To

Mary Beth Scow, Chairwoman

Board of Directors of the Southern Nevada Water Authority

From

Brock Hicks
Masters Candidate in Urban and Regional Planning, UCLA Luskin School of Public Affairs

Date

22 October 2013

Subject

A more ambitious block tax system is the most effective strategy for curbing non-essential water
use

In response to potential price hikes due to the groundwater importation project, and concerns with the sustainable
use of the Colorado River and Lake Mead, we took a closer look at several strategies for decreasing water use as
low-cost alternatives to investing in additional costly water infrastructure. We target consumption because of the
high levels of non-essential water use in the region. Some of the standard methods, like educational campaigns,
hold promise; however, they will require creative approaches because they do not create economic incentives to
reduce consumption and therefore typically have limited effects on changing peoples behavior. Because of the
success that SNWA has had with its rebate programs and increasing block rates system, we develop here an outline
for a more comprehensive water tax system that directly incentivizes decreased non-essential water consumption
by individuals and businesses. We recommend an integrated approach, implementing several strategies together,
with consumption taxes as the most cost-effective measure. Moreover, because of the continued drought, we
recommend revising the SNWA Drought Plan, replacing the distant milestone of 2035 with incremental, year-byyear reduction goals.
We took a look at the informational strategies, incentives programs, and restrictions used by SNWA and the seven
regional member agencies, and here propose some creative additions. One, educational campaigns can play a
useful role in reducing water use; however, they often do not change behavior because they do not create economic
or social incentives. For this reason, we investigated possible approaches to adding social incentives to
informational campaigns. Two, while caps on water use are simple and efficient, setting caps for different sectors
is problematic. Also, they can incentivize increased use by parties who consume below the cap. Three, ordinances
are important mechanisms because they target non-essential water use. However, because they do not impact
peoples wallets, it can be common practice to ignore or circumvent them. Finally, we look at consumption taxes.
Because progressive taxes do create real incentives, they have the best track record and greatest promise in
changing peoples consumption habits. We paid particular attention to the disproportionate burden taxes can put
on low-income households. While we look at each strategy separately, the strategies we recommend are best
implemented together. Our emphasis is on price-based strategies, with regulations as secondary measures. Pricing
is both more cost-effective and easier to enforce than restrictions.

Non-essential and luxury water use

Because all water use is not equal, and water is a common resource, not a simple commodity, we target its nonessential and luxury use, which remains high in the Southern Nevada region. In comparison with Los Angeles,
Tucson, or Albuquerque, Las Vegas uses substantially more water: single-family homes use 100 gallons of water
outside, per person, per dayalmost entirely for landscaping (Pacific Institute for Studies in Development,
Environment, and Security, 2004). Despite rebate programs and progressive taxing of water use, significant nonessential consumption persists. We have identified three key problems with current reduction programs. One, the
rebate programs create incentives to reduce water use through retrofits, but do not actively disincentivize use, with
the end goal of changing peoples consumption habits in the long-term. Two, the existing progressive block rates
tax system does not differentiate between commercial and residential use, only between single and non-single
households. Three, the current tax system does not adequately match increases in inflation or monitor use to see
when user complacency with a rate has set in.

Attach social incentives to informational campaigns and avoid standard methods

Education about water consumption is important. People need access to information to make informed decisions.
However, standard informational campaigns to promote voluntary reduction are relatively ineffective. For example,
in Colorado, voluntary and mandatory restrictions were implemented in five municipalities, while three other
municipalities used only mandatory restrictions. Voluntary restrictions did little to curb net use, and in some cases,
such as Boulder, actually increased use. Mandatory restrictions reduced use in all cases, with reductions ranging
from 13 to 53% (Kenney et al., 2004).
Because informational campaigns do not affect peoples economic incentives, we investigated ways to add a social
incentive element. A variety of innovative ideas have been used around the world to promote what is called prosocial behavior. The Tidy Street project in London is an apt example. A group of volunteers on the street were given
energy meters to monitor daily usage. A local street artist painted the usage of each household, compared to the
area average, in front of each home (The Guardian, 2011). Consumption habits were no longer private, creating a
social incentive to save. This project created a visual, social, and accessible medium for reducing consumption. A
similar model, focusing on making abstract information tangible to everyday life, could have greater effects than
traditional information campaigns. Drawbacks include: it is small scale, labor-intensive, and therefore hard to scale
up.

Key
Develop programs that focus on creating social incentives at low-cost, while avoiding standard methods like
Recommendations including informational brochures with water bills.

