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Proposed electricity tax exemption could give jolt to residential customers

Loren Laugtug, manager of legislative affairs for Otter Tail Power Company, testifies Feb. 28 before the House Taxes Committee in favor of HF2421, sponsored by Rep. Jeff Backer, left, which would expand the sales tax exemption for purchases of electricity. Photo by Paul Battaglia

Has electricity become a necessity in the modern world?

Rep. Jeff Backer (R-Browns Valley) told the House Taxes Committee Wednesday that he believes electricity is on par with food and clothing — two items exempt from sales tax in Minnesota.

“Electricity in our society is as important as food and water,” Backer said, quoting his father, “… And if you live in a township when [the] electricity goes out you don’t have water — your pumps don’t run.”

Backer is the sponsor of HF2421 that aims to provide a tax exemption for all electricity and repeal existing exemptions for electricity sales.

It was held over for possible omnibus bill inclusion. There is no Senate companion.

Electricity sales tax is currently exempt when used as a primary heating source for residential customers over the winter, and when consumed during industrial production. Some exemptions also apply for data centers and certain taxable services.

The greatest beneficiary of the change would be residential settings, where it is estimated only 11 percent of electricity sales are currently exempt. Additional estimates show 90 percent of industrial electricity and 25 percent of commercial electricity are currently exempt.

Data shows the effects of the tax would be far-reaching. In 2016, residential electricity usage in Minnesota was approximately $2.7 billion. The average residential electrical bill is $90 a month, resulting in a potential tax savings of $85 a year per household.

“It’s really a regressive tax,” Backer said. “As a person gains in their wealth proportionally they do not see an increase in their [electricity] taxes.”

Commercial electricity usage was $2.3 billion in 2016, which averages to a $565 monthly bill per business. Elimination of the sales tax would save the average business $470 a year.

“It would make us more competitive and take us out of that regressive tax,” Backer said.

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