Taxability of Financial Incentives: State Tax Issues

Taxability of Financial Incentives: State Tax Issues

Forty-one states collect personal income taxes, so it is possible that rebates or other financial incentives for water efficiency or stormwater programs to be subject to state income taxation in these 41 states. The nine states that do not tax personal income where this issue would not arise are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

In an effort to bring some clarity to this tax question, California has updated its tax code to provide that some water efficiency rebates are not taxable. Specifically, California has established that rebates for water efficient toilets and clothes washers, and certain plumbing for recycled water are exempt from both personal and corporate taxes. (Cal. Rev. & Tax Code §§ 17138, 17138.1, 24308.1.) California has also amended its Constitution to exclude from property tax assessment the construction of systems to harvest and reuse rainwater systems. (Constitution Article 13A, Sec. 2(c)(5) and Revenue & Tax Code § 74.5 (Proposition 72 (2018))(effective 1/1/2019 and sunsets 1/1/2029).)

Other states use their tax code to incentivize water efficiency and onsite stormwater management in various ways:

• Georgia
  • Revenue & Tax Code § 48-7-40.29 — Income tax credit of 25% of the cost of the qualified equipment or $2,500.00, whichever is less, for purchasing energy/water-efficient equipment for residential or business use including rainwater capture and greywater reuse systems.
• Maryland
  • Tax-Property Code § 9-224 — Authorizes a county or the City of Baltimore to establish a property tax credit against the county or municipal property tax when a sediment control pond or stormwater management structure was required by law to be built on that property.
• Texas
  • Tax Code: Property § 151.355 — Sales tax exemption for equipment, services, and supplies used solely for rainwater harvesting, water recycling, desalination, brush control, or precipitation enhancement.
  • Tax Code: Property § 11.32 — Exemption from property tax reassessments for the implementation of “approved water conservation initiatives, desalination projects, or brush control initiatives” where the local taxing entity has approved eligible projects by ordinance.

Water managers interested in starting or scaling up a localized water infrastructure financial incentive program should check their state’s tax codes for similar provisions.

However, often times, these types of tax exemptions and credits come with expiration dates and some states have allowed previous income tax exemptions or credits aimed at encouraging localized water solutions to lapse:

• Arizona
  • Taxation of Income § 43-1090.01 — Income tax credit for up to 25% of project cost or $1000 for installing residential greywater conservation system expired on January 1, 2012.
  • Taxation of Income § 43-1176 — Income tax credit for up to $200 per house for installing water conservation plumbing stub-out to collect greywater expired on January 1, 2018.
• Georgia
  • Revenue & Tax Code § 48-7-40.10 — Income tax credit for investments over $50,000 in qualified water conservation projects resulting in at least 10% reduction in annual permitted water usage expired December 31, 2016.
• New York
  • Real Property Tax Law § 499-aaa to 499-ggg — Property tax credit for installing a green roof on certain properties in New York City expired on March 15, 2018.

State legislatures may be amenable to renewing these tax incentives or exclusions if their constituent cities and utilities highlight the importance of these programs in implementing decentralized water strategies.