Arizona Senate Puts Coal Tax Relief Bill on Hold

The Arizona Capitol Museum building in Phoenix, Arizona.

A bill to provide tax relief for Arizona’s Navajo Generating Station (NGS) by exempting income derived from coal mining from the state’s transaction privilege tax (TPT) was held up in the Arizona Senate’s Finance Committee with the legislation falling one vote short of passage.

The bill’s sponsors are working to gain additional support before bringing it up for reconsideration in the wake of the March 14 setback.

Native-American Workforce

NGS, a 2,250-megawatt coal-fired power plant located on the Navajo Nation reservation near Page, Arizona, is the largest electricity power generator in the state. NGS operates under a lease agreement with the Navajo Nation, supplying electricity to customers in Arizona, California, and Nevada. It also provides the power needed to pump water for agriculture and municipal uses from the Colorado River to Phoenix and Tucson through the Central Arizona Project.

The plant is jointly owned by the Salt River Project and the U.S. Bureau of Reclamation, who own the largest percentages of the installation, and the Arizona Public Service Co., NV Energy, and Tucson Electric Power, who have smaller shares. NGS employs more than 400 full-time staff, 90 percent of whom are Navajo.

NGS uses coal from the Kayenta Mine, operated by Peabody Western Coal Company under lease agreements with the Navajo Nation and the Hopi Tribe. The coal is delivered to NGS by a 75-mile electric railroad owned and operated by the plant. Ninety-nine percent of the mine’s 340 employees are Native American.

‘A Tax Elimination’

Arizona’s TPT taxes companies’ gross receipts in 16 separate business classifications, including mining, retail, telecommunications, and utilities. Arizona also allows municipalities to levy local TPTs.

HB 2003 would exempt coal from the retail and mining classifications under the state TPT and any municipal TPT and sales taxes. A Fiscal Note prepared for HB 2003 estimated although the proposed exemptions would reduce Arizona’s General Fund by $9.1 million in Fiscal Year 2019, the ongoing revenue loss from a closed NGS would be $12.2 million.

State Rep. Mark Finchem (R-Tucson), HB 2003’s sponsor, says TPT never should have been imposed on coal mining.

“This is … a tax elimination,” said Finchem. “The state does not collect a [TPT] on the wind, the sun, or the water, nor does it collect the tax on natural gas and nuclear fuels, … [so the TPT on coal] never should have been laid.”

Fails Tax Tests

John Nothdurft, director of government relations at The Heartland Institute, which publishes Environment & Climate News, testified HB 2003 would improve energy markets in the state, during a hearing before Arizona House Ways and Means Committee on February 14.

“Arizona’s transaction privilege tax … [is] dissimilar to how other states tax raw materials used to produce energy, such as coal, natural gas, and other fossil fuels,” Nothdurft testified. “Sound tax policy generally abides by four basic principles: It is applied to a broad base; kept at a competitive, low rate; it is non-distorting; and rate-setting and the regulatory process are completely transparent to the state’s citizens.

“Arizona’s transaction privilege tax fails on at least three, if not all four, of these principles,” Nothdurft said.

High Closing Costs

Nothdurft also testified failure to implement the proposed tax reform might cause NGS to close, which would increase energy prices in Arizona.

“Thirty-one percent of Arizona’s electricity generation comes from coal, but this would significantly decrease if NGS is closed,” said Nothdurft. “This is a significant problem, since the cost of coal electricity is much cheaper than other forms of electricity—especially wind and solar, which are heavily subsidized and yet remain more expensive.”

Severe Power Disruptions Forecast

Fred Palmer, a senior fellow at The Heartland Institute, says ending TPT for coal mining would benefit all of Arizona.

“HB 2003 is designed to help extend the commercial life of NGS, a crucial resource for the economic future of the Navajo Nation and the Hopi Tribe, as well as water users, electric consumers, and agricultural interests in Arizona,” Palmer said. “Since a closed NGS will produce no mining tax revenues, opposition to the bill can only be construed as anti-Native, anti-fossil fuels, and anti-growth.”

A recent study by utility consulting firm Quanta Technology confirms NGS is critical to the power supply in the Southwest.

The report states closing NGS in 2019 would result in “power deficiencies which could evolve into potential voltage collapse and outages, load shedding triggers, potential rotating brownouts, failing transformers or transmission lines and equipment damage” affecting Phoenix, Flagstaff, other large Arizona cities, and California cities such as Lugo and Shandon.

Confident in Bill’s Prospects

Although HB 2003 stalled in the Senate Finance Committee, Carlyle Begay, a Navajo and former Arizona state senator for the district where NGS is located, says he is confident HB 2003 will eventually pass.

Finance Committee member Warren Petersen (R-Gilbert), who initially withheld support for the bill, which kept it from moving out of the committee, now supports the proposal, Begay says.

In addition, “we will have enough Democrat votes to pass the bill through the Senate,” Begay said. “The commitment will be in place in case we need it.”

Editor’s Note: This article was published in cooperation with The Heartland Institute’s Environment & Climate News.

PHOTO: The Arizona Capitol Museum building in Phoenix, Arizona. Photo by Gage Skidmore.

Timothy Benson

Timothy Benson is a policy analyst with The Heartland Institute.