Common Sense: Tax-Free Water Conservation Rebates

Many Southwest cities help their utility customers pay for long-term water-saving changes they make to their homes and yards. These changes can include buying a more water-efficient toilet or replacing grass with low-water-use landscaping. Water conservation rebate programs are popular and growing, not just in Arizona and the arid Southwest but across the country. As water supplies are affected by drought, climate change and other factors, cities will continue to encourage customers to use water more efficiently. For many, rebate programs will play an important role.

Here's the problem: The Internal Revenue Service (IRS) taxes water conservation rebate checks of $600 or more as miscellaneous income. As the number and size of these rebates have increased, the number of homeowners receiving an IRS Form 1099 reporting “income” of $600 or more also has grown.

Cities and utilities eager to reduce water use are concerned that continuing to tax such rebates will discourage their customers from using them and limit an important conservation tool. Water conservation rebates are not income. They simply defray upfront costs in order to spur investment in efficient water use, reduce water demand, and encourage onsite use of graywater and stormwater runoff . There is precedent for exempting water conservation rebates. The U.S. Congress exempted energy conservation rebates from federal income tax in 1992. Cities, utilities and conservation groups are coming together to ask Congress for an amendment to the tax code to give water rebates the same status as energy rebates or “tax parity.”

AMWUA has joined a national effort to ensure that federal tax code is not a disincentive to use water wisely. This month, the AMWUA Board of Directors passed a resolution  supporting the exemption of water conservation rebates from taxes and sent it to Arizona’s congressional delegation. Other state and national organizations and utilities actively calling for the exemptions include the Northern Arizona Municipal Water Users Association, Texas Water Foundation, Western Urban Water Coalition, and the Alliance for Water Efficiency , which has championed the cause for several years.

The idea of exempting water conservation rebates is popular in Washington, D.C. The Treasury Department calls it a “desired amendment” in its budget request. The Congressional Joint Tax Committee determined the impact on the federal budget would be negligible. Here’s the hang-up: In January the IRS and the Treasury Department concluded it would take an act of Congress to exempt the water conservation rebates. U.S. Representatives Jared Huffman and Dana Rohrabacher of California introduced legislation in February that is still awaiting action. California’s Sen. Dianne Feinstein and six other U.S. Senators have requested the Treasury Department to put in place a moratorium on taxing water conservation rebates.

BEFORE Photo: ALCA             AFTER Photo: ALCA

Arizona cities have encouraged residents to save water by offering water conservation rebates for decades. In 1986, the City of Glendale was the first city in the country to offer a low-flow toilet rebate program. Today, four AMWUA cities help customers pay for efficient toilets and showerheads. Six offer rebates to assist residents in converting to low-water-use landscaping. Five cities help customers pay to install smart irrigation controllers that fine-tune outdoor water use according to weather and soil moisture. The City of Tempe helps customers pay to harvest laundry water or “graywater” and use it to irrigate their yards.

Some cities find it easier to reimburse customers for their water conservation expenses by deducting the cost from their water bills. These deductions are not taxable.  Other cities with different finance operations cut their customers a check. For example, four of 10 AMWUA member cities provide rebate checks to their customers, as does the City of Tucson for higher cost rebate projects. Whether reimbursed or issued a check, the AMWUA cities agree it is important to remove any impediment to water conservation, including the federal tax code.

Want to help? A short email or Tweet to your Congressional Representative will help build momentum, assist utilities to entice more customers to save, and may even help you pay for a new, more efficient appliance or landscape without an additional tax burden.

For 46 years, Arizona Municipal Water Users Association has worked to protect our member cities’ ability to provide assured, safe and sustainable water supplies to their communities. For more water information visit www.amwua.org .