Water and Taxes
54 Pages Posted: 4 Sep 2016 Last revised: 29 Sep 2016
Date Written: September 2, 2016
This article considers how water consumption in the United States is taxed, and how it should be taxed. It reviews the few federal and state tax code provisions that directly target water use and the somewhat larger number of provisions with indirect implications for water policy. It also draws upon existing literature on tax policy, water law, and water economics to evaluate whether taxation of water consumption makes sense.
That analysis leads to two key conclusions. First, although provisions of tax law affect water use, and although some provisions undercut key policy goals of water law, they do so only to a modest extent. The intersections between the two fields are limited and largely inadvertent. Second, the interconnections between the fields should be stronger; water use should be taxed. The reasons are similar to commonly-cited justifications for carbon taxes and other so-called Pigouvian taxes: taxation would encourage more efficient water consumption, decreasing the negative environmental and energy consequences of water overuse and alleviating conflict among competing users. Taxation also would raise revenue, which could fund badly-needed water infrastructure and governance or reduce the need to tax more socially desirable activities.
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