Joseph Krist
Publisher
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TAXING TECH
It took a long time and an extended legal battle for states to get the ability to tax sales on the internet. Fortunately, the issue was settled before the pandemic occurred. This allowed states to reap some of the “benefits” of the move to online retailing that reflected stay at home orders. Now the effort to tax one of the most valuable industries – technology companies – have moved to a new phase.
The Maryland legislature has passed the nation’s first tax on the revenue from digital advertisements sold by companies like Facebook, Google and Amazon. The legislation is estimated to generate as much as an estimated $250 million in the first year after enactment. The intent is to use those monies to aid education in the state.
The effort comes as Connecticut and Indiana have introduced bills to tax the social media industry. Prior efforts have fallen short in West Virginia and New York. Industry opponents of the tax include telecom companies and local media outlets. Opponents claim that the tech companies will pass the cost to their advertisers (mostly small businesses) as a reason not to tax.
A company that makes at least $100 million a year in global revenue but no more than $1 billion a year would face a 2.5% tax on its ads. Companies that make more than $15 billion a year would pay a 10 % tax. Facebook’s and Google’s global revenues far exceed $15 billion. the Maryland tax would be the first to be applied solely to the revenue a company got from digital advertising in the United States.
It is an idea pioneered in Europe where the tech companies face less favorable government regulation. France has imposed a 3 percent tax on some digital revenue. Austria taxes income from digital advertising at 5 percent. The tax will be litigated by the companies. They feel that because the largest tech companies are not based in Maryland, the law would tax activity that originated outside the state, violating the Constitution. When sales taxes were approved, the issue of a physical nexus for tech companies and the jurisdiction levying taxes against them it was argued prohibited those taxes.
LOUISIANA
We have had states as a declining credit sector for some time. Now that the budget season for states is fully underway, the problems being faced by states due to the pandemic have become clearer. They are trying to formulate budgets to meet the requirements of increased pandemic related costs, declines in economic activity, and high unemployment. While there is hope regarding vaccines and the potential revival of economic activity, the outlook for states is uncertain at best.
So we were surprised to see that Moody’s has chosen now to revise the rating outlook of the general obligation, lease and State Highway Improvement Revenue Bonds of the State of Louisiana to positive from stable. “Louisiana’s positive outlook reflects the significant progress the state has made restoring its financial reserves and liquidity in recent years by aligning revenue and spending in a post-energy boom era, rebuilding borrowable funds and generating budgetary surpluses in consecutive years.” We acknowledge these improvements. However, the state’s major industries – fossil fuels and petrochemicals – face enormous pressures in the near and long term.
The other major industry is tourism. Moody’s acknowledges that “the state’s recovery, however, depends in part on the economic recovery of New Orleans, the state’s largest city and a popular tourism destination. Ultimately, tourism may indeed return to pre-pandemic levels but that remains a highly uncertain proposition. Mardi Gras was cancelled this year. Issues related to climate change continue to have a significant impact on the state’s longer term outlook. The state’s historic vulnerability to climate issues continues.
So we ask ourselves what is it that moved a change in outlook now? We continue to believe that with states at the center of managing the vaccine rollout and continuing uncertainty about ultimate levels of federal funding, the outlook can only be uncertain at this time.
ILLINOIS
With all of its problems in addition to the pandemic, Illinois is one state that we are confident will not receive an improved outlook. Gov. J.B. Pritzker of Illinois presented his proposed budget for FY 2022. It comes in the wake of the defeat at the ballot box of a proposed constitutional amendment establishing a graduated income tax. Voters chose to maintain the existing flat income tax at 4.95%.
The Governor’s plan contains no new tax increases and avoids major service cuts. It seeks to end business tax breaks. The business tax changes include reversing a phase-out of the state’s corporate franchise tax, eliminating an additional tax credit for companies receiving other state incentives that create construction jobs, capping the discount retailers get for collecting state sales tax, limiting accelerated depreciation under a federal tax change and accelerating the already scheduled expiration of a tax exemption for biodiesel fuels.
The plan would also extend repayment of state borrowing, shift earmarked revenues to the state’s general fund and use existing federal COVID-19 relief funding to address a budget deficit of more than $2.6 billion. The dedicated revenues that would be shifted to general government operations are a 10% share of state income taxes that local governments are due to receive.
The State’s long standing credit issues remain. The Governor’s proposal would cover the state’s required pension contribution totaling nearly $9.4 billion. For the current budget year, the state has nearly $5 billion in unpaid bills and $4.3 billion in short-term borrowing, including $2.8 billion from the Federal Reserve that must be repaid over three years.
