At the end of 2019, Congress passed the Revitalizing Underdeveloped Rural Areas and Lands (RURAL) Act, fixing a tax law change that threatened to raise rates and delay the expansion of broadband for rural cooperative members across the country.
Passage of the RURAL Act ensures that cooperatives can accept federal funds for broadband deployment, disaster relief, and other efforts without risking their nonprofit tax exempt status. A change in the 2017 tax law would have labeled these funds as revenue for the first time, potentially causing co-ops to exceed the allowable percentage of non-member income they must maintain to remain tax exempt.
After Senators Tina Smith (D-Minn.) and Rob Portman(R-Ohio) and Representatives Adrian Smith (R-) and Terri Sewell (D-Ala.) introduced the bipartisan bill in April, it attracted 55 additional cosponsors in the Senate and more than 300 in the House. It was eventually incorporated into the consolidated appropriations act and signed into law in December.
“Obstacles From the Federal Government”
We described the possible impact of the 2017 tax law change on rural cooperatives over a year ago, when Senator Smith first brought the issue to our attention.
Failure to remedy it would have forced some co-ops to choose between continuing with desperately needed broadband and disaster recovery projects and increasing their members’ rates. Northwestern Electric Cooperative CEO Tyson Littau described the difficulty of that decision to the National Rural Electric Cooperative Association (NRECA):
Do we rebuild and try to strengthen our distribution system and pay the taxes, or do we delay the mitigation project that would improve 1,200 miles of line throughout our territory? I think we have a responsibility to the membership to improve the system for the future.
Gulf Coast Electric Cooperative was another co-op faced with the prospect of raising electric rates to cover the unexpected taxes. The cooperative received $32 million in federal disaster recovery grants to repair damage from Hurricane Michael. “Our members are still struggling to fix their homes and businesses as it is,” CEO John Bartley told NRECA. “Asking them to pay millions more in higher rates is just wrong.”
Forked Deer Electric Cooperative, the recipient of the first USDA ReConnect broadband grant, was also concerned about the impact of the tax law change on co-op members. CEO Jeff Newman explained:
All of our members have these high hopes for broadband, and we don’t want to let them down . . . A middle-aged woman came into our office the other day and cried because she can now do online schooling and change her lot in life. We’re realizing broadband has life-changing impacts for our members . . . We don’t need obstacles from the federal government.
RURAL Act Fixes Fears
Elected officials and cooperatives alike lauded the passage of the RURAL Act, which will prevent cooperatives from losing tax exempt status as a result of accepting needed federal grants.
“Without this legislation, many co-ops may miss out on grant income or disaster assistance, hurting our efforts to promote economic development and job creation in these rural areas,” stated bill co-sponsor Senator Portman after it became law.
NRECA CEO Jim Matheson celebrated the legislative success in a press release:
This [bill] preserves the fundamental nature of the electric cooperative business model and will save electric co-ops tens of millions of dollars each year . . . Moreover, it protects co-op members from unfair increases in their electric rates and provides certainty to co-ops that leverage federal and state grants for economic development, storm recovery and rural broadband deployment.
Individual co-ops also cheered the good news.
“This means we can receive FEMA grants to help pay for the damage that was done to our system during the last snowstorm, and not be taxed on it,” Debi Wilson, General Manager of Lane Electric Cooperative, told a local news station. “This is huge for our members.”