Late last spring we discussed how the 2017 Tax Cuts and Jobs Act (“TCJA”) negatively affected development by increasing the costs incurred by developers to install water and wastewater infrastructure (Part I and Part II). Effective January 1, 2018, the TCJA required that water companies include advances for construction (“Advances”) and Contributions in Aid of Construction (“CIAC”) in taxable income. Of course, water companies do not want to incur the tax directly, so it is passed on to developers thereby making their cost to install water and wastewater infrastructure even higher.
On February 28, 2019 the Pennsylvania Public Utility Commission (“PUC”) granted Pennsylvania American Water’s (“PAW”) Petition for Reconsideration of its order in Docket Nos. R-2018-3002502/R-2018-3002504. The order requires developers or builders to pay for the TCJA-imposed tax on CIAC and Advances. As a result of the PUC’s grant of reconsideration, there was a cautiously optimistic sigh of relief that the PUC might take a broader and deeper look at the positive impact of new development on the entire base of customers and spread the tax to all customers, not just the developer that installed the improvements.
Operationally, 2019 is not 1989 in the water and wastewater space. Private water companies now own not only water but also wastewater systems. Moreover, no respectable water company would have permitted a developer to touch its system in 1989. But in 2019, both water and wastewater systems are constructed and installed by the developer and the pipes and other utility plant are contributed (i.e. given for free) to the water company. It is that contribution that is being taxed under the TCJA and imposed on the developer.
In response to the new burden, developers, frustrated by the PUC’s order, could take a self-help approach. For example, they could install a meter at the entrance to a development, turn the water and wastewater systems over to the homeowner’s association, and then walk away from the development. If not properly maintained by the HOA, the small, private system would deteriorate just as the water and wastewater systems installed in the 1960s and 1970s did. Pennsylvania spent 40 years addressing these small, troubled systems and we trust that the PUC would never let that happen again. We remain optimistic that the PUC will adjust its approach and spread the tax more evenly to reflect the benefits received.
But wait, there’s more! On March 8, 2019, Representative Roae, Chair of the House Consumer Affairs Committee (“HCAC”), introduced a bill that would settle this issue once and for all. House Bill 751 would amend 66 Pa.C.S. § 1301.1 such that “A water or wastewater public utility shall be solely responsible for funding the income taxes on taxable contributions in aid of construction and customer advances for construction and shall record the income taxes the water or wastewater public utility pays in accumulated deferred income taxes for accounting and ratemaking purposes.” A voting meeting is scheduled before the HCAC on Tuesday March 12, 2019. Accordingly, calling your local Representative or Senator before tomorrow to explain how requiring developers to pay for the tax on CIAC and Advances would impede development and to indicate your support of HB 751 would certainly help it receive a affirmative vote. The next steps after an affirmative vote out of the HCAC would be a House floor vote, a Senate vote and then to the Governor. Enactment of HB 751 would be a huge win for developers across the state.
**UPDATED MARCH 14, 2019: A FEW STEPS CLOSER TO FAIRNESS REGARDING TAX ON CIAC AND ADVANCES
House Bill 751 (Printers No. 876) provides that, “A water or wastewater public utility shall be solely responsible for funding the income taxes on taxable contributions in aid of construction and customer advances for construction and shall record the income taxes the water or wastewater public utility pays in accumulated deferred income taxes for accounting and ratemaking purposes.”
On March 12, 2019 House Bill 751 was considered by and unanimously voted out of the House Consumer Affairs Committee and referred to the House floor, after which it was read for the first time. We anticipate a vote in the House next week and referral to the Senate Consumer Protection and Professional Licensure Affairs Committee.
The Senate will be in session for three days in March after the 18th, five days in April, four days in May and fourteen days in June. Accordingly, calling your state representative and senator indicating your support for HB 751, soon, will help to produce a positive vote.
Please contact any member of the McNees Wallace & Nurick Land Use Group for assistance with any land use or development issues and/or if you have any questions regarding this post.