Published
June 21, 2021
Americans will be paying more for energy if Congress passes President Biden’s proposed corporate tax hike. With prices rising sharply in recent months, higher energy bills will further strain families’ finances now and well into the future.
President Biden wants to raise the corporate tax rate from 21% to 28%. Doing so would break his pledge not to raise taxes on Americans with income less than $400,000. That’s because electricity and natural gas distributers are regulated utilities that generally must pass on increased costs directly to their customers by operation of state law, whether they want to or not. It is fair to assume then that if the tax burden of utilities goes up because of a higher corporate rate and other tax hikes President Biden proposed in his budget, they will ask their regulators to pass those increased costs on to customers, with most regulators granting such requests. In fact, many utility rates are set through formulaic rates, which will automatically bake-in the recovery of increased tax rates from their customers.
This outcome has already been demonstrated in the reverse. When Congress passed the Tax Cuts and Jobs Act (TCJA) of 2017, many utilities passed on their corporate tax savings to customers. In fact, a U.S. Chamber Global Energy Institute study of rate impacts in 15 states showed significant residential consumer savings as well as sustained employment growth and billions added to state economies. Another estimate found that utilities in total refunded $90 billion to consumers due to the lower tax rates implemented through the TCJA.
A recent analysis by Americans for Tax Reform showed that energy customers in 38 states would face higher energy bills under President Biden’s plan. This would amount to an unwelcome increase to utility bills in the wake of widespread COVID-19 forbearance policies that now see utility customers catching up on unpaid service charges now coming due.
As we emerge from the pandemic Americans are eager for a return to normalcy. Some have savings to spend on activities and services that were largely unavailable for the last 15 months. They are poised to spend on those things in a big way in the coming months, supporting the forecasts of robust growth into 2022. This spending will lead to increased demand and higher prices in some areas, which hopefully will only be short term as supply and demand normalizes. However, in contrast, higher energy prices that would result from a higher corporate tax rate will not be “transitory,” to use the popular term of the day. Those higher energy costs will persist as long as higher tax rates remain in place, and often impact lower- and middle-income Americans most.
Families have started to spend down the savings they have accrued since the pandemic commenced. Higher energy prices, directly driven by higher tax rates, will deplete those reserves faster. After those savings are gone, higher energy prices will start squeezing their budgets even more – month after month after month. They will have President Biden’s broken tax pledge to thank for that added stress.
About the authors
Curtis Dubay
Curtis Dubay is Chief Economist, Economic Policy Division at the U.S. Chamber of Commerce. He heads the Chamber’s research on the U.S. and global economies.
Heath Knakmuhs
Knakmuhs studies, develops, and communicates strategic energy policies and initiatives with a focus on the electric power sector. He also examines the impact of regulatory action, market-based factors, and emerging threats on the American electric grid.
