Report: Utah water districts are swimming in tax revenues

Critics say practice subsidizes water delivery, promoting wasteful use of a disappearing resource.

(Trent Nelson | The Salt Lake Tribune) Spinning sprinkler in Salt Lake City on Tuesday, June 29, 2021. Outdoor watering amounts for most of Utah's municipal water use, which critics believe could be greatly reduced if Utah ended its reliance on property taxes in ways that subsidize wasteful practices.

Property taxes provide a quarter of the revenue reaped by Utah’s biggest water districts, resulting in a cycle of wasteful water use driven by artificially low water rates, according to a report released Wednesday by the Utah Rivers Council.

The environmental advocacy group announced its finding to draw attention to what they call Utah’s “socialistic” practice of subsidizing profligate water use, especially on outdoor landscaping, in the nation’s second driest state. Utah’s five biggest water districts raised $133 million in tax revenue last year, compared with $83 million by 100 water districts in seven other Western states.

“We are completely unique in Utah in our use of property taxes. Conservative Utah is vastly over-collecting property taxes by its wholesale water conservancy districts,” said Zach Frankel, URC’s executive director. “The Republican Legislature has let this special interest collecting property taxes dictate property tax policy. And it’s time for legislators to rein in this unelected government special interest.”

One lawmaker plans to do just that. Sen. Daniel McCay, R-Riverton, unveiled legislation last week that would revoke cities and water districts’ right to spend property tax revenue on water delivery projects and operations in most cases, starting next year.

The bill’s aim, which enjoys bipartisan support, is to require water users, especially nonprofit institutions that are exempt from paying taxes, to bear the cost of the water they consume. Homes, farmers and institutions, such as churches and schools, would be inclined to use less if water costs more, he told the Revenue and Taxation Interim Committee.

This measure could undermine water conservation by restricting districts’ ability to fund conservation projects, such as turf removal, a water lobbyist shot back.

“That is actually a community benefit,” said Mark Stratford, general counsel for the Jordan Valley Water Conservancy District. “And it’s fair for the community to pay for that with property taxes, rather than just individual ratepayers doing that on their own.

Jordan Valley is among the five Utah districts highlighted in the report for their heavy reliance on tax dollars. The Central Utah Water Conservancy District is Utah’s largest collector, bagging $73 million in tax revenue last year, while Jordan Valley weighed in with $22.4 million. The Tribune extended invitations to comment to both these districts, but neither made anyone available.

Utah districts have traditionally used property taxes to fund water infrastructure, according to Candice Hasenyager, director of the Division of Water Resources.

“Tax revenue is a stable income stream that supports water supply and infrastructure projects,” she said. “Changing the pricing structure to eliminate tax revenue would cause water rates to increase and could have a disproportionate impact on lower-income households. All water providers are required [by law] to use tiered water rates and can incentivize conservation by making water more expensive as usage increases.”

Utahns use more water per capita than most other Americans while enjoying some of the lowest water rates. That’s no coincidence, according to Frankel.

“Salt Lake City uses 100 gallons more water per person per day [than Denver],” he said, “because of the property tax hidden in the water change delivery because the wholesalers delivering water to Salt Lake City enjoy this property tax collection.”

The rivers council report surveyed 342 water providers, including 16 of Utah’s largest, in 10 Western states. Property tax accounted for 9% of the revenue generated, on average, by the districts outside Utah, versus 25% for those in Utah. Frankel believes limiting water subsidies could reduce per capita water use by 20% to 30%, and lower water suppliers’ overall costs.

“Over-delivering water cost taxpayers money,” Frankel said. “It’s not just about new water projects. It’s about increasing treatment costs. It’s about increasing wear and tear. It’s about requiring the operation and maintenance costs to be increased because of your high water volumes.”

Three states — Nevada, Montana and Washington — don’t collect any property taxes for water, although some Nevada districts siphon sales tax revenue.

The Central Iron County Water Conservancy District, which is looking to spend $260 million on a proposed groundwater pumping operation and pipeline to serve fast-growing Cedar City, raises nearly half its revenue from property taxes, making it one of the most tax-dependent water agencies in the West.

In fairness, some non-Utah districts are just as eager to collect property taxes, according to the report. The Central Arizona Water Conservancy District by itself raked in $83 million, accounting for 23% of its 2021 revenue.

And the worst tax hogs are in California with several large water agencies tapping property taxes as much or more than any Utah district. The Santa Clarita Valley Water Agency, for instance, collected $58.5 million, accounting for 37% of its revenues, and the Mojave Water Agency took in nearly $41 million for 74%.

On average, however, Utah water suppliers are more reliant on tax revenues than California’s, according to the report.

“Utah was the only state we surveyed where every water supply agency collected a property tax,” said Nick Halberg, a URC researcher who co-authored the new report.

Curbing providers’ reliance on taxes would create new pathways to reduce water use, Frankel argued, and potentially replenish the state’s reservoirs and rivers and rescue the Great Salt Lake, which is rapidly approaching an ecological calamity as its waters recede thanks to climate change and upstream diversions.

At last week’s legislative hearing, Stratford was speaking on behalf of Prep 60, an alliance of four big water districts advocating for multibillion-dollar investments in Utah’s water infrastructure. He claimed Utah is no outlier when it comes to property taxes, citing the districts in California and Arizona that tax as much as Utah’s.

“All of these other states see that having a broad base of available revenues is important in order to build, maintain and replace these systems,” he said. And restricting access to tax revenues would raise water districts’ borrowing costs.

“If they [bond-rating agencies] were to see that the state of Utah said, ‘You can no longer collect property taxes,’ they are going to reanalyze the stability of our revenues,” Stratford said. “And there will be immediate consequences as far as the rating agencies’ opinions of our bonds.”

Anticipating this argument, the URC report analyzed the water district’s financials.

“We found no real correlation between the percent of your revenues collected from property taxes and bond ratings,” Halberg said.

He noted the Truckee Meadows Water Authority, serving the rapidly growing Reno, Nevada, area, was recently upgraded to the highest AAA rating, even though it doesn’t collect a nickel in property tax. Nearly 90% of its $115 million in revenues comes from water rates.

At 165 gallons per day, Reno’s per capita water use is 31% less than Salt Lake City’s.

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