Chapter 6: Taxes

CHAPTER 6 Taxes As it now stands, TVA pays no federal taxes. TVA claims that it should pay no federal taxes because TVA is the federal government. Yet, for purposes of comparing its electricity rates with private power companies, it is claimed that TVA operates just like a private business. Again, these tax and interest subsidies would appear to cast considerable doubt on the claim that TVA can be used as a "yardstick" for measuring the rates charged by private power companies. TVA financial records do show a cost item called "payments in lieu of taxes" to local governments. The reasoning behind these payments is as follows: TVA has taken over many taxpaying industries, and it has taken many thousands of acres of productive land off the tax rolls. The tax load on the remaining privately owned land and businesses would have to be increased to make up the original amount. Therefore TVA pays money to local governments to make up part of the local tax losses caused by the TVA project.

Why doesn't TVA use the same logic in respect to federal taxes that it uses in respect to local taxes? The same conditions apply to federal taxation as apply to local taxation. Federal taxes that resulted from the private ownership of land and businesses in the Tennessee Valley were also reduced by the TVA project. The taxpayers had to make up that loss in federal taxes. And they still 38 TAXES do. Yet TVA makes no payment in lieu of taxes to the federal government. Like interest, taxes are a cost of production. From the over-all viewpoint, this fact cannot be avoided. It is true that government can — and sometimes does — neglect to collect taxes from certain favored productive enterprises. But this means only that the less favored corporations and individual taxpayers are forced to make up the difference. Even if government were to assume complete ownership and operation of all the means of production, taxes would still be a cost of this production. This cost of production might then be given another name, but the fact still remains that even under government ownership a portion of current production would necessarily be used to support such government functions as courts, police forces, naval and military forces, diplomatic services and others. For purposes of simplicity, these may be called the "government overhead" costs of all business — paid by taxes on production.

Someone pays these "government overhead'' costs — taxes — on TVA production. These costs can be included in the TVA electricity rates — and charges for other services rendered by TVA — or they can be shifted to the taxpayers, directly or partially deferred by government borrowing. There is no other choice. Senator Norris, "the father of TVA," once said: "A proposal from a great association of Tennessee says, in effect, 'Let TVA property be subject to taxation the same as everybody else's property.' ... If we go to that extreme, Senators can see that the TVA would be out of business in three months."35 In order to keep TVA in business, therefore, the remaining privately owned electric companies must keep their own rates high enough to pay their share of the taxes needed to subsidize low rates for TVA customers. For example, in 1947 TVA paid in lieu of local taxes 3.93% of its total revenues received.36 Private electric companies paid in total taxes TVA PAYS 4% TAXES; PRIVATE COMPANY 19% 39 — federal, state and local — an average of 18.9% of total revenues received.37 These figures do not take into account the other special tax privileges enjoyed by TVA — but not by private utilities — such as the franking privilege in the use of the mails, tax-free gasoline, exemption from various license fees, and so on.

In defense of these tax exemptions, TVA says that private companies pay only a certain percentage of their profits as taxes to the federal government. TVA claims that it pays all its profits to the federal government, call it taxes or whatever you wish. But this TVA claim begs the question of its costs as compared to the costs of private companies. It assumes that TVA makes a profit. But how can a profit be determined until all costs are calculated and fully met? The issue involved in a true comparison between rates charged by TVA and the rates charged by private electric companies includes more than unpaid interest and taxes. It includes a detailed and technical analysis of TVA's questionable method of dividing its total costs among the flood control, navigation and electricity programs. It requires the inclusion of many TVA expenses now borne by other departments of government — for instance, the compensation insurance that TVA carries on its 15,233 employees but does not pay for.

A recently published study, An Analysis of the Real Cost of TVA Power, by C. J. Green, undertakes to make this difficult comparison.38 Mr. Green is a professional engineer-accountant who recently retired from the Federal Power Commission after twenty years of service. In his detailed and thorough accounting-study on the TVA electricity program, he reaches the conclusion that the present TVA rates would have to be about doubled if TVA had to compete on an equal basis with private utilities. Thus, instead of TVA supplying "cheap" power, its rates would be higher than the rates of private power companies in the same region.

40 TAXES On this same point, here is a summary extract from the results of an investigation of federal power projects authorized by the House Appropriations Committee in 1947. In his report of December 20, 1948 to the Chairman of this Committee, the chief of the investigating staff, Robert E. Lee, wrote: "In general, federal power is not cheap, but can be made to appear so by allocating substantial portions of the investment and expenses to other than power. Also, our studies indicate that if the federal projects pay taxes at the levels paid by the privately-owned utilities, the federal rates would, in general, be higher than the rates of the privately-owned utilities in the contiguous areas." Here is a comparative tax picture between private utilities and TVA for the past three years: 1945 1946 1947 TVA payments in lieu of taxes as per cent of revenue 5.40% 5.85% 3.93%36 Private utility taxes as per cent of revenue 21.7% 20.4% 18.9%37 If one wishes to add the payments in lieu of taxes made by the TVA municipal and cooperative distributors, this would make the total TVA payments in lieu of taxes 5.5% of revenues for 1947.39 At this point, it may be argued: "Well, suppose that, as you claim, taxes from all the people are used to benefit TVA customers.

What of it? Eventually all of us will get our money back in cheap electricity when the federal government builds a TVA or some similar project in every community." This view ignores an undeniable fact: Of the money thus taken and spent by the federal government, only a part can come back to the people who earned it. The government's cost of handling must be taken out. These charges are often a large fraction of the total. As Carl J. Faist says in a Saturday Evening Post editorial, November 20, 1948: "When we need a new bridge, or an additional health nurse, or an addition to the airport, we go down to TVA POWER NOT CHEAP; FEDERAL AID COSTLY 41 Washington for the money. It is called a 'Federal grant/ but it looks like some of our own tax money coming back to us, with a great many restrictions as to its use. For every dollar we get back this way, I'll venture to guess that another dollar is eaten up in Federal administrative expense — collecting it from us in the first place, telling us how, when and where we may spend it, then compiling voluminous statistics about it afterward. Certainly it is not a gratuity, as some might think...."

It seems to be axiomatic that the spending of money that has not been earned by the person who spends it, usually results in inefficiency and waste. In addition, the tremendous political power over others that goes with this spending is an open invitation to corruption, greed and favoritism. That is what Lord Acton had in mind when he said: "All power corrupts, and absolute power corrupts absolutely." For these reasons, a taxpayer in any state is on questionable ground when he imagines that he can get back the cost to him of a government project in another state by voting to have the government tax the people of that state to build a project in his own state.