Tax Payments and Electric Utility Prices

Abstract

ous taxes imposed on the utility with the tax burden presumably passed on to the consumers of utility services. Since taxes are deducted as a legitimate supply cost in the rate setting process to ascertain the permitted rate of return for a utility, the incidence is upon the consumer via higher prices for service.l The relationship between tax payments and utility prices by consumer classes has, however, been spared systematical empirical analysis. This failure to determine the link between utility taxes and prices leaves several interesting economic issues unexplored. For one, utilities can segregate their customers into user categories, charging each group a different price. We currently do not know which consumer groups feel the greatest impact of taxes levied on the electric utility. For another, the traditional view of public utility taxes denies accepted principles of taxation, the concept of price-elasticity of demand, or the assumption of profit maximization when it presumes that different sorts of taxes elicit the same price response. Given any degree of elasticity (a price-elasticity coefficient exceeding zero), the rational reaction to taxes based on total output or gross receipts would be to absorb part of