Ordinances may be necessary to deter non-essential water use but should otherwise be avoided
Mandatory policies, like ordinances, tend to have greater impacts than educational campaigns and voluntary
policies. However, ordinances can be difficult and potentially costly to enforce, and in some cases cause equal or
even greater levels of consumption. For example, residents may take longer showers with low-flow showerheads,
flush twice with low-flow toilets, and water lawns longer under day-of-the-week or time-of-day restrictions
(Olmstead & Stavins, 2007). In cases like hose bans, people have simply come up with ways around the policy,
having their kids slip-and-slide while they water the lawn. Such bans target how water is transported, not its
consumption (The Economist, 2012).
If not accompanied by strong enforcement and promotion, restrictions like ordinances can fall short of changing
behavior. For example, twenty localities in Virginia in the midst of a drought were studied. Thirteen imposed
voluntary restrictions while seven imposed mandatory restrictions. Voluntary restrictions led to reductions of 0-7%,
while mandatory restrictions ranged from 4-22% (Halich et al., 2005). Like informational campaigns, ordinances do
not create economic incentives. Therefore, it is important to pair any restrictions with strategies like rebate programs
and progressive water tax systems.
In the case of the luxury use of water, for example in private swimming pools, ordinances can play an important
role. While we generally recommend more flexible strategies like taxes, it is unfair to let some consume water for
luxury uses simply because they can pay for it; because water is a common resource, the luxury consumption of
some could affect the long-term livelihoods of all.
Instead of spending funds on enforcement and promotion of restrictions, focus efforts and precious public funds

Key
on more cost-effective methods like comprehensive and progressive water pricing systems. In the case of
Recommendations luxury use, ordinances are necessary to the design of fair policies, even though they may lead to a loss in total
revenue for water districts because some people would have been willing to pay high consumption taxes.

Cap on water consumption are difficult to enforce, costly, and are typically ineffective
While caps are easy to design, they are difficult and potentially costly to implement and enforce. Water delivery and
metering systems do not typically have the ability to remotely shut off water. Upgrading systems, or the personnel
required to monitor meters, would be expensive. Moreover, while people who consume above the cap would be
forced to reduce use, those who use less could be incentivized to consume more. Caps also often create incentives
to break the law; during the 1990s, quotas in California were widely violated by more than half of residential users.

Although the cap was put in place because of a prolonged drought, industrial users were largely exempt. (Dixon et
al. 1996, cited by Olmstead & Stavins, 2007). This demonstrates the vulnerability of these types of restrictions to
unfair loopholes. Also, setting caps for different industries is difficult and hard to enforce.
It is important to note that the potential total revenue lost to a cap has an opportunity cost. The revenue from higherincome people paying for non-essential water use could be used to fund expensive, but useful programs, like
rebates for retrofits, educational campaigns, and subsidies for low-income households.
Caps, like ordinances, are difficult and potentially costly to enforce, and can incentivize illegal activities. Unlike

Key
ordinances, caps do not necessarily limit luxury use of water and therefore do not play a role in the fair use of
Recommendations a common resource. Instead, caps can lead to a loss in revenue that could be used to fund other key reduction
programs.

