You asked whether Connecticut or other states allow municipalities to levy property taxes on water utilities based on the value of the water they distribute. The Office of Legislative Research is not authorized to provide legal opinions and this memo should not be considered one.

SUMMARY

Connecticut allows municipalities, under certain circumstances, to levy property taxes on water utility property based on the value of the water they distribute, using the income approach to valuation. The way that such property is taxed depends in part on whether the utility is privately owned. In the case of land (as distinct from other real property or personal property), the property tax treatment also depends on whether the land is in the “490” program, which taxes open space, forest land, and farm land that meets certain criteria based on its current use rather than its fair market value.

It appears that land in the 490 program could not be taxed on the basis of the income it generates, since the income approach is used to determine fair market value. But land that is owned by private water utilities that is not in the program could be so valued. Separate rules apply to the valuation of property owned by municipal utilities. Property owned by the South Central Connecticut Regional Water Authority is tax exempt, but the authority must make payments in lieu of taxes on part of its property.

According to American Water Works Association, most water utilities in other states are publicly owned and exempt from property taxes. However, Washington allows municipalities to impose a business tax based on gross revenues that applies to sales of water, including water sold by municipal utilities. Texas imposes a revenue-based state tax on water, electric, and gas utilities. The tax rate varies depending on population of the municipality where the service is provided. Seventy-five percent of the tax revenue is allocated to the state’s general revenue fund and 25% percent to the foundation school fund.

We were unable to find any state that specifically allows or prohibits the use of the income approach to valuation with regard to private or public water utilities. Texas requires appraisers, as a general principle, to consider this approach, as well as the comparable sales and cost approaches to property valuation, and use the most appropriate method.

CONNECTICUT

Property Owned by Private Utilities

CGS § 12-75 requires that a private water utility’s land, buildings, and appurtenances (e. g. , pumping stations and pipelines) be assessed in the town where they are located. Personal property must be assessed in accordance with CGS § 12-63 (this section also specifically applies to land. ) CGS § 12-63 requires that land in the “490” program be assessed on its current use without regarding for neighboring land uses of a more intensive nature. The program includes open space land, forest land, and farm land. Land must meet various criteria specified in CGS § 12-107d or § 12-107c, respectively, to be classified as forest land or farm land.

In the case of open space, the land must be designated as such in the municipality’s plan of development and its subsequent use may not have changed its essential character. The landowner must apply to the assessor for its classification as open space. Such land cannot be assessed at a value less than farmland (CGS §§ 12-107b and 107e). In effect, a municipality can determine whether utility land is eligible for participation in the 490 program as open space by how it classifies the land in its plan of development. If a municipality classifies such land as something other than open space, it would be ineligible for the program under this classification and the municipality could assess the land using the income approach. However, the utility might be eligible to participate in the program by having the land classified as forest land or conceivably as farm land.

CGS § 12-63 requires that land that is not in the program be assessed at its fair market value. The law allows assessors to determine fair market value based on (1) comparable sales, (2) the income the property produces, or (3) the property’s original cost, adjusted for depreciation. Whitney Center, Inc. v. Town of Hamden, 4 Conn. App. 426 (1985). Thus, if utility property is not in the 490 program, municipalities may value it based on the value of the water the utility distributes, according the Kathy Rubenbauer of the Office of Policy and Management. However, in practice, it appears that most municipalities value utility property that is not in the 490 program based on the cost method.

Property Owned by Municipal and Regional Utilities

Different rules apply under CGS § 12-76 to property owned by municipal utilities. Property owned by a municipal utility located in its home town is tax exempt. If a municipal utility owns land in another town, the land is tax exempt if the residents of that town can buy water from the utility under the same terms as residents of the home municipality. However, the utility must make a payment in lieu of taxes on such land acquired on or after January 1, 1978. If the residents of the town where the land is located cannot buy water from the utility on the same terms as residents in the utility’s home town, the land must be assessed as though it was farmland. These provisions also apply to the Metropolitan District Commission.

In the case of the South Central Connecticut Regional Water Authority, property taxation is governed by the special act (SA 77-98, as amended) that established the authority. The authority’s property is tax exempt, but it must make an equivalent payment in lieu of taxes on property it acquired from its predecessor, the New Haven Water Company, as of 1980 and on new pipes.

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