Peter Reichard: How should we pay for water? A matter of priorities

(Rob Schumacher | The Arizona Republic via AP file) Water is released into the Colorado River at the Glen Canyon Dam in Page, Ariz., on Nov. 19, 2012. On Tuesday, Oct. 1, 2019, environmental groups filed a lawsuit against the federal government, saying that the U.S. Bureau of Reclamation ignored climate science when approving a 20-year operating plan for the dam.

It can be said that the modern history of Utah began with water — and a bet.

The year was 1824, and Jim Bridger was sitting around with his fellow mountain men in Cache Valley, on the banks of the Bear River, laying bets over where the water flowed. To settle the bet, Bridger followed the river down and found a giant, briny inland sea.

Ever since, water has shaped the contours of Utah's history and development. Utah is one of the driest states and one of the fastest-growing states. Getting water management right is therefore the key to Utah's destiny. And how we pay for water is central to water management.

During the last several weeks, Utah Foundation has released its four-part “Paying for Water Series.” The series addresses the ongoing debate over the role of property taxes in water revenues. While most of Utah's 300-plus water providers rely solely on water rates, a number of the largest providers also rely on property taxes, meaning that most of the state's population lives in a place where water taxes are collected.

Should property taxes be part of the mix, or should providers rely solely on user fees? To a great extent, the answer depends upon priorities.

If you care most about water conservation, look to a greater reliance on water rates. The greater the reliance on water rates, the greater the leverage over usage, assuming rates are structured to discourage higher usage levels.

If you care most about fairness, and your view is that those who use the most water should pay the most, then a greater reliance on water rates is again desirable. Property taxes not only ignore usage, they are also subject to exemptions — whereby nonprofits and government institutions pay no taxes on property used for an exempt purpose and resident homeowners pay at a reduced rate.

However, property taxes can help to capture a broader base of beneficiaries than water rates alone, which put the cost burden solely on users. Property owners reap the economic benefits of water as a basic need of civilization. Furthermore, some water providers have public responsibilities beyond just providing water, and it can be argued that property owners should share in that cost.

One can also look at fairness from the standpoint of lower-income residents. Water is a basic of survival for all, regardless of ability to pay. It can be argued that, by subsidizing water rates with property taxes, water can be made more affordable to lower-income residents. On the other hand, tiered water rates can accomplish the same goal.

If you care most about the overall cost, it gets more complicated. On the one hand, property taxes offer heightened financial stability and, through higher bond ratings, cheaper debt. However, water rates are also fairly stable, and the difference they make in bond ratings compared to property taxes tends to be marginal. Furthermore, if a greater reliance on water rates encourages conservation, it may help to delay expensive infrastructure projects needed to bring citizens more water. There are also questions about the cost of market distortions that come with lowering water rates by using property taxes.

If cost transparency it a top priority, water rates draw a clearer picture, because each customer’s usage and cost are captured in a single, monthly bill. With that said, property tax increases are subject to a more stringent public process than water rate increases.

Finally, if you prize funding flexibility, having access to property taxes is desirable. A combination of both sources tends to counterbalance the weaknesses in each. And property tax offers an extra arrow in the finance quiver that may come in handy.

Various other factors come into play in the tax versus fee debate, such as local circumstances, representation questions and basic taxation principles. As policymakers look ahead, they must carefully weigh all of the competing priorities and choose carefully. Anything less would mean betting over Utah’s future.

Peter Reichard

Peter Reichard is president of Utah Foundation, a nonpartisan, nonprofit public policy research organization. Reach him at peter@utahfoundation.org. Find the full “Paying for Water Series” at utahfoundation.org.