Public Water Utilities Want Water Rebate Taxes Lifted

Public water utilities are calling on the Obama administration to alter federal policies so water-conservation rebates are not taxed.

With tax season right around the corner, members of the National League of Cities and the WaterNow Alliance sent a letter to Obama administration officials this month urging them to do away with taxes on water-conservation rebates, which offer residents and businesses incentives to install water-efficient landscaping and technology.

“Consumer rebates and subsidies are among our most cost-effective and efficient tools for increasing water supply resilience, limiting pollutants in waterways, and keeping water affordable for citizens. Interest is growing to substantially increase these subsidies in order to scale water use efficiency and green infrastructure programs and avoid costlier, and less sustainable, alternatives for our utilities,” the letter said.

California officials are leading the charge. Bob Baker, the mayor of San Clemente, CA, and Art Levine, president of the Board of Water Commissioners of the Long Beach Water Department, offered arguments in favor of lifting taxes for conservation rebates in a San Francisco Chronicle editorial this month.

“Requiring recipients to pay taxes on these reimbursements represents a financial penalty, and thus discourages consumer participation in the very programs we need to collectively meet our water-conservation and drought-resilience objectives,” Levine and Baker wrote in their editorial.

Yet it is not perfectly clear that federal officials have the power to shield conservation rebates from taxes. CBS Sacramento points out that the tax status of water conservation rebates is not exactly explicit.

“We examined federal tax code. It does state you are exempt from paying taxes on ‘Energy Conservation’ rebates for your home. However, the tax code says nothing about water conservation rebates,” the report said.

In their editorial, Baker and Levine argued government officials have the power to shield rebates from taxation.

“Various legal theories support our position that the IRS has discretion not to tax water rebates. For example, there is an exemption for energy rebates. Given the direct relationship between water conservation and reduced electrical use, the energy exemption itself can be understood to cover water rebates,” they wrote.

Taxes on water conservation rebates surprised some California residents last year after they received state money to install drought-resistant landscaping, CBS reported:

Many who participated in the State’s program are getting surprised with a letter stating they may owe federal taxes on it. If your rebate was $600 or more, the letter reads, “We have been instructed by the Internal Revenue Services (IRS) that in order to comply with federal tax rules, you must… file a 1040 form registering your rebate for federal tax purposes.”