The budget debate will occur in a significantly changed political environment in Springfield. After being replaced as Speaker of the Illinois House, Michael Madigan has resigned his seat. One of the last of the old school machine politicians, Madigan was as often an obstacle to progress as much as he could be an ally and his departure is as credit positive as anything else.
GAS TAXES
A confluence of forces has pushed transportation funding – particularly roads – towards the top of the priority list in many states with budget season upon us. They are all approaching the issue from various perspectives and the resulting proposals for funding reflect those diverse standpoints.
In Wisconsin, the top two revenue sources for the state’s transportation fund — fuel taxes and vehicle registration fees — fell short of projections by more than $116 million combined in Fiscal Year 2020. Transportation dollars included in a federal relief package passed in December are estimated by the American Association of State Highway and Transportation Officials estimates to provide Wisconsin with about $188 million in transportation funding. The Wisconsin Department of Transportation projected fuel tax revenues would remain below 2020 levels for next two years and total revenues in 2022 are expected to be the lowest since 2013.
In Washington, the state legislature is considering a proposal which would bring the state’s gasoline taxes to $0.85/gallon. That would be the highest combined gasoline tax in the nation. The increased gas tax is estimated to raise more than $16 billion dollars over the next 16 years for Washington transportation projects. Conversely, Ohio Governor Mike deWine has proposed cutting state funding for public transit. The woes of public transit agencies during the pandemic have been clearly shown. Consequently, bipartisan pushback on the Governor has been strong.
CALIFORNIA MUNICIPAL UTILTIES
The ongoing saga which is Pacific Gas and Electric over the last few years led to many calls for a public takeover of the utility and its transmission and distribution assets. Whether it be the damage resulting from wildfires or the impacts of the resulting policy of rolling blackouts, efforts to separate Californians from the troubles of PG&E are increasing.
One municipality at the forefront of such an effort is the small city of Gonzales, CA. This city of 9,000 has formed an electric utility, the City Gonzales Electrical Authority. The Authority has contracted with a power supplier to deliver wholesale electric power via a community-scale microgrid. The microgrid is designed to integrate a mix of 14.5-MW-AC of solar energy, 10-MW/27.5 MWh of battery energy storage and 10-MW of flexible thermal generation. The initial customer for the power is the Gonzales Agricultural Industrial Business Park, which houses processing facilities for fresh vegetable and wine producers.
Concentric Power, the power supplier, will develop, design, build, operate and maintain the microgrid assets, including both generation and distribution. The distribution assets will be transferred to Gonzales Municipal Electric Utility. The initial term of the energy services agreement is 30 years and the project is expected to break ground in mid-2021 and be ready for service in 2022.
The GEA microgrid power program’s objectives include, among other things, an integrated microgrid system that, at least in early phases, is independent from the Pacific Gas & Electric power delivery system. One of the industrial park’s major tenants already produces some of its own renewable-based power. This project will enable the park to integrate these existing distributed energy sources and operate the industrial park facilities independent of the larger transmission grid.
We think that projects like this are just the start for municipal utilities across the country. Microgrids have the potential to improve reliability and resilience for systems of all sizes. By virtue of public ownership of distribution assets, the utility is able to make decisions based on value and efficiency rather than the dividend needs of a corporate parent.
MUNICIPALS AND ELECTRIC VEHICLES
The City of St. Louis has just enacted a series of bills mandating electric vehicle readiness and charging stations in new construction and certain rehab projects. The city is mandating that beginning in January 2022 single family (new construction) have one electric vehicle ready space per dwelling unit. Beginning in January 2022 multifamily residential (new construction and rehabs of more than 50% of building area) have one electric vehicle ready space for five to 20 parking spaces; two electric vehicles spaces and one charging station for 21 to 49 parking spaces; and if 50 or more parking spaces exist, 5% of them be electric vehicle ready and 2% have charging stations.
Beginning in January 2022: nonresidential (new construction and rehabs of more than 50% of building area) have one electric vehicle space for 10 to 30 parking spaces; two electric vehicle spaces and one charging station for 31 to 49 parking spaces; and if 50 or more parking spaces exist, 5% of them be electric vehicle ready and 2% have charging stations. Beginning in January 2024: single family (new construction and rehabs of more than 50% of building area except where parking is more than 50 feet from the main structure, or has insufficient electrical service capacity) have one electric vehicle ready space per dwelling unit.
Beginning in January 2025: multifamily residential (new and rehabs of more than 50% of building area) have one electric vehicle ready space for five to 20 parking spaces; two electric vehicles spaces and one charging station for 21 to 49 parking spaces; and if 50 or more parking spaces exist, 10% of them be electric vehicle ready and 2% have charging stations.
