In drought-plagued western states, the idea of repealing property taxes that flow to water districts has been catching on, as illustrated by a recent report by the Utah Foundation, titled “Flowing Toward 2050: Utah’s Water Outlook.” The report argues that cheap water, subsidized by property taxes, is the largest inhibitor of conservation. It recommends using market mechanisms to encourage conservation by eliminating property taxes that go to water districts, making water more expensive in order to bring demand in line with supply.
Water districts in Utah are funded through property taxes, impact fees and user fees. Property taxes go towards subsidizing water and making it cheaper to use, not only in Utah, but in certain areas throughout the western U.S.
The concern over water supply is not surprising in western states, especially in Utah, which is the second most arid state in the U.S. and the second highest per-capita consumer of water. Under current water-usage rates, Utah’s demand is projected to outstrip its supply by 2015.
The vast majority of diverted water goes to agriculture, at 80 percent, compared to just 6 percent that goes to residential irrigation. And of that 6 percent that goes toward residential use, 60 percent goes towards outdoor use, such as the watering of lawns and gardens. A 2010 Utah Division of Water Resources (DWR) put that ratio even higher, finding that indoor use was 60 gallons per capita daily while outdoor use was 134 gallons per capita daily—69 percent outdoor by those estimates. Thus, of all water used in Utah, a miniscule 1.86 percent is used for indoor residential use, i.e., drinking, washing and bathing.
The study acknowledges the argument that raising water rates would disproportionately affect low-income residents, but it too quickly dismisses the argument by saying that “low-income residents use less water than other residents.” While this is true, it does not change the fact that low-income residents will still be paying more for water as a percentage of income, and because as more low-income residents rent than own homes, they would also be less likely to benefit from an elimination of the property tax.
Unsurprisingly, the Utah DWR found that homes that are 3,000 square feet and larger use significantly more water than homes under 1,000 square feet. In Salt Lake City specifically, homes in the outskirts of the city use 80 gallons more water per capita daily for outdoor use than homes in the city center, with very little variation in indoor use. The study suggests a very sensible solution to this problem, allowing “suitable amounts of water” for indoor use, while increasing block fees for heavy users of water outdoors.
But could there be better ways to use market-based incentives to encourage water conservation? The Los Angeles Department of Water and Power created the Cash in Your Lawn program, and increased the incentive in 2013, which incentivizes residents to remove grass and replace it with drought-tolerant landscaping that is appropriate for desert conditions. Instead of eliminating the property tax for everyone, it may be better to reduce taxes only for those who voluntarily take steps to reduce their need for water. As the study observes, the most effective and permanent reduction in water usage will probably be “spurred by the consumer’s best interest.”
Also, could the goal of using price incentives be achieved without eliminating the property tax, which the water districts view as a crucial, steady revenue source? Increasing the block fees alone could possibly achieve the of incentivizing large users of outdoor water, while leaving the property tax in place to fund other programs that incentivize changes in water use. As the study points out, the major water infrastructure project in Utah are also in dire need of extra financing.
The Utah Foundation is correct to re-examine the role of property tax funding for water districts. The western U.S. is in desperately need of a solution.
Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Is eliminating the property tax sufficient to encourage residents to use less water?
By: George Lynch
Follow BBNA on Twitter: @BBNAtax
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