A Study of Feasibility of State Water User Fees for Financing Water Development

Water user fees imposed by a state on major water uses is a possible new alternative source of state water development funds. A fee, similar to an excise tax, might be charged for the use of the water resource per se, which in a number of states is declared to be the property of the public of the state. States generally have not employed such fees as a source of operating funds for water agencies or of development capital. Only in the area of water based recreation-fishing, coating, camping, etc.—have states extensively employed user fees. The revenues from these fees, however, are used only to defray management and operating expenses associated with these activities. The implementation of user-fee financing would result in some shifts of financing burden connected with water programs from the general taxpayers of the state to specific water users. Although this approach has not been utilized by states to a significant extent, the “user pay” principle is well established in economic theory. The theory indicated that user fees would be an economically more efficient and equitable source for financing water development than general tax revenues. In the design of fee structures for major water uses, several characteristics of fees are appropriate to consider. Five which were identified in this study are as follows: equity, economic efficiency, allocational effectiveness, administrative simplicity, and revenue generating potential. These were used to evaluate different structures for extracting fees from the user. These rate design considerations may relate only indirectly to a state system of user fees since the state fees envisioned in this study in many cases may be only an add-on or surcharge to a basic charge imposed by a local entity, such as a municipality or an irrigation district. Revenue generating potential, the last of the five characteristics listed, was of primary interest in this study. Estimates of revenue potential for four major water uses—irrigation, municipal, industrial, and recreations—were made with a formula developed in this study for this purpose. Gross estimates of potential from public supply and irrigation uses were made for several selected states, and somewhat more detailed estimates were made for the four major uses in Utah. The calculations indicated that substantial amounts of funds could be generated with only modest increases in current charges. A preliminary assessment of legal and administrative implications of implementing water user fees in the State of Utah was made in this study. The results indicated that some fee alternatives probably could be implemented by administrative action; others would require legislative approval. Constitutional issues related to some alternatives would have to be resolved by the state supreme court. New uses associated with developing Utah’s vast energy resources appear to offer a particularly promising prospect for instituting a user fee program with minimal legal complications