The legislative process also produced cost estimates for compliance with the requirements. Those costs include needed panel capacity, conduit and wiring which could cost $750 to $2,000 each for new, multifamily construction and $1,500 to $10,000 in retrofits. The cost for one- to four-family residential, the city said, can range from $380 for an EV-ready outlet and $800 to $1,170 for charging stations. The cost for one- to four-family residential, the city said, can range from $380 for an EV-ready outlet and $800 to $1,170 for charging stations.
In Arkansas, the state Department of Energy and Environment launched a program this month using nearly $1 million from Volkswagen’s environmental mitigation fund to provide rebates to public and private applicants that install Level 2 EV stations, which can charge electric vehicles in eight hours or less using a 240-volt output. Arkansas has an estimated 202 EV charging locations with 434 individual stations. While nearly one-third are in greater Little Rock, Thirty-seven of Arkansas’ 75 counties have no charging locations.
ANOTHER EXAMPLE OF TRANSIT’S FINANCIAL WOES
The revenue losses experienced by mass transit systems across the country have been in the news for some time but with so much focus on NY’s MTA, the impact on other big city systems gets a bit lost. The latest example comes to us from the Pacific Northwest.
In Seattle, Sound Transit faces a projected $6 billion reduction in tax revenue due to the COVID-19 recession. Sound Transit’s board requested last week that the new federal transportation secretary to provide an extra 30% Federal Transit Administration (FTA) contribution to major projects in progress. That would translate into a $1.9 billion windfall for ongoing extensions. Sound Transit is looking for that funding in addition to some $2 billion received under the initial stimulus package.
The agency has already implemented several tactics to deal with its funding needs. At the federal level, there is estimated to be $70 billion Congress already approved for low-interest, deferred-payment loans through the Transportation Infrastructure Finance and Innovation Act (TIFIA) currently unspent. Sound Transit knows how that funding source works as it is the biggest TIFIA client, having borrowed $3.3 billion for five projects.
WINTER STORM GENERATES UTILITY HOT AIR
As public sentiment drifts inexorably towards the demand for electric power from renewable sources, the ice storms which plagued the country last week generated a host of claims that the resulting power outages highlighted the “dangers” of renewable fueled electric generation. Claims are that the rolling blackouts imposed across several states would not have occurred if wind and solar generation were not part of the equation.
One municipal utility in Colorado offers a different perspective. Platte River Power Authority in Colorado is a long time municipal bond issuer. In this instance, the storm led PRPA to ask consumers to reduce their power consumption because of a cascading series of events that threatened the power supplier’s ability to meet anticipated demand . In the summer, consumers across the country face requests like that especially in the case of hot weather.
The energy emergency throughout Colorado and the middle of America was sparked by a spike in demand for natural gas, which often is used to reduce electrical energy consumption peaks. In this case, the gas supplier chose to supply residential and smaller customers with gas while reducing gas supplies to peaking electric generation. It is true that wind and solar were of limited use in the storm which curtailed or halted production of both.
Proponents of the status quo for electric generation will point to events like the storm to justify keeping coal generation open. What it should do is increase attention and resources on battery and storage technologies. The development of those technologies to “economic critical mass” will be central to long term climate concerns.
Regardless of the current issue, transmission infrastructure lies at the center of any energy discussion. We have seen public entities in multiple regions finance and operate. Large scale transmission projects have been developed by municipal issuers in New York and California for decades. For a long time, the issuers’ focus was on generation. Now the likely focus for issuers will be on transmission, storage, and distribution.
CANNABIS AND THE ECONOMY
A report by Leafly and Whitney Economics has attempted to quantify the economic impact of the cannabis industry on a number of economic indicators. One has to rely on private sources of this data as Federal prohibition prevents the US Department of Labor from counting state-legal marijuana jobs. Until that changes, the industry will drive much of the data. Now that we have established the nature of the lens through which data is viewed, here is what they see.
Medical marijuana is now legal in 37 states, while 15 states and Washington, DC, have legalized cannabis for all adults. The 2021 Leafly Jobs Report found 321,000 full-time equivalent (FTE) jobs supported by legal cannabis as of January 2021. Now compare that to any number of jobs in more traditional categories. In the United States there are more legal cannabis workers than electrical engineers. There are more legal cannabis workers than EMTs and paramedics. There are more than twice as many legal cannabis workers as dentists.
