For builders and developers working in areas served by a for-profit, corporate water utility, a small tax change in the 2017 tax reform bill resulted in higher sewer and water costs. As part of the new tax law, a longstanding exemption to the tax treatment of contributions in aid of construction (CIAC) was removed to the detriment of housing affordability.
Now, in areas served by a corporate, for-profit water utility, when a builder installs new water or sewer infrastructure to support additional housing — at no cost to the existing residents — that infrastructure is taxed by the federal government.
In some states, affected utilities are required by the public utility commission to pass this additional tax liability back to the developer in form of a gross-up fee, in certain cases reaching as high as 40% of the cost of the infrastructure. Other state regulators have allowed the utility to add the tax increase into the rates charged to all ratepayers. Although the tax change only affects for-profit, corporate utilities — not municipal or other non-profit water utilities — when the developer is expected to cover the gross-up fee, this can add thousands of dollars to the cost of building a home.
S. 2942 would restore the exemption for water and sewer CIACs so that they are no longer included in the utility’s gross income.
NAHB applauds Shaheen, Murkowski and Hassan for introducing legislation to restore within Section 118 of the tax code the exemption for water and sewer. At a time when the country faces a housing affordability crisis and rising costs associated with aging infrastructure, removing the water and sewer tax exemption made no sense. It is time to fix that mistake, and NAHB urges Congress to pass S. 2942.