Energy sales tax is a hot political issues in New York that has a big implication on municipal and state budgets. Like every minute charge on my utility bill there is a long story behind the 6% sales tax I pay on my gas and electric consumption. In this post I will attempt to learn about the array of countervailing forces behind this tax.
Ironically, New York State consumers are exempt from energy sales taxes, but municipalities are free to add energy sales taxes as they see fit. Energy sales taxes typically fund municipal and school budgets in several, but not all municipalities in New York. Currently, I pay 6% sales tax on electric supply, 6% on electric delivery and 6% on combined gas supply and delivery. Though, as I noted in my post on November 2023 ConEd bill, gas delivery and supply taxes are now reported as separate 6% taxes. Here’s a great article on the Power Management site that goes into detail about energy market deregulation and sales tax.
Businesses were exempt from energy sales tax since the inception of the de-regulated energy markets in 1999, but that changed in 2019. As the Sales Tax Institute details, New York State lifted the energy tax exemption for businesses in 2019 to make up for a short-term budget gap.
Energy Deregulation and Taxes – The Vision Ruling
The energy market in New York is largely shaped by legislation from the mid 90s when the New York Public Service Council built the structure for a ‘deregulated’ energy market. Before energy deregulation, power companies like Con Ed owned energy generation infrastructure like coal and gas power plants and the delivery networks that bring energy to us customers. In the pre-vision ruling market, even though utilities could purchase electricity from other suppliers, end users couldn’t make contracts with suppliers other than ConEd. Consumers were paying high energy rates, businesses were limited in their energy choices and energy traders like Enron wanted to expand their trading opportunities. States like California led the way in energy de-regulation and New York decided to follow suit.
The fight to de-regulate the New York, and national, energy markets that largely took place in the 1990s is a story that is lost to most of us consumers, but it’s relevant in a discussion of energy sales tax in New York. I highly recommend browsing the original NY Public Service Commission ruling that defined the new energy market. You can read the gory details in the 1996 NYPSC Ruling here, known as the ‘Vision Ruling’.
Here were the primary goals of the original ‘vision’ order:
- Lowering Rates for Consumers
- Increasing Customer Choice
- Continuing Reliability of Service
- Continuing Programs That are in the Public Interest
- Allaying Concerns About Market Power
- Continuing Customer Protections and the Obligation to Serve
- It’s hard to imagine New York State government s.
These goals seem quite innocuous and focused on the welfare of New Yorkers, though they helped create some of the highest energy costs in the country in New York. There have many updates to the ‘vision’, including the Reforming the Energy Vision plan in January, 2023, though a lot of the basic market structures intact.
Looking at the goals of 2023 vs. 2019, it’s clear that things have changed!
- Building a more resilient energy system
- Empowering New Yorkers to make more informed energy choices
- Creating new jobs and business opportunities
- Improving our existing initiatives and infrastructure
- Supporting cleaner transportation
- Cutting greenhouse gas emissions 80% by 2050
- Protecting New York’s natural resources
- Helping clean energy innovation grow
Source: https://www3.dps.ny.gov/w/pscweb.nsf/all/cc4f2efa3a23551585257dea007dcfe2
The pre-1996 energy market in New York had many perceived problems. Businesses couldn’t deal directly with lower cost energy suppliers, retail customers were vulnerable to price spikes and ConEd and other utilities were having a hard time keeping up with energy demands.
After lots of study, which is brilliantly outlined in this paper at the Utility Project, and many court battles deciding between the interests of consumers, small businesses, utilities, electricity suppliers, manufacturers, large businesses, New York State hydro suppliers (NYPA), energy trading companies like Enron, and a diverse set of industrial concerns the New York Public Service Commission created a deregulated energy supply market which was outlined in the aforementioned 1996 Vision ruling.
In the new deregulated market, utilities had to sell their energy generation plants, new energy spot markets were created so utilities could purchase energy from multiple suppliers and many new regulations and fees were launched.
In the deregulated energy market, Energy Supply Companies (ESCO) create electricity, the NY-ISO grid operator transports wholesale energy to utilities, and the local utilities deliver the energy to our homes. For us consumers, we now get to ‘choose’ our own energy supplier, and are bound to the local utility serving our zip code.
