Thursday, January 25, 2007

Blumenthal’s Quick Fix Is No Fix

Attorney General Richard Blumenthal’s quick fix solution to soaring energy prices – impose a “windfall” profits tax on the greedy captains of the energy industry – will not fix the problem.

His pseudo-solution to high energy prices in Connecticut -- caused by an insufficient energy transmission system and the absence of competition in the energy market – is likely to worsen the problem in the long run.

The powerful Speaker of the House of Representative, Jim Amann, so far has resisted the tune piped by Blumenthal. He may have been fully awake in his high school Economics 101 class when the teacher explained that companies do not pay taxes – not even taxes labeled, for the edification of the general public, “windfall profit taxes.” Companies are tax collectors not tax payers. If you demand they pay a windfall profits tax, they will collect the tax from consumers in the form of higher prices charged for their product. All business taxes result in higher prices or – when they are state or local taxes – business flight. A Connecticut profits tax imposed on a business that operates in other states will be collected from non-Connecticut consumers in the form of higher prices; if the higher prices make the company less competitive, the company will seek to lower its costs by withdrawing services from Connecticut.

According to a Hartford newspaper report, “If the (windfall profit) tax is adopted, homeowners and businesses faced with some of the highest electric rates in the country could see credits on their bills - at the expense of the companies churning out the juice.”

That juicy line easily could have been written by Blumenthal himself, who briefly had a fling at journalism in college. It contains a grain of truth. Under the Blumenthal inspired bill, one coal-fired plant in Bridgeport owned by New Jersey-based PSEG Power and the Millstone nuclear power station in Waterford, owned by Virginia-based Dominion Resources would surrender 50 cents on the dollar of excess profits to state government, which then might pass it on to ratepayers. It has been determined that other energy providers in the state are not making profits sufficient enough to provide a gross profit tax rebate to the state.

A number of things, most of them bad, will happen should Blumenthal’s bill make it past Amann’s discerning eye.

If the stockholders of Dominion Resources decide that the windfall profits tax so diminishes their profits that it will be no longer profitable for them to supply energy to Connecticut, they will press the company to do business elsewhere – and Connecticut will have lost yet another energy supplier. Other energy suppliers will “get the message” and avoid doing business in the state. So then, there are two unintended consequences that are certain to follow in the wake of Blumenthal’s bill: Energy supplies in the state will be diminished in the long run because energy suppliers, reading the writing on the wall, will have determined it is not profitable to do business in Connecticut; and the tax rebate, if that is what it is, will be self terminating -- because you cannot pluck a golden egg from a golden goose that has fled the coup.

Now then, let us reason together. Connecticut’s energy prices are high because demand is high and there are too few energy suppliers meeting the demand. There are only two ways to provide a long term fix to this problem. You can reduce demand by imposing a consumption tax on consumers, a windfall profits tax in reverse; or you can increase the supplies. More energy providers would reduce the cost of energy without any assistance from self aggrandizing attorneys general or legislators who fancy they are Teddy Roosevelt battling corrupt trusts that have cornered the energy market.

For the past two decades, under prodding from Blumenthal, Connecticut has pursued a policy that has constricted the supply of energy to Connecticut. The resulting increases in the price of energy, due also to the state’s inadequate transmission lines, serve as a consumption tax on ratepayers. Remember -- companies don’t pay taxes; ratepayers do.

Blumenthal and his enablers in the legislature have now been reduced to this: They have only two energy companies to plunder – two! That’s it. There ain’t no more. And there will be no more. Energy providers that might otherwise consider entering the state to do business will steer clear of the “profit tax state.”

Deregulation of energy is in Connecticut not a process that has been tried and found wanting. It is a process that has been subverted by policies pursued by Blumenthal that help him – and, in the long run, no one else.
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