AGENDA #5d
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
Ralph D. Karpinos, Town Attorney
SUBJECT: Information Report on Possible Local Electric Franchise Tax
DATE: August 26, 2002
The purpose of this memorandum is to report on the issues related to the possible enactment of a local franchise/privilege tax on Duke Power.
BACKGROUND
Last February, in an effort to maintain a balanced State Budget, the Governor of North Carolina ordered the withholding of the state franchise tax revenues collected from electric utility companies that otherwise were to be distributed to municipalities. As a result of that Executive Order (attached), municipalities throughout North Carolina did not receive distributions for the second and third quarters of the 2001-02 fiscal year. The fourth quarter distribution, due in September, also may not be distributed.
Following this action, the North Carolina League of Municipalities circulated a draft of a local electric franchise tax ordinance that has been generally followed and adopted by a few NC municipalities.
DISCUSSION
The basic theory of the local ordinances being enacted, in summary, is that municipalities have general authority to enact such ordinances, but are prohibited by the tax statutes from doing so as long as they receive a distribution of the tax collected by the State. With that distribution being stopped as a result of the Executive Order, the municipalities arguably now have the right to impose the tax. (Please see attached memoranda from the League of Municipalities for more detailed information.)
At least two legal initiatives have been undertaken to challenge the authority of North Carolina municipalities to impose this tax:
1. Carolina Power & Light Company has filed a complaint against seven municipalities challenging the authority of those municipalities to enact ordinances seeking to impose a franchise tax on C.P. & L. C.P. & L. is seeking a declaratory judgment ruling that the municipalities do not have the statutory authority to impose the local tax and that the ordinances violate the U.S. Constitution.
2. Duke Energy Corporation has filed a formal Objection to the tax imposed by several other municipalities and is seeking a hearing on that objection before the Secretary of Revenue or another forum, if the Secretary of Revenue is not the proper person to consider Duke’s petition. Duke also raises statutory and constitutional objections to the local taxes.
On August 13, 2002, the Manager and Attorney attended a meeting at the League of Municipalities Building in Raleigh to learn more about this issue. Several of the municipalities represented at the meeting are involved in the pending litigation. Among the topics discussed at the meeting were:
1. Merits of the litigation, including the Attorney General’s opinion. (That opinion (copy attached) advises that municipalities remain barred from imposing such taxes.)
2. Strategies for responding to the lawsuit by the named defendant Municipalities. (Representatives of the named defendants met to discuss a joint defense and the hiring of an attorney. League of Municipalities attorneys made it clear that the League is not a party to the litigation. However, in the event the cases go up on appeal, the League does have a process for seeking approval to file a Friend of the Court brief.);
3. State budget issues and the likelihood that the taxes collected will continue to be withheld from distribution to municipalities;
4. Possibilities for additional litigation or that the state might be drawn into the current proceedings;
5. The status of a pending bill that if enacted could make the litigation and local franchise taxes unnecessary.
6. Potential loss of revenue in the event the taxes are not imposed at this time.
7. Possibilities for other municipalities enacting such taxes. Several municipalities represented at the meeting indicated that such a tax was under consideration.
NEXT STEPS
A key issue for consideration is whether it is reasonable for the Town of Chapel Hill to consider enactment of a local franchise tax on the provision of electric service at this time or whether we should wait to see what happens over the course of the next several weeks with respect to further distributions of the tax by the Secretary of Revenue, and the results of the of the pending litigation and pending legislation. The first distribution of the electric utility tax for the 2002-03 fiscal year is required to be sent to the municipalities within 75 days after the end of September.
There is some risk in electing to enact such a tax at this time in that the Town would likely be subject to litigation or an administrative proceeding similar to those that are already pending.
There is also some risk in delaying the enactment of a local franchise tax. If ultimately the results of the pending administrative appeal and lawsuit establish that the local franchise taxes are valid and can be collected, we would have foregone an opportunity to collect the tax for the period in which we delayed imposing the tax.
There is the pending legal question of whether municipalities have the legal authority at this time to impose these taxes.
There is also the question of whether the Council would wish to impose a tax on the provision of electric service that could ultimately be passed on to Duke’s customers. Under what circumstances a local tax could be added to customers’ bills was discussed at the Raleigh meeting. League staff indicated that they had sought information on this issue from staff at the N.C. Utilities Commission, but had not received a definitive answer.
RECOMMENDATION
We will continue to monitor the pending litigation and administrative proceedings and continue to research the issues involved. We will bring to the Council an additional report in September that will include options for the Council to consider for enactment of a local tax on electric power companies.
ATTACHMENTS
1. Governor’s Executive Order (p. 4).
2. Memorandum from N.C. League of Municipalities Executive Director (p. 8).
3. Memorandum from N.C. League General Counsel (p. 10).
4. Attorney General’s Opinion (p. 11).