Lead Service Line Bill Moves Forward

February 6, 2023

A potential tax issue for private property owners receiving grant assistance was discovered in the past week.

The House Health Finance and Policy Committee on Feb. 2 heard HF 24 (Rep. Sydney Jordan-DFL, Minneapolis), a bill that establishes a program and process for public water systems to address lead service lines and for federal and state funds to be directed to that effort.

The bill will be heard next on Feb. 8 in the House Environment and Natural Resources Finance and Policy Committee.

What’s included in the bill

The bill was amended by the author to include changes and additions requested by the Public Facilities Authority (PFA) and the Minnesota Department of Health (MDH).

The bill, as amended, would allocate $80 million of state funding to this effort and is intended to leverage $43 million per year for five years under the federal Infrastructure Improvement and Jobs Act (IIJA).

The program ideally would cover 100% of the cost of the replacement of lead service lines that are the responsibility of a private property owner and would provide subsidized loans for the replacement of publicly owned segments of lead service line, with the potential of up to 49% of that being forgivable loans.

Minnesota cities recently discovered a complication with that plan. Internal Revenue Service rules declare that state and federal grants to private entities must be reported as taxable income unless the underlying statutes clearly exempt the funds from being taxable.

The IIJA does not have that exemption in it, so a private property owner would have to claim the work paid for by the grant as income, even though the money was used entirely to replace their water connection. Each homeowner assisted could end up owing thousands of dollars of taxes on that repair.

Background on the issue

Federal changes to the lead and copper rules for public water suppliers were recently completed and will require city water utilities to complete inventories and maps of their water supply system by October of 2024, noting anywhere lead pipes exist in the public segments or the private connections to that system, where that information is known.

A plan must then be developed for how any lead service lines identified will be replaced and how unknown segments will be identified, with lead pipes properly replaced by 2034.

All of this is complicated by the fact that city staff cannot go onto private property without the permission of the property owner.

The House Economic Development Finance and Policy Committee first heard the bill on Jan.18. At that hearing, the League testified in support of the timely replacement of lead service lines and encouraged the maximization of state and federal support to accomplish those ends.

League continues to advocate for support and funding

The League has been working on this legislation since early in the 2022 legislative session with the bill author, PFA, MDH, and the advocates proposing the bills.

The League’s goal has been to ensure that the maximum possible support and funding from state and federal sources are directed to public water suppliers to address requirements related to lead service lines with minimal duplication of effort and using existing programs, where possible. Finding a way to avoid the tax liability problem for property owners will be important in getting them to allow the work to be done on their property.

As the bill progresses, the League will continue to support the recommendations of the PFA and MDH on how best to word the bill and will advocate for city and water facility concerns to be addressed as part of those changes.

Read more news articles