HOUSE BILL REPORT
SSB 6369
As Reported by House Committee On:
Finance
Title: An act relating to excise tax exemptions for water services provided by small water systems.
Brief Description: Providing excise tax exemptions for water services provided by small water systems.
Brief History:
Finance: 2/20/06, 2/23/06 [DP].
Brief Summary of Substitute Bill |
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HOUSE COMMITTEE ON FINANCE
Majority Report: Do pass. Signed by 8 members: Representatives McIntire, Chair; Hunter, Vice Chair; Orcutt, Ranking Minority Member; Ahern, Condotta, Ericks, Hasegawa and Santos.
Staff: Mark Matteson (786-7145).
Background:
Water systems and federal requirements. The Washington State Department of Health
statistics indicate that, at the end of 2005, there were over 17,000 water systems in
Washington. Water systems may be run by any one of a number of entities, including
municipalities, special purpose districts, other governmental entities, associations, and private
investors.
Water systems serving at least 25 persons or 15 connections must meet the federal Safe
Drinking Water Act requirements. The Safe Drinking Water Act requires water testing for
more than 100 different types of contaminants. If tests indicate the presence of contaminants,
then additional testing, treatment and system upgrades may be required. A water system
using surface water as its source must also filter the water. Fulfilling water testing, filtration,
and treatment obligations imposes costs on water systems. The cost per customer in meeting
these obligations can be high for small systems, since small systems must spread costs over a
smaller customer base and cannot realize economies of scale.
Excise taxation of water systems. Public and privately-owned utilities, including water
distribution businesses, are subject to the state public utility tax (PUT). The PUT is applied
to the gross receipts of the business. For water distribution businesses, the applicable tax rate
is 5.029 percent. Revenues are deposited to the State General Fund.
The business and occupation (B&O) tax is Washington's major business tax. The tax is
imposed on the gross receipts of business activities conducted within the state. Revenues are
deposited to the State General Fund. A business may have more than one B&O tax rate,
depending on the types of activities conducted. Firms that provide services are generally
taxed at a rate of 1.5 percent.
Neither the PUT nor the B&O tax permits deductions for the costs of doing business, such as
payments for raw materials and wages of employees. Nonetheless, a number of exemptions,
credits, deductions, and other preferences have been enacted for specific types of business
activities under the PUT and B&O tax statutes. For example, an exemption exists for public
utilities for which the gross income is $2,000 per month or less. Many small water systems
qualify for this exemption.
In 1997, the Legislature enacted legislation that exempted certain businesses from paying
public utility and B&O taxes on amounts received for water services. The legislation, which
was further amended in 1998, applied to:
(1) Water-sewer districts and irrigation districts that:
a. serve fewer than 1,500 connections; and
b. charge a residential water rate exceeding 125 percent of the average statewide water rate.
(2) Water systems owned or operated by a satellite system management agency that:
a. serve fewer than 200 connections; and
b. charge a residential water rate exceeding 125 percent of the average statewide water rate.
A water system or irrigation district claiming one of these tax exemptions was required to
supply proof to the Department of Revenue (DOR) that at least 90 percent of the value of the
tax exemptions would be used to repair, equip, upgrade, or maintain the system. The tax
exemptions expired on July 1, 2004.
Data from the DOR indicates that approximately 58 districts or businesses that provide water
services took the exemption on an annual basis, resulting in a total taxpayer savings of about
$230,000 annually.
Reporting requirements for taxpayers taking incentives. In recent years, a number of tax
incentives have been enacted with certain reporting requirements. The principal components
of these provisions are reporting requirements and enforcement mechanisms. For example,
aluminum smelters that take certain incentives must provide an annual report with details
about employment, wages, and health benefits. If such smelters fail to submit the report, the
business must pay back the value of the incentive. As part of the enactment of recent
incentives, the Legislature has also required that the fiscal committees of the Legislature
report periodically on the effectiveness of the program.
