In-Stream Flow Incentives Program

HB08-1369, by Rep. Jack Pommer and Sen. Dan Gibbs

HB 1369 creates a tax incentive to encourage donations of water rights to be held by the Colorado Water Conservation Board as instream flows to benefit the environment.  The purpose of this measure is to increase the utilization of the ISF program as a tool to protect and/or improve stream flow and aquatic and riparian ecosystems across Colorado.

Under current law, the Colorado Water Conservation Board is exclusively authorized to hold "such water, water rights, or interests in water in such amount as the board determines is appropriate for stream flows or for natural surface water levels or volumes for natural lakes to preserve or improve the natural environment to a reasonable degree."  Colo. Rev. Stat. § 37-92-102(3).  The Board can acquire such rights through grant, purchase, donation, devise, lease, exchange or other contractual arrangement from any person or governmental entity. 

Under current law, no discrete, valuable financial incentive to encourage the donation of stand-alone water rights to be held in the stream currently exists.  By creating a distinct financial incentive to water rights holders to donate all or partial water rights to the CWCB, more streams can be protected from diminished flows and more agricultural lands can be protected from development.

This proposal seeks to create the Instream Flow Incentive Tax Credit that would:

• Create market incentives that encourage voluntary water rights donations to preserve Colorado's streams and rivers.
• Create a transferable income tax credit, equal to up to 50% of the current use value (as determined by the CWCB) of the water right converted to instream flow.
• Cap the individual tax credit claimed by rights holders to $250,000, and allow it to be carried over for up to five years or until the entire credit is used.
• Cap the entire tax credit program at $2,000,000 per year.
• Disallow instream flow tax credits in years in which the general fund budget does not reach its 6% expenditure cap.
• Require rigorous scrutiny of the value and desirability of each proposed donation by the CWCB prior to issuance of a tax credit certificate.
• Require the highest industry standards for water rights appraisers and appraisals to qualify for tax credits, a reform recently added to the conservation easement tax credit program. See section 3.3 of HB 07-1361

This proposal would NOT:

• Alter the nature of the instream flow water right as recognized under C.R.S. § 37-92-102.
• Require any water rights holder to forfeit their water rights or limit their ability to develop or transfer water in accordance with existing law.
• Alter the Colorado Water Conservation Board's exclusive authority to hold instream flow rights.
• Require the CWCB to accept any donation or issue any tax credit for a donation of water right that it deems to be of insufficient economic or environmental value.
• Create privately-held instream flow rights.
• Disrupt the priority of appropriations on any streams.
• Affect the substance or applicability of the prior appropriation doctrine in Colorado water law. 

The Instream Flow Incentive Tax Credit program will achieve stream protection in river basins across Colorado by providing economic incentives and more fully engaging market forces on behalf of the CWCB Stream and Lake Protection Section.

The proposal proactively addresses the issues related to oversight and accountability that have challenged the current conservation easement tax credit program and that are currently under consideration by a legislative task force. 

Through consultation and collaboration with water lawyers, appraisers, Colorado Water Conservation Board ("CWCB") staff and the Department of Revenue, and careful drafting, we have crafted a proposal that emphasizes maximum conservation value for tax dollars invested and provides ample opportunity for public scrutiny and oversight.

Summary of Proposed Instream Flow Tax Credit Legislation

	HB1369:  Proposed Instream Flow Tax Credit Legislation
Basis of Credit	Value of donated water rights as set forth in qualified appraisal subject to review by CWCB.
Who can hold conveyed value?	Only the CWCB.
Calculation of Credit	50% of value of the water right, unless CWCB determines lower amount is appropriate.
Pre-approval	CWCB must hold hearing and determine to accept the water right donation and only then issue the tax credit certificate to the donor.
Per-taxpayer Cap	$250,000
Total program cap	$2,000,000 per year.
Budget protection	Credits disallowed in years in which General Assembly forecasts that revenue will not reach 6% threshold.
Transferability	Yes, credit can be transferred once.
Carry over unused tax credit to subsequent tax years?	Yes, up to five years from date of filing.
Tracking of credits/donations	All donations of water rights to CWCB are handled through a public process at CWCB and their rights are continually tracked and maintained.