The job growth was across jurisdictions both established (CA) and new (IL). California saw the industry generate 23,700 new jobs while Illinois saw job growth of 8,348. States that you do not normally associate with forward thinking social environments saw job growth. Oklahoma’s industry grew 6,200 new jobs and Pennsylvania saw just under 7,200 new jobs.
Other data on sales is revealing. Colorado continues to lead the nation in per-capita cannabis sales. In California there are now more cannabis workers (57,970) than bank tellers (41,140). Florida now sells more cannabis products than any other state except California and Colorado, even though it’s only legal for medical patients. With the opening of its first state-licensed adult-use cannabis stores in 2020, Illinois tripled its total sales last year. Michigan’s first adult-use marijuana stores opened in Dec. 2019, and that new customer base drove 2020 sales to more than double Michigan’s 2019 medical-only revenue, from $420 million to $990 million.
ENERGY OUTLOOK
U.S. crude oil production declined by an estimated 0.9 million b/d (8%) to 11.3 million b/d in 2020 because of well curtailment and a drop in drilling activity related to low crude oil prices. The U.S. Energy Information Administration’s (EIA) February 2021 Short-Term Energy Outlook (STEO) estimates that 2020 marked the first year that the United States exported more petroleum than it imported on an annual basis.
On a volume basis, U.S. consumption of gasoline declined by more than other petroleum products in 2020. EIA forecasts that U.S. gasoline consumption will rise in the forecast but remain lower than 2019 levels. U.S. gasoline consumption is forecast to average 8.6 million b/d in 2021 and 8.9 million b/d in 2022, up from 8.0 million b/d in 2020 but lower than the 9.3 million b/d consumed in 2019. total U.S. consumption of natural gas will average 81.7 billion cubic feet per day (Bcf/d) in 2021, down 1.9% from 2020.
EIA forecasts that consumption of electricity in the United States will increase by 1.6% in 2021 after falling 3.8% in 2020. It expects the share of U.S. electric power generated with natural gas to fall from 39% in 2020 to 37% in 2021 and to 35% in 2022. Coal’s forecast share of electricity generation rises from 20% in 2020 to 21% in 2021 and to 22% in 2022. Electricity generation from renewable energy sources rises from 20% in 2020 to 21% in 2021 and to 23% in 2022. The nuclear share of U.S. generation declines from 21% in 2020 to 20% in 2021 and to 19% in 2022.
EIA estimates that the U.S. electric power sector added 17.5 gigawatts (GW) of new wind capacity in 2020. EIA expects 15.3 GW of wind capacity will be added in 2021 and 3.6 GW in 2022. Utility-scale solar capacity rose by an estimated 11.1 GW in 2020. The forecast for added utility-scale solar capacity is 16.2 GW for 2021 and 12.3 GW for 2022. At the same time, EIA expects U.S. coal production to total 589 million short tons (MMst) in 2021, 50 MMst (9%) more than in 2020. In 2022, EIA expects coal production to rise by a further 5 MMst (1%). These increases reflect higher forecast demand for coal in the electric power sector because of rising natural gas prices, which increases coal’s competitiveness relative to natural gas for power generation dispatch.
CLIMATE CHANGE
The Oregon Climate Change Research Institute at Oregon State University has released the results of its study of flooding patterns in the Columbia River Basin. The goal of the research was to better understand how flooding in the Columbia River basin might change as the planet warms.
The study used hydrology models and a previously collected set of streamflow data for 396 sites throughout the Columbia River basin and other watersheds in western Washington over a 50 year period. The results led the study to conclude that the Willamette River and its tributaries are expected to see the biggest increase in flooding magnitude, with 50% to 60% increases in 100-year floods. Parts of the Snake River will see a 40% increase in 10-year floods and a 60% increase in 100-year floods.
The question yet to be answered is what mitigation infrastructure might be required. The region’s historic reliance on dams is under challenge anyway and the data generated for the report will force communities potentially impacted to reevaluate their infrastructure needs.
AIRPORT TRAFFIC
We saw that some issuers which depend on air travel are taking steps to align the decreased revenues which have resulted from the pandemic. Several are using refundings at current low interest rates to restructure amortization schedules to reflect new expectations about revenues.
An estimated 368 million passengers flew in 2020, the lowest number since 1984. The Bureau of Transportation Statistics (BTS) reported that April saw the biggest drop in U.S. passenger traffic. Three million people flew that month, a 96% year-over-year drop and the lowest monthly total in BTS records since 1974. The previous low was 14.6 million passengers in February 1975.
That explains why some specific projects like stand alone rental car facility credits are extremely vulnerable to limits on travel.
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