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:
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:
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.
A WaterNow Alliance Initiative
Whether you have a project that needs support or are just dipping your toe in, our team of experts is here to help.