Consumption taxes: institute a block price structure with incentives for reduced water use
Unlike ordinances or caps, which can require costly monitoring and enforcement, taxes are more cost-effective and
more efficient (OECD, 2008). Taxes are flexible and continuous, where regulations are typically absolute. And
restrictions do not create economic incentives. Because of the flexibility of progressive taxes, districts can target
optimal levels of water use according to multiple factors, such as household size and income. Taxes can have the
added benefit of raising revenues, which can offset other taxes, be used to upgrade water districts infrastructure,
or fund other reduction programs (OECD, 2006).
Progressive water pricing has been successful in reducing consumption. For example, in Denmark, Household
water consumption was greatly reduced by a 150% increase in the price of water through a combination of taxes
(OECD, 2008, 15). In practice, a 10% increase in the marginal price of water in the US typically decreases urban
residential demand by approximately 3 to 4%. In other words, the price elasticity of water is low so price hikes
decrease use but do not affect demand (price elasticity is 0.3 to 0.4) (Olmstead & Stavins, 2007). Taxes can also
be graduated according to consumption levels or household size. This, along with compensations for low-income
households, makes taxes more appropriate than restrictions in terms of fairness (OECD, 2006).
For this reason, we researched ways to improve the existing progressive tax system with the objectives of efficiency
and fairness in mind. We conclude that several measures are necessary to further reduce consumption, provide
incentives, and increase fairness for low-income households. One, the block rate structure used by SNWA member
agencies sends a weak price signal to users. As the Pacific Institute for Studies in Environment, Development, and
Security notes,
The unit price increase that customers in each of these cities experience when they move from
one block to the next is relatively insignificant, especially with customers who are accustomed
to using and paying for large volumes of water. For example, the Las Vegas Valley Water District
charges $1.10 per thousand gallons for the first 5,000 gallons of water; $1.89 for the next 5,000
gallons; and $2.62 per thousand gallons for use between 10,000 gallons and 20,000 gallons. A
customer using 20,000 gallons would pay a consumption charge of $41.15 under the current
inclining block rate structure, which is only $3.35 more than if all units had been priced at a flat
rate of $1.89 and, as a result, is unlikely to alter behavior. In comparison, customers in Tucson
and Seattle would pay $65.53 and $132.66, respectively, for the same amount of water (2004,
22).
A more progressive block rate structure needs to be implemented, similar to that of Tucson, in order to incentivize
significant reductions in water use and induce changes in peoples habits.
Two, SNWA member agencies can provide incentives by creating a cash rebate program based on the average
water consumption for last year according to consumer categories. Categories are defined by household size and
square footage, as well as residential versus commercial uses. For example, a family of four in a 1,200 square foot
house that consumed 5% less than the average in their category would receive a certain percent of the conserved
value back each month, based on the average from the previous year. This rebate would show up as a deduction
on residents water bills. The rebate percentage would need to be determined through a study that measured what
percentage would be substantial enough to create a strong incentive, but would not overburden district agencies.
In the long-term, the average for the different categories will decrease incrementally as people lower use to get

rebates. Year by year, this will also decrease the amount the water agencies have to give out in rebates, moving
towards an equilibrium between water use savings and cash incentives. This will serve to cut down on non-essential
water use through a self-enforcing system of personal economic incentives.
Three, because taxes can disproportionately affect low-income households while higher-income households have
less incentive to curb use, the initial tier should be priced affordably and be defined by the ideal quantity of
consumption for each user category. Each price tier thereafter should rise dramatically in order to curb non-essential
water consumption.

Key
Recommendations

Improve the existing block tax structure by implementing ambitious pricing blocks, similar to other cities in the
region, like Tucson, in order to disincentivize non-essential water use. Implement a previous-year-average
model for consumption where users receive cash rebates as incentives to continually reduce consumption. The
block structure should include an initial tier that is affordably priced for low-income households and increase
dramatically thereafter, disincentivizing high consumption while avoiding a proportionally heavier tax burden for
low-income households.

Recommendations
1) Focus on price-based strategies because they create economic incentives that change consumer behavior
in the long-term and are cost-effective to implement and manage.
2) Implement regulatory, informational, and pricing strategies together. Each strategy proposed affects
different incentives and targets distinct elements of consumer water use. With increased revenues from higher
taxes on water use, more funds would be available to develop non-price-based strategies.
3) Informational campaigns: focus on strategies that create social incentives and that are low-cost, such as the
Tidy Street example.
4) Ordinances are necessary in the case of luxury use of a common resource, such as private swimming pools.
However, in general they are not cost-effective and should be supplementary to price-based strategies.
5) Caps are also cost-ineffective. Avoid caps; because they are restriction-based and do not create economic
incentives, they are hard to enforce. They can also potentially lead to a loss in revenue that could be captured
in the block tax system, which could be used to fund supplementary programs.
6) More ambitious pricing blocks, similar to cities like Tucson, could have a significant effect in reducing nonessential water in both the short and long-term. It can also generate funding for supplementary programs like
retrofit rebate programs and educational campaigns, as well as infrastructure maintenance and upgrading
costs. The initial block should be priced affordably and correspond to the targeted level of essential water use.
This will offset a disproportionate tax burden on low-income households. After the initial tier, rates should
increase quickly in order to incentivize lower consumption.
7) Implement a previous-year-average model for consumption where users receive monthly cash rebates based
on how much they consume below their category average. This directly incentivizes reductions while at the
same time continually reducing the amount of cash district agencies have to give out.

Appendices
A
B

Monthly water use for select cities

Water demand by sector

Comparisons of water use with other sectors

Appendix A

Monthly water use for select cities

(PacificInstituteforStudiesinDevelopment,Environment,andSecurity,2004)

Appendix B

Water demand by sector

(PacificInstituteforStudiesinDevelopment,Environment,andSecurity,2004)

Appendix C

Comparisons of water use with other regions

(PacificInstituteforStudiesinDevelopment,Environment,andSecurity,2004)

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