserve and create new jobs.

Evidence indicates that processors have met both public policy objectives

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.

Inferred objective: Retain family-wage jobs

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.

• In 2004, only EKA Chemical (now AkzoNobel) qualified for the exemption.  On January 1, it employed 33 workers in its manufacturing operation, making the target employment level 24.75 jobs.
• The Washington processors now include AkzoNobel in Moses Lake, and Westlake Chemical in Longview.  Together, they employed 106 workers in 2015.

“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:

• The median hourly wage for all Washington occupations was $20.28.
• The median hourly wage in Cowlitz and Grant counties was $18.20 and $16.23, respectively.  The processors are located in these counties.
• The hourly wage for 105 of the 106 jobs reported by the processors was over $20 per hour.  Of those, 77 paid more than $30 per hour.

Inferred objective: Allow processors to continue production

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 reduces electricity costs for electrolysis

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.

Public utilities must pass the preference savings to electrolytic processors

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

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.

Indirect beneficiaries

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:

• A sodium chlorate plant in Moses Lake owned by AkzoNobel Pulp and Performance Chemicals, Inc, a subsidiary of Amsterdam-based AkzoNobel.
• A chlor-alkali plant in Longview owned by Westlake Chemical, based in Houston, Texas.

Estimated beneficiary savings in 2017-19 Biennium are $1 million

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.

According to their 2015 annual reports, employment at the beneficiaries totals 106.  This equates to 2015 beneficiary savings of $6,300 per job.

Absent the tax preference, processors would experience a 3.8734 percent cost increase in electricity costs

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 identified other states that provide tax relief for electricity sales

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

• States that specifically exempt electricity used for electrolysis are Washington, Alabama, Arkansas, Delaware, Louisiana, Mississippi, and Texas.

Eight other states have broader exemptions or lower tax rates for electricity

• Six states do not tax sales of electricity consumed in the manufacturing process: Kentucky, Nevada, New York, Utah, West Virginia, and Wisconsin.
• Ohio does not define electricity as tangible personal property and does not tax its sale.
• Tennessee imposes a lower sales tax rate on electricity sold to manufacturers.  The tax commissioner can approve an exemption for electricity used directly in the manufacturing process.

RCW 82.16.0421

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.]

Legislative Auditor recommends clarifying the tax preference

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.

1. If the Legislature is interested in family wage jobs, then a jobs target and definition of “family wage jobs” would help future reviews of the preference and inform legislative decision-making.
2. If the Legislature is interested in allowing the industry to continue production, clarifying the criteria to use to assess competitiveness and production would help future reviews and inform legislative decision-making.  Possible options for such criteria include the relative industry employment concentration in Washington, or the level of production compared with the industry as a whole.

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.

The Commission does not endorse the Legislative Auditor’s recommendation and recommends that the Legislature should continue the preference.

The tax preference is consistent with other similar exemptions where electricity is a prime raw material component in the processing. It is also clearly meeting inferred objectives, which are based on fairly recent legislative pronouncements. In addition, testimony surrounding this preference suggested the metric for jobs does, in fact, reflect current employment levels and is an adequate indicator of this preference’s policy success.