To amend the Internal Revenue Code of 1986 to provide an exclusion from gross income for water conservation subsidies provided to customers by water utilities and to allow such utilities an expense deduction for such subsidies.

SECTION 1. EXCLUSION OF WATER CONSERVATION SUBSIDIES PROVIDED BY WATER 
              UTILITIES.

    (a) General Rule.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to amounts specifically 
excluded from gross income) is amended by redesignating section 137 as 
section 138 and by inserting after section 136 the following new 
section:

``SEC. 137. WATER CONSERVATION SUBSIDIES PROVIDED BY WATER UTILITIES.

    ``(a) Exclusion.--Gross income shall not include the value of any 
subsidy provided (directly or indirectly) by a water utility to a 
customer for the purchase or installation of any water conservation 
measure.
    ``(b) Denial of Double Benefit.--Notwithstanding any other 
provision of this subtitle, no deduction or credit shall be allowed 
for, or by reason of, any expenditure to the extent of the amount 
excluded under subsection (a) for any subsidy which was provided with 
respect to such expenditure. The adjusted basis of any property shall 
be reduced by the amount excluded under subsection (a) which was 
provided with respect to such property.
    ``(c) Water Conservation Measure.--For purposes of this section--
            ``(1) In general.--The term `water conservation measure' 
        means any installation or modification primarily designed to 
        reduce consumption of water or to improve the management of 
        water demand with respect to any property. The purchase and 
        installation of specially defined water property shall be 
        treated as a water conservation measure.
            ``(2) Specially defined water property.--For purposes of 
        paragraph (1), the term `specially defined water property' 
        means--
                    ``(A) a toilet using 1.6 gallons or less per flush 
                for gravity designs and 2.5 gallons or less per flush 
                for flush valve style pressure-assisted designs,
                    ``(B) a urinal using 1.0 gallons or less per flush,
                    ``(C) a laundry machine using 11.0 gallons or less 
                per cubic foot of capacity per complete washing cycle,
                    ``(D) a dishwasher using 2.0 gallons or less per 
                cubic foot of capacity per complete washing cycle,
                    ``(E) a faucet equipped with an aerator or flow 
                control which restricts the flow to 2.5 gallons or less 
                per minute at 65 psi, and
                    ``(F) a shower head which restricts the flow to 2.5 
                gallons or less per minute at 65 psi.
            ``(3) Certain other property treated as specially defined 
        water property.--For purposes of paragraph (1), the term 
        `specially defined water property' includes--
                    ``(A) equipment which automatically reduces the 
                pressure (or controls the flow) of water,
                    ``(B) water recycling, recirculation, and reuse 
                equipment,
                    ``(C) cooling equipment,
                    ``(D) equipment using treatment processes which 
                optimize water cycling,
                    ``(E) equipment and facilities which use treated 
                municipal effluent (instead of drinking quality water) 
                for non-potable applications, thereby reducing the 
                demand for drinking quality water,
                    ``(F) evapotranspiration stations, software, and 
                controllers,
                    ``(G) tank and reservoir covers and liners,
                    ``(H) sub-metering, overflow and other monitoring 
                control systems which improve operating efficiencies 
                and identify water loss or equipment maintenance needs 
                directly associated with inefficient water use,
                    ``(I) equipment to identify and repair water leaks, 
                and
                    ``(J) any other property of a kind specified by the 
                Secretary by regulations,
        the principal purpose of which is reducing water consumption.
            ``(4) Water efficiency of property must exceed local code 
        requirements.--The term `specially defined water property' does 
        not include any property if--
                    ``(A) such property is required under local 
                building standards or codes to meet water efficiency 
                standards, and
                    ``(B) the water efficiency rating of such property 
                does not exceed such standards.
            ``(5) Leak identification and repair services included.--
        The term `water conservation measure' includes services to 
        identify and repair water leaks.
            ``(6) Certain landscape measures included.--The term `water 
        conservation measure' includes landscape measures that improve 
        soil moisture retention by reducing water lost to evaporation.
    ``(d) Water Utility.--For purposes of this section, the term `water 
utility' means any person engaged in the furnishing or sale of water if 
the rates for such furnishing or sale have been established or approved 
by a State or political subdivision thereof, by any agency or 
instrumentality of the United States, or by a public utility or public 
service commission or other similar body of any State or political 
subdivision thereof or of the District of Columbia. For purposes of the 
preceding sentence, the term `person' includes the Federal Government, 
a State or local government or any political subdivision thereof, and 
any instrumentality of any of the foregoing.''
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 of such Code is amended by striking the item 
relating to section 137 and inserting:

                              ``Sec. 137. Water conservation subsidies 
                                        provided by water utilities.
                              ``Sec. 138. Cross reference to other 
                                        Acts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts received after December 31, 1993.

SEC. 2. WATER CONSERVATION EXPENDITURES BY WATER UTILITIES.

    (a) In General.--Part VI of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to itemized deductions for 
individuals and corporations) is amended by inserting after section 197 
the following new section:

``SEC. 198. WATER CONSERVATION EXPENDITURES BY WATER UTILITIES.

    ``(a) General Rule.--In the case of a water utility (as defined in 
section 137(d)), there shall be allowed as a deduction for the taxable 
year an amount equal to the water conservation expenditures paid or 
incurred by the taxpayer during such taxable year.
    ``(b) Water Conservation Expenditures.--For purposes of this 
section, the term `water conservation expenditures' means expenditures 
for subsidies provided directly or indirectly to customers for the 
purchase, installation, or modification of any device or service 
primarily designed to reduce consumption of water or to improve the 
management of water demand. Such term shall not include any expenditure 
taken into account in determining the basis of any tangible property 
which is owned by the taxpayer and which is of a character subject to 
the allowance for depreciation.''
    (b) Conforming Amendments.--
            (1) Paragraph (1) of section 263(a) of such Code is amended 
        by striking ``; or'' at the end of subparagraph (F) and 
        inserting a comma, by striking the period at the end of 
        subparagraph (G) and inserting ``, or'', and by adding at the 
        end thereof the following new subparagraph:
                    ``(H) expenditures for which a deduction is allowed 
                under section 198.''
            (2) The table of sections for part VI of subchapter B of 
        chapter 1 of such Code is amended by adding at the end thereof 
        the following new item:

                              ``Sec. 198. Water conservation 
                                        expenditures by water 
                                        utilities.''
    (c) Effective Date.--The amendments made by this section shall 
apply to expenditures paid or incurred in taxable years beginning after 
December 31, 1993.

Summary: Amends the Internal Revenue Code to exclude from gross income the value of any subsidy provided by a public utility to a customer for the purchase or installation of energy or water conservation measures. Allows water utilities a deduction for water conservation expenditures.