Hurricane Dorian and the Need to Solve a Taxing Problem

Electric cooperatives throughout rural America face a financial crisis inadvertently caused by Congress. And the weight of this crisis is made even more clear as Hurricane Dorian churns toward Florida and Georgia.  

If not-for-profit co-ops accept government grants to restore power in the wake of Hurricane Dorian, they could lose their tax-exempt status and be forced to pay back a substantial chunk of that money to the government.

Most of America’s 900-plus electric cooperatives — which are built by and belong to their communities — are tax-exempt entities. A change to federal tax laws in 2017 targeted at for-profit companies has created a requirement for co-ops to count grants from federal, state or local governments as non-member revenue. For a co-op to maintain its tax-exempt status, no more than 15 percent of its annual income can come from sources other than co-op members.

As stewards of America’s rural communities, electric co-ops work hard to secure grants to recover from fires, floods, hurricanes and winter storms, or jump-start local economic development projects like building out a broadband network. But many of these grants will push the co-op over the 15 percent revenue threshold with severe consequences.

This leaves co-ops with an unfair choice: do they take the money they need to turn the lights back on for their members as quickly as possible after a disaster? Do they accept the broadband grants to help close the digital divide between rural and urban America? Or do they turn down those grants so they won’t have to spend their members’ money paying taxes rather than improving service?

That dilemma, and accompanying uncertainty, is all too real for electric co-ops from Florida to Oregon.

Here are three examples:

  • West Florida Electric Cooperative received $24 million in expedited reimbursement from FEMA this year for storm recovery work in the wake of Hurricane Michael. That’s about 40 percent of the co-op’s projected annual revenue. Gulf Coast Electric Cooperative to the south is in the same tax position, and three other Florida co-ops could surpass the 15 percent threshold by year’s end.
  • Otsego Electric Cooperative received a $10 million broadband grant from the state of New York, which will put the co-op well over the 15 percent limit for non-member revenue in 2019. Otsego will lose its tax-exempt status unless the law is changed this year. The co-op CEO expects to have to borrow an amount equivalent to 21 percent of that $10 million broadband grant to pay taxes.

According to the Treasury Department, congressional action is the only way to address this issue. Fortunately, key lawmakers recognize this is an unintended consequence of the 2017 tax bill and they’re working together toward a solution before it hits home with their rural constituents.

The bipartisan RURAL Act, introduced by Reps. Terri Sewell (D-Ala.) and Adrian Smith (R-Neb.) and Sens. Rob Portman (R-Ohio) and Tina Smith (D-Minn.), will restore certainty and common sense. The bill ensures that co-ops do not jeopardize their tax-exempt status when they accept government grants.

Time is running out and lawmakers must pass legislation this year. Passage of the RURAL Act is essential for America’s rural communities. As co-ops in Florida and Georgia prepare for another significant power restoration effort, relief can’t come soon enough.

Jim Matheson is CEO of the National Rural Electric Cooperative Association, the national service organization that represents the nations more than 900 not-for-profit, consumer-owned electric cooperatives. Matheson previously served seven terms as a U.S. representative from Utah.

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