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NY bid to end tax exemption of retail energy sales brews debate

New York energy retailers are protesting Gov. Andrew Cuomo's proposal to eliminate their exemption from paying taxes on energy sales in a bid to raise state and local government revenues. Cuomo announced the proposal to end the sales tax exemption on the transmission and distribution of nonresidential natural gas and electricity purchased by energy service companies, or ESCOs, as part of his fiscal-year 2019 budget plan unveiled Jan. 16.

Unlike default service sales of utilities, New York ESCOs have been exempt from paying state sales tax since the early 2000s, when the energy retail market was established to give New York consumers more competitive choices in the hopes of lowering energy bills. The Cuomo administration said the exemption is no longer needed now that New York's more-than 200 ESCOs are "established entities" and are already being taxed by some school districts and local governments, including New York City since 2009. As reported by City & State New York, state officials expect to collect $96 million in taxes initially and $128 million in coming years by ending the state sales tax exemption for ESCOs.

"The existing tax exemption benefits customers, not ESCOs, by providing them with direct savings and encouraging a more competitive energy market, which is good for all consumers," countered Bryan Lee, spokesman of the ESCO-representing Retail Energy Supply Association. "Eliminating the tax exemption for businesses would increase energy costs at precisely the wrong time."

The state legislature has tried several times in recent years to repeal the tax break, with the latest being Senate Bill 5291, which was introduced Jan. 3 by Energy and Telecommunications Committee's Republican Chairman Sen. Joseph Griffo.

Cuomo's plan to eliminate the sales tax exemption for ESCOs is also the latest action by his administration to crack down on price gouging and other abuses by some ESCOs in the retail energy market. This includes an indefinite moratorium prohibiting ESCOs from contracting with subsidized, low-income customers until the third-party energy sellers consent to state-supervised audits. However, the New York State Public Service Commission on Jan. 18 gave permission to five local communities to start buying bulk purchases of electricity and natural gas from ESCOs.

"ESCOs do not provide value in the mass market," asserted Richard Berkley, executive director of the Public Utility Law Project of New York. He said the state's record on ESCOs speaks for itself and cited a 2010 analysis by the Public Utility Law Project that found the ESCO sales tax exemption "distorts the marketplace by favoring ESCO providers and their customers."

Ending the tax break for ESCOs will just hike electricity prices, warned Paul Steidler, a spokesman for the New York Affordable Reliable Electricity Alliance, a coalition of businesses, labor unions, energy experts and community and environmental activists.

"New York already has extremely high taxes on electricity," continued Steidler. "In fact, about a quarter of the typical consumer's bill is for electricity taxes, electricity subsidies and various government programs."

"There is no doubt that the vast majority [of the would-be taxed ESCO sales], if not all of it, will be passed onto consumers," said Steidler. "Its a very bad idea and it is a regressive tax."

Senior citizens interest group AARP is likewise worried about New York's high electricity prices, especially since energy bills consume a larger share of an older person's household budget than a younger person's for the same amount of power. However, AARP is not opposed to ending a tax break for ESCOs.

"We're not happy with the ESCO marketplace in the state of New York and we haven't been for a while," explained Bill Ferris, AARP's New York state legislative director. Ferris said the economic theory that greater competition in the energy market will lead to lower energy prices has "essentially failed" in New York. He also cited federal data that ESCO customers pay on average significantly more than if they had stayed with their incumbent utility.

While otherwise staying neutral on Cuomo's proposal, Ferris said AARP thinks its time for a public debate over the tax break for ESCOs, especially in light of the state's documentation of the "unscrupulous business practices of some ESCOs."