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In 2019, we set out to undertake a structured literature review on the topic of water taxes. For a topic that has such global significance, it has attracted surprisingly little research attention and warrants significantly more.

Our reasons for wanting to undertake such a task were multiple:

  • Water is essential for survival and there are a range of different approaches to managing it throughout the world;
  • Water quantity and quality are worthy of investigation;
  • While there is significant professional and academic literature on water in general, most of it ignores the effect of tax, despite the known effect of it on water markets and water pricing;
  • The little research that has been undertaken on water and taxes appears to have had minimal influence on water policy in either Australia or New Zealand.

We found a reasonable breadth of topics covered in water tax research, alongside an absence of depth. Most of the studies we reviewed focused on economics, engineering, environmental management or agriculture. Research was conducted across a wide range of countries and used a mix of methodologies. However, the predominant method was economic modelling, either theoretical or empirical.

In investigating the literature, we also applied our findings to Australia and New Zealand.

Using these two countries in our study allowed us to consider different components of the literature, as Australia’s primary issue is water availability, while New Zealand’s primary concern is water quality (although we acknowledge that some parts of New Zealand also suffer from regular droughts).

Although Australians pay for domestic water based on a variety of pricing structures that are particular to each state, there is currently no specific tax on water used by irrigators. Meanwhile, rollover relief is available for capital gains made by irrigators on their disposal of water entitlements and allocations.

There are no water taxes in New Zealand. New Zealanders pay for water infrastructure through the local government rates system. However, as most councils do not meter water consumption, the rates system provides little incentive to moderate water usage.


In general, there is academic support for water taxes, for both decreasing water use and improving water quality. However, this support is highly contingent on a range of factors, including design of the tax, how tax collected is used, and economic and social impacts.

A number of high-level themes can be drawn from the studies we examined. The three themes most frequently highlighted in the literature were tax design, effectiveness of policy instruments, and water saving/efficiency. A smaller number of studies had a primary theme of water quality, pollution, water pricing, agriculture/food, and other economic factors.

Important findings that can be distilled from the literature include:

  • Small taxes were found to have minimal impact, although the difficulty in determining the ‘right’ rate was noted;
  • The problem of imperfect information in the overall effectiveness of using taxes to manage water use;
  • The administrative and transaction costs associated with effective tax schemes;
  • Uncertainty around the strength of the behavioural response to water taxes, for example the potential for substitution of land use to less economically or socially optimal usage;
  • The importance and complexity of water valuations: balancing minimising environmental damage and efficient allocations, while noting that incorrect pricing can result in externalities such as overutilisation or wastage;
  • The potential for water taxes to impact more on poorer households if water taxes increase the price of agricultural products and decrease wages in the agricultural sector;
  • The potential for water taxes to impact negatively on production and consumption and not result in environmental gains, where the tax does not generate an incentive to invest in water saving technologies;
  • A range of potential efficiency gains on top of reduced water extraction or use, including adoption of new water saving technologies, reducing emissions into water, encouraging environmentally sustainable supply chains, reallocation of water to the most efficient usage, and reducing demand so that greater capital investment is not needed;
  • The potential for a double or triple dividend from a water tax, namely, to have environmental, economic and equity effects.

Application to Australia and New Zealand

Some themes are clear.

Water taxes have the potential to reduce demand on water resources and to improve the quality of water. In Australia, a significant proportion of the population, including irrigators and other industries, rely on water from the Murray River, but the river and surrounding basin has suffered environmentally from over-extraction of water.

Water markets were adopted in the late 20th century so that water can be allocated to its most efficient use by being priced appropriately leading to improvements in the health of the Murray River. Our review of the literature shows that a water tax may increase the efficiency of these markets and the river’s health even further by helping to price water appropriately for the environmental damage that over extraction causes.

In New Zealand, a water tax may improve water quality by encouraging the development of water quality improvement technology.

A myriad complex interacting variables will impact on the success and impact of taxes. Tax design is crucial, including the extent to which taxes are reinvested in water technologies or sectors that are high consumers of water. Sectors such as agriculture have both the potential to change pollution and use from taxes, but are also susceptible to the greatest welfare losses where hypothecation does not protect the sector. Ideally taxes will result in behavioural changes, without generating welfare losses where they are not desired.

All of these themes would benefit from greater focus and research attention to provide greater clarity and certainty on their outcomes.


Further reading

Marriott, L & Whait, R 2020, ‘Water taxes: a systematic literature review with application to Australia and New Zealand’, Australian Tax Forum, vol. 35, no. 4, pp. 496-520.

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