If You Get Too Cold, I’ll Tax the Heat

Public utilities are funny things. The industry is highly capital intensive and many argue that it makes for natural monopolies. At the same time, access to electricity and water (and internet) are assumed as given in any modern building. Further, utility providers are highly, highly regulated at both the state and federal levels of government. Many utilities must ask permission prior to changing anything about their prices, capital, or even which services they offer.

Don’t get me wrong. Utility companies have a sweet deal. They are protected from competition, face relatively inelastic demand for their goods, and they have a very dependable rate of return. I just can’t help feeling like state governments are keeping hostage a large firm with immobile fixed business capital. For that matter, given what we know about the political desire for opaque taxation, I also have a suspicion that many states might tax their populations by using the utility companies as an ingenious foil. “Those utility companies are greedy, don’t you know. It’s a good thing that they are so highly regulated by the state.”  

There are two types of utility taxation. 1) Gross receipts taxes are like an income tax. From the end-user’s perspective, the tax increases with each unit consumed. 2) A utility license tax is like a fee that the utility must pay in order to operate in the state. From the user’s perspective, well… This tax may not even appear on the monthly bill. But if it does, then the tax per household falls with each additional household that the utility serves. Either way, state governments can get their share of the economic profits that protection affords. Below is map which shows the 2021 cumulative utility tax per resident in each state.

Personally, I don’t see much of a geographic pattern except maybe some special correlation. Except for Alabama and Illinois, the South and Midwest appear to have lower taxes per capita than the other regions. Just as with housing affordability, the more expensive parts appear to be in the corners of the country. Which states impose the heaviest burdens? Below are the five states with the highest and lowest tax burdens. Most states impose a burden that is comparable to the next. But D.C. and Alabama? What the heck is going on? Like, what’s their deal? I don’t know specifically, but both states levy heavy gross receipts taxes. Alabama’s license tax is unexceptional and D.C. doesn’t even have one.

When thinking about who uses how much, utilities are kind of weird. Poorer people can’t cut their usage down to zero and consuming those first amounts have big impacts on standard of living. Richer people afford a lot of utility consumption and are less sensitive to the price. This is why many states have a gross receipts tax rather than a per-unit tax. When companies have a sliding scale for the per unit price – that is, they charge quantity premia – states can tax heavy users more than lighter users.

The 2021 per capita utility tax burden in the US was $42.20. How does your state measure up? Below is the ranking.

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