Public Power Magazine

Post Script

From the June 2013 issue (Vol. 71, No. 4) of Public Power

Originally published May 8, 2013

May 8, 2013
A Q&A with Kansas Sen. Pat Roberts.

The chairmen of the House and Senate tax-writing committees are pressing ahead with tax reform legislation. What are the prospects such legislation will be enacted this or next year?

There is bipartisan agreement within the Senate Finance Committee that fundamental tax reform is long overdue. I agree. There is no question that the existing tax code is confusing and difficult to understand. The average American citizen should be able to file his or her own tax return. In addition, it is clear that our corporate income tax system must be reformed, to increase the international competitiveness of American companies and to encourage economic growth and job creation.

How do you think tax reform legislation or a budget deal could effect the exclusion for municipal bonds?

While fundamental tax reform is necessary, it is also important that reform should be carefully structured so that existing industries and investments are not harmed. For example, many Kansans have expressed to me their opposition to tax code changes that would cap itemized deductions, which would effectively raise taxes on individuals subject to the cap. In addition, because the proposals would limit the amount of tax-exempt bond interest taxpayers could exclude from their income, the proposal would have a significant impact on state and local government finances, as well as on the investors in these important financial instruments.

I am concerned that limiting itemized deductions will lead to less demand for tax-exempt bonds and raise borrowing costs for state and local government, including municipally owned utilities, which are so important to the Kansas economy. This would be disastrous in the current economic environment, and would lead to a reduction in services, less investment in communities, and potential job losses at the exact time when this type of assistance is most needed.

I am especially concerned that the proposals to cap or eliminate various tax provisions will not be used to create a more pro-growth tax system, but will simply be used to increase spending.

How do you think Congress will act on energy-related tax provisions, including provisions related to fossil fuels, renewable energy, conservation, and the like?

In order to stabilize energy prices, we need to increase our energy supply. The government can help by supporting domestic oil and gas exploration and the development of alternative, renewable energy resources. From a state perspective, Kansas plays a unique leadership role in production of both conventional and renewable forms of energy. We are second only to Texas in wind capacity and rank among the top 10 states in both crude oil production and refining.

I am hopeful that the energy-related tax provisions will be reviewed in the course of the tax reform debates. However, reform of the energy-related tax provisions must be very carefully considered. The oil and gas industry, particularly smaller independent producers, are not dependent on low income tax rates. For them, the current tax structures provide them with cash flow, even when wells aren’t producing, which allows them to invest in new wells and equipment. The tax structures are absolutely essential to their success. This isn’t to say that we shouldn’t consider reforms in this area, but that, again, we must take care that we do not harm these industries, especially at a time when America is benefitting so greatly from new energy technology and newly discovered resources.

One of the arguments for tax reform is that taxpayers may lose tax “breaks,” but will benefit from lower tax rates — does this argument hold for publicly owned electric utilities?

With the prominence in the U.S. economy of small businesses, many of which are “pass-through” businesses, it is critically important to carefully consider how the pass-through form fits into the U.S. tax system and how any particular tax reform might affect pass-through businesses. Elimination of business tax expenditures to finance a lower corporate rate can raise substantial issues for many small businesses. Pass-through businesses could potentially lose the benefit of widely used business tax provisions such as the exclusion for interest earned on tax-exempt bonds without the benefit of the lower corporate tax rate. Without corresponding reform of the individual income tax, these changes would also be in addition to any higher individual income tax rates that were enacted in January 2013 as part of the legislative response to the “Fiscal Cliff.”

The tax code provides businesses with considerable flexibility in how they organize and structure their business operations. Depending on their ownership and capital needs, businesses can choose between several different organizational forms. This distinguishes the U.S. in comparison to its major trading partners and provides greater flexibility to the overall economy. Tax reform must keep these issues well in mind so as to not damage the most vibrant sectors of our economy.

In implementing the Dodd-Frank Act, the Commodity Futures Trading Commission is imposing new regulations on swaps, one of which has had the effect of discouraging non-financial entities from entering into transactions needed to help public power utilities hedge commercial operations risks. What are the chances legislation amending the Dodd-Frank Act, including to address issues of concern to public power, will be enacted this year?

Since its enactment in 2010, the financial market regulators have focused on the implementation of the Dodd-Frank Act. The Commodity Futures Trading Commission (CFTC) is two-and-a-half years into the implementation of the Dodd-Frank Act, yet has only completed 43 rules, which [address] approximately 80 percent of the Dodd-Frank reforms. These rules continue to weigh down the financial services industry and create uncertainty across a wide swath of the business world. In light of this, I think that it is perfectly appropriate for the Congress to begin a robust examination of the impact Dodd-Frank is having on the economy. Since 2011, the House of Representatives has moved a number of bills to delay or restructure the Dodd-Frank Act, but none of these have been moved in the Senate. At this juncture, it isn’t clear whether the Senate will take up measures to revise or reform the Dodd-Frank Act.

I am particularly concerned about the derivatives title of the Dodd-Frank Act, which will allow the CFTC to regulate the purchase and sale of commodity derivatives. The CFTC is developing rules and regulations to implement the derivatives portion of the Act, but I remain concerned about the impact of these regulations on the financial markets and on participants in these markets. Derivative products are essential risk management tools used to mitigate price volatility of goods and services purchased and used in the normal course of business. While it important to bring transparency and stability to the derivatives market, the CFTC’s rule proposals must be carefully tailored so that they do not disrupt risk-management practices that pose no systemic risk to the economy. Managing risk through hedging is essential for many businesses, particularly regarding volatile commodity prices, currencies and interest rates. Derivatives end-users did not contribute the financial crisis and, in fact, many were able to successfully mitigate their risks during this period by using derivatives.


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