Tax law experts say new utility charges likely might not be a tax if the money isn’t spent to benefit the general public.
A lawsuit seeking to block a referendum on FirstEnergy Solutions power plant subsidies could hinge on who the court believes will benefit from them.
FirstEnergy’s generation subsidiary on Wednesday asked the Ohio Supreme Court to stop a referendum on House Bill 6, which was passed by state lawmakers in July. The law creates new charges on customers’ bills to help prop up uneconomic coal and nuclear plants.
The energy company claims the charges represent a new tax, which means they cannot be overturned by voters through a referendum. That could be a stretch, though, according to interviews with two tax experts in Ohio.
Under a 2012 Ohio case, Drees Co., three criteria are important for judging if something is a tax: the entity imposing it, the parties who have to pay it, and whether the money is spent for the benefit of the general public.
“In most cases, and in this case, the question turns on the third criteria: Who benefits from the assessment?” said retired tax attorney M. Susan Murnane, who is not involved in the case. “If the general public is the primary beneficiary, then the assessment is likely a tax. If a small number of nuclear energy providers are the primary beneficiaries, then the assessment is likely a fee.” Ultimately, the issue is “a question of fact for the court,” she added.
FirstEnergy Solutions’ brief also notes that the U.S. Supreme Court found that penalties under the Affordable Care Act were a tax. However, there are differences.
“The HB 6 assessment applies to all utility users, whereas the individual mandate only applied if a taxpayer failed to purchase health insurance,” said retired government tax attorney Dennis Driscoll, who also is not involved in the case. “Another difference is that the benefit of the HB 6 assessment will primarily go to a few utility companies.” In contrast, “the ACA assessment was used to fund the medical insurance subsidies for the general public.”
Trish Demeter, chief of staff for the Ohio Environmental Council, said the subsidies will clearly and overwhelmingly benefit one company and its shareholders. “They have $150 million per year for at least six years at stake. This is an estimated total going to FirstEnergy Solutions or a successive owner of Ohio’s nuclear plants of $900 million.”
Additional charges under the laws will go to support two 1950s-era coal plants through 2030. And $20 million per year will go to six existing solar energy projects.
The company’s legal filing quotes various opponents of the bill who objected that it would amount to a bailout tax. It also cites a 2012 Ohio Supreme Court case for the point that the court “must analyze ‘the substance of the assessments and not merely their form.’”
“The charges levied by House Bill 6 are a tax, and laws providing for the levy of a tax are exempt from a referendum under the Ohio Constitution,” said a company statement provided by Angela Pruitt at Sitrick and Company, a New York public relations firm. “The referendum is inherently misleading and confusing to Ohio voters.”
Referendum campaign spokesperson Gene Pierce rejected FirstEnergy Solutions’ arguments about the new rate charges under HB 6. “Flawed, tortuous legal reasoning should not be copied,” he said. “It should be avoided, especially when consumers’ needs should be a priority.”
After having its initial petition rejected by Ohio Attorney General Dave Yost, the Ohioans Against Corporate Bailouts coalition filed its second referendum petition on Aug. 16. That got a go-ahead from Yost on Aug. 29 and from Ohio Secretary of State Frank LaRose on Aug. 30.
HB 6 provides that utilities will collect the subsidy charges as part of customers’ rates and then send money to the state treasurer, but the funds “shall not be part of the state treasury.” Debate by supporters in the Ohio House of Representatives also undercuts claims that the charges are a tax.
“Not one word in this bill creates any kind of tax whatsoever. We are talking about rates,” Rep. Bill Seitz, R-Cincinnati, one of the bill’s co-sponsors, said during the debate.
FirstEnergy Solutions’ lawyers first submitted the tax argument to the Ohio attorney general and secretary of state before they authorized the petition last month.
Unless the court blocks the referendum, the campaign will continue work to collect the approximately 266,000 voter signatures needed by Oct. 21 in order to get the issue on the ballot next year.