One solution to California's drought: tax water

The idea is straight out of Economics 101: If you want people to do less of something, raise the price. And California desperately needs its residents and businesses to use less water. So rather than trying to curb water use through a complex maze of regulation, why not just raise the price though a new state-wide tax on all users?

Governor Jerry Brown, perhaps feeling constrained by the state’s stiff anti-tax laws, is taking the regulatory approach. Last week he announced an executive order requiring cities to reduce their water use by 25 percent by next year.

But his proposed regulatory curbs such are already being called unfair and will almost surely generate decades of litigation.

Farmers, who use 80 percent of the state’s water, are exempt from the curbs.  Worse, any regulations would have to navigate an incredibly complex system of private water rights, governing both groundwater and rivers and streams. And they’d have to be managed by the state water board, nine regional water commissions, and hundreds of local water districts—many of which are likely to be highly sensitive to hometown political pressures.

By contrast, a tax would be relatively easy to administer. If a B-list owner of a Beverly Hills mini-mansion really felt the need keep his green lawn, he could do so. But he’d have to pay a tax.

If a farmer wanted to grow water-intensive crops such as almonds or rice (in a state where it has barely   rained in 3 years), he still could. But his price would include the tax.

If more expensive water makes that farmer no longer cost-competitive, he’d have to invest in water-saving technology or do something else with his land. But it would be his choice. He wouldn’t be barred from water-intensive farming. He’d just have to pay the real cost of using a scarce resource.

The state could use some of the revenue from the new tax to help fund conservation efforts, desalinization plants, or the like. A new report by the Public Policy Institute of California finds that local revenues account for 84 percent of water spending in California (the state contributes just 12 percent), and that while urban systems are in good financial health, other districts—including those in rural areas—face severe shortfalls.  Those localities are often the most resistant to tax hikes but also the biggest per capita users of water.

Revenues from a statewide tax could be used to address some of those challenges.  However, if lawmakers preferred, the state could rebate some of the tax on a per capita basis, or even according to an income-based formula to mitigate the cost of the levy for poor households.  The idea is that revenues from a water fee could help alleviate local water issues, or might be offset by other tax cuts. But a tax on water could help change behavior—a necessary step in a state that simply does not have enough.

Raising water taxes in California won’t be easy. Local water authorities that have introduced tiered rate structures (where those who consume the most pay the highest rates) have already run afoul of the state’s powerful anti-tax movement. And, thanks to a series of voter initiatives, most water taxes require two-thirds voter approval, an extremely difficult hurdle.

I’m not surprised that Brown didn’t want to go there. But maybe after the state struggles with a regulatory solution, it will realize that taxing water is easier, more equitable, and more effective.

The post One Solution to California’s Drought: Tax Water appeared first on TaxVox.