Summary of Bill:
The exemptions that existed through Fiscal Year 2004 under the PUT and the B&O tax for
water-sewer districts and irrigation districts that provide water services to small customer
bases are reenacted with modifications and extended indefinitely. The exemptions are
extended to include public utility districts that provide water services to small customer
bases.
Goals are provided for the exemption program: To provide assistance to small public water
systems that are most in need in order to make necessary repairs; and to allow these systems
to comply with state and federal mandates associated with clean drinking water.
Water services providers that participate in the exemption program are required to submit a
report to the DOR annually. The report must detail the specific capital improvements that
were made using the tax savings attributable to the exemptions. The report content is not
subject to confidentiality requirements and may be disclosed to the public. During any year,
if a business fails to submit a report, all tax savings attributable to the exemptions for the year
are due.
The fiscal committees of the Legislature are required to report to the Legislature on the
effectiveness of the exemptions by December 2010.
Appropriation: None.
Fiscal Note: Available.
Effective Date: The bill contains an emergency clause and takes effect immediately.
Testimony For: There are not many big public water systems in Island County. Many
struggle with issues like saltwater intrusion. Every dollar that can be saved is used in
improving the systems to make the drinking water quality better. Many urban residents do
not understand how difficult it is to keep up the quality of the potable water supply in small
districts. The federal government mandates are burdensome yet necessary. Camano Island's
largest system serves only 300 households.
This bill reestablishes some tax relief that was provided to small water systems through
mid-2004. The previous exemption resulted in a number of success stories. The new
proposal is consistent and requires that 90 percent of the value of the relief be spent on
infrastructure. These systems have elected commissioners. There is an accountability section
to ensure objectives are met.
Penn Cove Water and Sewer District provides service to 181 homes with a total population of
450 persons. Most of the residents are retired, military, or otherwise lower income. We had
to replace the entire water system due to Department of Health mandates at a cost of $1.6
million in 1998, and the ongoing assessments on our residents to pay for this are a constant
burden. Small systems are subject to the same requirements as larger systems, but have a
much smaller customer base. During the previous exemption, we spent hundreds of hours to
improve our system in various ways, using the cost savings to install an emergency generator,
upgrade level controls, and improve the mineral removal process.
Potable drinking water through public and private water systems has been the biggest
contributor to public health since the dawn of man. A little money goes a long way in terms
of keeping everybody healthy.
The Clinton Water District provides water to the community that is the Ferry Landing on
Whidbey Island. Our commissioners have boldly taken on the enormous task of ensuring that
the infrastructure meets the needs of the changing population. We have installed $2 million
of improvements, including a new filtration facility. This would not have been possible
without the previous exemption. This improvement is very large in magnitude for a district
that doesn't have the economies of scale of a city distribution system. Compliance with the
state's code is expensive. Passing this bill is one way to reward commissions of the systems
of small communities for showing leadership on these issues.
In January, I wrote a $12,000 check to the Department of Revenue to cover our public utility
tax costs for the year. This amount is equal to 25 percent of our capital budget funds for the
year. We have only 1.6 full-time equivalent employees, and our system has just 725
connections. About $77,000 of a recent $300,000 improvement came from savings that were
attributable in part to the previous exemption.
There are 17 different public utility districts (PUDs) that provide water service. In some
cases, the PUDs inherited shoddy sytems that had been privately developed when state and
federal oversight was not as good. The PUDs are often the white hat that come in to fix these
private systems. While we were not part of the previous exemption, we would be part of this
one, for those districts that serve small customer bases.
Testimony Against: None.
Persons Testifying: Senator Haugen, prime sponsor; Dean Thiem, Penn Cove Water & Sewer District; Mike Helland and Maury Hood, Clinton Water District; Joe Daniels, Washington Association of Sewer and Water Districts; and Bill Stauffacher, Washington Public Utilities Association.