NRRI 79-8 ACCELERATED DEPRECIATION INVESTMENT TAX CREDIT


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Create Date March 1, 1979
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By NRRI

March 1, 1979

Accelerated depreciation was adopted in 1954, and the investment tax credit was enacted in 1962. From the outset the economic effects of these tax benefits on the regulated public utilities and their customers have been debated, and controversy has surrounded the treatment of the tax benefits in the ratemaking process for the public utilities. This paper presents a detailed analysis of the legislative history of these tax benefits and of their economic effects on utility rates, tax payments, cash flow, and profits. Finally, an economic evaluation of the alternative ratemaking treatments is offered. The analysis which follows is detailed but not exhaustive; the full range of policy issues relating to the application of the tax benefits to public utilities is beyond the scope of a single study. For example, while the legislative history presented in section II is voluminous, there is no attempt to draw upon it to analyze any of the several legal issues related to the subject. There is also no attempt to assess the implications of the tax benefits and their alternative regulatory treatments within the framework of energy policy considerations. Several issues are briefly summarized in the study but not analyzed in depth, for example the impact of the tax benefits on capital investment by the utilities. Finally, the economic analysis in the study is premised on the federal tax code in essentially its present form; no attempt is made to evaluate whether the corporate income tax should apply to public utilities (as opposed to some other form of tax, such as an excise tax) or whether utilities should qualify for accelerated depreciation and the investment tax credit. The focus of the analysis is on the legislative history of the tax benefits and their economic effects on utility rates, tax payments, cash flow, and profits. This first section provides a summary of the legislative history, economic analysis, and evaluation which appear in the remaining sections of the paper.

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