ESCO tax treatment is a big issue in the ‘vision’ ruling. ESCOs were subject all income and property taxes, but their product was exempt from sales tax – at least at the beginning. Energy delivery was still taxable at the prevailing local sales tax.
This tax break lasted for nearly 20 years until New York had a budget gap in 2019. It was decided to cut the AID program (Aid and Incentives for Municipalities) budget of by 7.1%, or $33mil. This fund provides direct payments to municipalities so the funds were important to community budgets. Rather than taking away the funding, the New York legislature had a better idea – why not rescind the ESCO tax exemption for businesses and give that money back to the municipalities? You can see the details buried on page 126 of the New York 2020 State Budget.
However, if you look on page 28 of the same 2020 budget, there is some interesting context to the decision to add ESCO sales tax.
In addition, the Budget replaces Aid and Incentives for Municipalities (AIM) to low-reliance towns and villages with an equal amount of sales tax revenue funded from the elimination of the Internet sales tax advantage and the discontinuation of the energy service company (ESCO) exemption. The State Comptroller will intercept $59 million in sales tax revenue and pay affected towns and villages an amount equal to their prior-year AIM payment. There will be no loss of revenue for affected municipalities.
https://www.budget.ny.gov/pubs/archive/fy20/enac/fy20fp-en.pdf p. 28
In order to make up for this small amount of money ($33mil) from a few ‘low-reliance’ municipalities, every municipality in NY was now allowed to tax ESCO Commercial and Industrial customers using local sales tax laws. In the 2020 budget, New York says they will recoup $59mil in new tax revenues to offset $33mil that was cut from AIM. That’s some budget austerity! With the increase of gas and electric costs in 2022 and 2023, the energy supply taxes generate a lot more than the $59mil they were forecast to generate in 2020.
Nonetheless, consumer energy remains exempt from New York State sales tax. However, there is more to the story since sales tax in New York is comprised of New York State Tax + Municipality Tax + County Taxs. So even though I’m not paying sales tax to New York State, I’m still paying White Plains. Many municipalities and/or counties don’t add extra energy sales tax. If you live in New York, you can check the Jurisdiction Tax Lookup report or this NY Dept of Finance doc to see your local electric supply tax, and who levies the taxes
Local sales taxes where I live are split between the county (Westchester) and the municipality (White Plains), and specifically to the White Plains School District (WPSD). Let’s take a look at the last 12 months of the tax rates on my Con Ed bill to see how sales tax fluctuates.
Electric and Gas tax rates change from 3-6% in what seems like random fashion. However, there’s a story behind each tax change. According to New York law, municipalities are allowed to change tax rates March 1, June 1, Sept 1 and Dec 1, which aligns well to the recent tax change dates. However, this doesn’t explain why energy taxes change so frequently.
All sales taxes on gas and electric are local since there is no New York state sales tax, or MTA surcharge on energy sales. Sales tax on most goods and services in White Plains is 8.375% with 4% going to NY State, 1.5% going to Westchester County, 2.5% going to the City of White Plains and .375% going to the MTA. Since NY State and MTA don’t take their cut for sales
One Story Behind Tax Changes
Let’s dive into some of the tax rate oscillations that began in my January 2023 bill. In December, the gas, ESCO supply and electric delivery taxes were all 6%. Energy costs were going through the roof during the 2022 winter, so with great fanfare on November 1st, 2022, County Executive George Lattimer announced a pause of the Westchester County portion of gas and electric sales tax. As a result the energy supply tax dropped to 3% on my January bill, which reflects December usage. The press release referenced above states that the energy sales tax abatement began in November and to notify his office if the tax credit was incorrectly applied. In my case, I was charged 3% ESCO tax so I will apply for a refund
Executive Lattimer said the Westchester County portion of the ESCO tax would resume in February 2023, so far the tax hasn’t reappeared.
Summary
White Plains, NY, and Westchester County, NY are some of the highest taxed municipalities, and energy is no exception. We pay some of the highest energy sales tax in the state at 3-6%, but these rates can vary every quarter, or at the whim of a politician. While these energy taxes don’t burden most individuals too heavily, the cumulative value for our local schools is high. Are there better ways to fund schools than energy sales tax?
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