Evening star. [volume] (Washington, D.C.) 1854-1972, 1942-05-24
Power Industry
Helped by New
Tax Trends
Emphasis on Excess
Profits Levy Nay.
Ease War Burdens
Special pispatch to The Star.

Special Dispatch to The Star.
NEW YORK, May 23.-Federal
taxes continue to dominate the
profits outlook for the electric power
industry, according to the survey
Of electric, gas and traction utili-
ties released by Standard and Poor s
this week.
Although the magnitude of the
war cost makes burdensome taxes
inevitable, utility companies are
helped by the trend toward con-
centrating such tax increases in the
excess profits category, with more
moderate increases in normal and
surtax rates. Most electric COM
panies either have no liability for
excess profits taxes or a small one
relative to normal taxes and sur
taxes.
The original Treasury proposals,
calling for rs per cent top rate on
excess profits actually 88a4 per cent
since excess profits would also be
subject to normal and surtaxes) and
an increase in the normal tax and
surtax rates from last years 81 to
IS per cent would cut aggregate net
income of the power and light in
dustry by 81 per cent and the balance
available for the common stocks by
some IS per cent.
The more recent proposals of the
House Ways and Means Commit
tee would have a much less drastic
effect on earnings.
Small Increase Asked.
Under the committees proposal,
the combined normal tax and surtax
rate would be increased only to 40
per cent. Since some utilities have
been accruing taxes at As per cent
rate this year, the adoption of the
House committees proposal would
actually mean a reduction in tax
accruals.
The "a per cent top rate on excess
profits proposed by the committee
exceeds the 88a per cent effective
top rate in the Treasury Depart
ment's proposals, but only about one
hall OF the leading utility companies
paid any excess profits tax last year.
and in very few cases did these paw
ments constitute a large portion of
the total tax bill.
The proposed reduction in the ex-
cess profits tax exemption under the
invested capital option-from per
cent on the first $5.0000 900 of in
vested capital and per cent on
the balance, to per cent on the
first $5,000,000, Z per cent on the
second S., 900 900, 6 per cent on the
next $50 200, 900 and per cent on
the remainder-would, of course, in
crease considerably the amount of
income subject to the excess profits
tax. AS a result. many companies
will undoubtedly find it profitable to
switch over to the average earnings
option in calculating excess profits
taxes.
Runs Counter to S. E. C.
The increase in income taxes tends
to penaliZe the sounder companies
which have followed S. E. c. policy
of reducing the proportion of capital
represented by debt.
This is because income taxes are
assessed after payment of interest;
thus. of two companies with equal
total capitalization and equal net
operating income, the one with the
heavier debt and smaller stock equity
would pay the lighter tax.
High taxes are necessary war
measure, and it is safe assumption
that even higher taxes will be
needed if the war lasts a long
time. The restoration of peace will
be followed by lower taxes, but it
is very unlikely that rates will revert
to pre-war levels. at least for many
years to come. The change in the
investment status of some utility
stocks as a result of the higher
taxes is, therefore, of more than
temporary concern.
BY lowering the returns on utility
equity investment, the heavier in
come and excess profits taxes tend
to increase the incentive for con-
version of private operating COM
panies to public ownership. Munich
pal utility systems are virtually
tax-free, whereas corporate utilities
paid nearly 81 per cent of their
gross revenues out in taxes last year
and the percentage will be con-
siderably higher after tax increases
this year. Furthermore, a munich
pality can finance the entire cost
of its utility properties with low.
coupon bonds. AS result, the cleo.
trio rates of a municipal system
could be considerably under those
of privately owned system, every.
thing else being equal.
How stockholders would fare in the
event of municipalization depends
of course, on the condemnation price
and on how conservative the COM
panies are capitalized.
Operating Outlook Good.
Strickly from the operating stand
point, the electric industry should
continue to do reasonably well un-
der the war economy. Kilowatt- houl
output is at record levels and still
rising; year-to-year gains in recent
weeks have been averaging better
than II per cent.
Later in the year, the rate of i'm
provement will probably taper off
because of the curtailment of non
armament demand and because
comparisons will be with the high
base reached in the final months OF
1941.
Revenue gains. will be of relatively
small proportions, since most of the
increased power output will go to
industrial consumers paying rela-
lively low rates. The more profitable
residential and commercial con-
sumption will be restricted by lack
of new appliances, and in some
areas where power shortages de-
velop, possibly, by rationing. The
imposition of nation wide daylight