Rent Taxes on Norwegian Hydropower Generation

Abstract

In Norway, two obstacles to the introduction of a hydro rent tax are about to vanish, the old accounting system for public utilities and the system of administered non-rent prices. The tax authorities are now searching for a viable rent tax system. In this paper we consider detailed effects of six tax systems on realistically modelled marginal and highly profitable power plants. In addition to the existing “percentage system” we examine the ordinary corporate tax system, a special electricity income tax, a higher rate of proportional income tax, an excise tax and a resource rent tax. These systems are compared and evaluated with respect to neutrality, sensitivity to the amount of economic rent generated in a plant, cost-consciousness, stability of tax rates, stability of taxes paid, uncertainty of tax revenues and administrative costs. We conclude that the existing Norwegian tax system for electricity generation is not suited for taxing hydro rent since it seriously violates several of these criteria. The existing system ought to be replaced by a resource rent tax either as a pure system or in combination with a corporate income tax system.