Tax Exemption from Water
Author
Published
8/5/2019
The Utah Constitution (Article XIII, Section 3) expressly exempts water rights and facilities used in connection with water rights as being exempt from property tax. In addition, water sales and services historically have been exempted from sales tax. When Utah adopted its first sales tax in 1933, water was not taxed as it fell under the general exemption from sales tax on commodities. Current Utah law has explicitly exempted water from sales and use tax, exempting “sales of water in a (a) pipe; (b) conduit; (c) ditch or (d) reservoir.”
Water is a publicly owned resource (UCA 73-1-1) upon which the health, safety and welfare of the people of Utah depend. The policy of the State of Utah is to put its water to beneficial use in furtherance of economic development. Water brings value to land, is necessary to sustain life, food and livestock production and is required to support manufacturing, hydroelectric power generation. More recent public policy is cognizant of the need for water to protect ecosystems and promoting enhanced quality of life, among other recognized beneficial uses.
Should Utah change its policy and tax water? No.
Most municipal and governmental entities culinary water systems operate as enterprise funds. Water rates are directly tied to the cost of water service. Revenue from water rates funds both current operation and maintenance costs as well as future repair and replacement costs.
Imposing a sales tax on the sale of water may negatively impact current rate elasticity by reducing the ability of retail water providers to raise rates within consumer sensitivity levels to address the repair and replacement of aging infrastructure.
The imposition of sales tax on water would negatively impact bond ratings, as it would have a direct impact on the ability of municipalities to pay debt, as a water sales tax would reduce a provider’s capacity to increase rates.
A sales tax on water services would most likely contribute to the State’s General Fund and not a dedicated enterprise fund. This would be contrary to traditional water funding models and places the State’s infrastructure at risk of greater deferred maintenance and/or replacement.
The majority of water delivered to people is provided by governmental entities as an essential governmental service. Increase in cost of providing that essential service hits the poorest of society the hardest, as they have diminished ability to absorb such increased costs.
Taxing water services sets a novel precedent of taxing government services. If we tax this governmental service, then why not also tax police, fire and other emergency services rendered by government entities?
The imposition of a sales tax on water is punitive to the consumer with little correlation to actual water usage. Increasing the price of water with a sales tax to encourage conservation is a flawed policy. Conservation is better achieved through education, tiered rate structures, landscaping ordinances and other means of reducing consumption.
If imposing a sales tax on water was implemented, where is the point of sale? Taxation at multiple levels in the distribution chain could create significant pyramiding by taxing water at several points along the water distribution system such as at the reservoir, pipes and ditches, as well as wholesale and retail sales of water.
Utah Farm Bureau supports the existing 1/8 cent sales tax allocation to water infrastructure projects as provided in Utah law (UCA 59-12-103). These allocations, combined with municipal rates, provide critical resources to municipal and irrigation water providers and fund both new infrastructure and the repair and replacement of aging infrastructure necessary for sustained and safe water service to water users and citizens.
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