The gap between rural and urban Iowa continues to widen as population, earnings and net farm income are declining in several rural areas. Unfortunately, an unintended consequence of federal tax law changes now threatens to impose an additional financial burden on rural communities.
Under the new tax law, electric cooperatives that receive federal, state or local government grants are at risk of losing their tax-exempt status. This undermines a successful business model that has served America’s rural communities well for decades. It doesn’t matter what the grant is for—storm recovery, broadband deployment or economic development. If grant funding causes a co-op’s non-member income to exceed 15 percent, its tax-exempt status is gone.
Congress inadvertently created this problem, and now co-ops are urging Congress to fix this mistake this year. Such a correction will protect the tax-exempt status of electric co-ops and avoid needless rate increases for many American families and businesses that could result due to the changes being carried out by the IRS. Pending bipartisan legislation known as the RURAL Act (H.R. 2147 and S.1032) clarifies that government grants should not jeopardize the tax-exempt status of electric co-ops.
The bipartisan RURAL Act has been co-sponsored by nearly all of Iowa’s Congressional Delegation, including Senator Ernst and Representatives Axne, Finkenauer, King and Loebsack. We thank them for their support. Senator Grassley currently chairs the Finance Committee in the U.S. Senate which has jurisdiction over this proposed bill because it deals with the tax code. Iowa’s electric cooperatives are depending on Senator Grassley to help restore certainty and common sense to our tax treatment. His leadership can help ensure that co-ops won’t jeopardize their tax-exempt status by accepting government grants.
Lawmakers acknowledge that the threat to electric co-ops is an unintended consequence. Co-ops are locally owned, not-for-profit businesses created to supply electricity to their member-consumers. Among the 45 member cooperatives of the Iowa Association of Electric Cooperatives, there are roughly 650,000 Iowans in all 99 counties who will feel the impacts of this tax increase.
Iowa’s weather can be unpredictable and unrelenting. When disaster strikes and the lights go out, electric co-ops frequently rely on government assistance to recover from the damage and restore power quickly. If the damage is severe enough, the co-op may also seek assistance to help mitigate future threats by using grants to help “storm harden” the grid. But if the assistance pushes a co-op’s income over the 15-percent non-member income level, the co-op will have to choose between losing its tax-exempt status or walking away from needed funds.
If the new tax law changes had been in place over the past decade, several electric cooperatives across Iowa would have been in danger of losing their tax-exempt status for accepting FEMA assistance following natural disasters like flooding or ice storms.
Locally owned electric co-ops and the Iowans they serve should not receive a tax bill for stepping up to restore power after a natural disaster.
It’s time to stop a taxing problem for rural Iowa by passing the RURAL Act this year. As Iowa’s electric co-ops prepare for a potentially harsh winter, relief can’t come soon enough.