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Water Efficiency Rebates Are Taxed Despite the Need to Save Water and Reduce Costs

rebates-taxes-native plants-grass-turf
rebates-taxes-native plants-grass-turf
A rebated landscape transformation, which was later taxed as income | Photo by Krista Guerrero

Across the country, water utility agencies offer rebate programs to help residents transform their yards from water-intensive turf to native plants and grasses. These programs not only help residents save water and, therefore, money on their utility bills, but they also support the flourishing of pollinators and local wildlife.

Programs like these play an essential role in helping communities mitigate the challenges of changing climate and dwindling water supplies. The catch, however, is that the federal government currently classifies these rebated funds as income and taxes folks accordingly.

Krista Guerrero of Rowland Heights, Calif., recently paid $600 in taxes on a rebate she received from the Metropolitan Water District of Southern California (Metropolitan) to replace the grass turf in her yard with more water-efficient landscapes. Krista is familiar with this problem as the manager of Metropolitan’s Turf Replacement Program, which invests $40 million annually for rebates and incentives that help save water in the region.

“Many of our turf replacement program participants are surprised when they get the tax bill,” Guerrero said. “And as word gets around about the taxes, it discourages participation in rebate programs that help sustain our water supplies.”

Energy efficiency rebates have been exempted from federal taxation since 1992 in order to help customers save money on their energy bills and improve the environment. However, individuals and businesses continue to be taxed on rebates for water-efficient plumbing fixtures, appliances, irrigation systems, and landscapes. This can discourage these improvements and add administrative burdens for water agencies.

Time for a change

With climate change shrinking water supplies, and the cost of water services increasing faster than inflation and other services over the past decade — nearly 5% annually on average — advocates say it is time to eliminate taxes on water efficiency incentives.

Water efficiency and conservation can typically save water more quickly and cost-effectively than supply-side strategies like wells, reservoirs, and desalinization can deliver an equivalent amount of water. Water efficiency also mitigates climate change by reducing energy use and greenhouse gas emissions associated with heating, pumping, and treating water and wastewater, which accounts for nearly 2% of electricity use in the United States. 

Other water efficiency benefits include lowering family water bills by hundreds of dollars annually on average, according to the Environmental Protection Agency, making more water available to support healthy stream flows and lake levels, and limiting surface water contamination when over-irrigation contributes to fertilizer and pesticide run-off from yards and farm fields. 

Ron Burke

President and CEO, Alliance for Water Efficiency

“The climate is changing, droughts are getting worse, and water supplies are increasingly at risk,” said Ron Burke, president and CEO of Alliance for Water Efficiency. “It’s time for Congress to finally eliminate taxation of water efficiency rebates.”

Water shortages out west

Water stress is particularly problematic in the Western United States, where climate change and an increasingly arid climate have contributed to an emergency in the Colorado River Basin, requiring dramatic water usage cuts. Climate change also stresses water supplies beyond this region, with seasonal drought becoming commonplace in most states and parts of Canada.

As additional federal, state, and local funding is invested in rebates to address these challenges, the Internal Revenue Service continues to collect taxes from often-surprised homeowners and businesses.

“Making water efficiency rebates tax-free is more important than ever to address the water and climate crises and to stop undercutting government investments,” Burke said. “The government provides funding to incentivize water efficiency with one hand, takes some of the money back in taxes with the other, and adds paperwork and administrative burdens in the middle.”

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