To amend the Internal Revenue Code of 1986 to allow a credit with respect to clean renewable water supply bonds.

SECTION 1. CLEAN RENEWABLE WATER SUPPLY BONDS.

    (a) In General.--Part IV of subchapter A of chapter 1 of the 
Internal Revenue Code of 1986 (relating to credits against tax) is 
amended by inserting after section 54 the following new section:

``SEC. 54A. CREDIT TO HOLDERS OF CLEAN RENEWABLE WATER SUPPLY BONDS.

    ``(a) Allowance of Credit.--If a taxpayer holds a clean renewable 
water supply bond on 1 or more credit allowance dates of the bond 
occurring during any taxable year, there shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to the sum of the credits determined under subsection (b) with 
respect to such dates.
    ``(b) Amount of Credit.--
            ``(1) In general.--The amount of the credit determined 
        under this subsection with respect to any credit allowance date 
        for a clean renewable water supply bond is 25 percent of the 
        annual credit determined with respect to such bond.
            ``(2) Annual credit.--The annual credit determined with 
        respect to any clean renewable water supply bond is the product 
        of--
                    ``(A) the credit rate determined by the Secretary 
                under paragraph (3) for the day on which such bond was 
                sold, multiplied by
                    ``(B) the outstanding face amount of the bond.
            ``(3) Determination.--For purposes of paragraph (2), with 
        respect to any clean renewable water supply bond, the Secretary 
        shall determine daily or cause to be determined daily a credit 
        rate which shall apply to the first day on which there is a 
        binding, written contract for the sale or exchange of the bond. 
        The credit rate for any day is the credit rate which the 
        Secretary or the Secretary's designee estimates will permit the 
        issuance of clean renewable water supply bonds with a specified 
        maturity or redemption date without discount and without 
        interest cost to the qualified issuer.
            ``(4) Credit allowance date.--For purposes of this section, 
        the term `credit allowance date' means--
                    ``(A) March 15,
                    ``(B) June 15,
                    ``(C) September 15, and
                    ``(D) December 15.
        Such term also includes the last day on which the bond is 
        outstanding.
            ``(5) Special rule for issuance and redemption.--In the 
        case of a bond which is issued during the 3-month period ending 
        on a credit allowance date, the amount of the credit determined 
        under this subsection with respect to such credit allowance 
        date shall be a ratable portion of the credit otherwise 
        determined based on the portion of the 3-month period during 
        which the bond is outstanding. A similar rule shall apply when 
        the bond is redeemed or matures.
    ``(c) Limitation Based on Amount of Tax.--The credit allowed under 
subsection (a) for any taxable year shall not exceed the excess of--
            ``(1) the sum of the regular tax liability (as defined in 
        section 26(b)) plus the tax imposed by section 55, over
            ``(2) the sum of the credits allowable under this part 
        (other than subpart C, section 54, section 1400N(l), and this 
        section).
    ``(d) Clean Renewable Water Supply Bond.--For purposes of this 
section--
            ``(1) In general.--The term `clean renewable water supply 
        bond' means any bond issued as part of an issue if--
                    ``(A) the bond is issued by a qualified issuer,
                    ``(B) 95 percent or more of the proceeds of such 
                issue are to be used for capital expenditures incurred 
                by qualified borrowers for 1 or more qualified 
                projects,
                    ``(C) the qualified issuer designates such bond for 
                purposes of this section and the bond is in registered 
                form, and
                    ``(D) the issue meets the requirements of 
                subsection (g).
            ``(2) Qualified project; special use rules.--
                    ``(A) In general.--The term `qualified project' 
                means any--
                            ``(i) qualified desalination facility,
                            ``(ii) qualified recycled water facility,
                            ``(iii) qualified groundwater remediation 
                        facility, or
                            ``(iv) facility that is functionally 
                        related and subordinate to a facility described 
                        in clause (i), (ii), or (iii),
                in each case, owned by a qualified borrower.
                    ``(B) Refinancing rules.--For purposes of paragraph 
                (1)(B), a qualified project may be refinanced with 
                proceeds of a clean renewable water supply bond only if 
                the indebtedness being refinanced (including any 
                obligation directly or indirectly refinanced by such 
                indebtedness) was originally incurred by a qualified 
                borrower after the date of the enactment of this 
                section.
                    ``(C) Reimbursement.--For purposes of paragraph 
                (1)(B), a clean renewable water supply bond may be 
                issued to reimburse a qualified borrower for amounts 
                paid after the date of the enactment of this section 
                with respect to a qualified project, but only if--
                            ``(i) prior to the payment of the original 
                        expenditure, the qualified borrower declared 
                        its intent to reimburse such expenditure with 
                        the proceeds of a clean renewable water supply 
                        bond,
                            ``(ii) not later than 60 days after payment 
                        of the original expenditure, the qualified 
                        issuer adopts an official intent to reimburse 
                        the original expenditure with such proceeds, 
                        and
                            ``(iii) the reimbursement is made not later 
                        than 18 months after the date the original 
                        expenditure is paid.
                    ``(D) Treatment of changes in use.--For purposes of 
                paragraph (1)(B), the proceeds of an issue shall not be 
                treated as used for a qualified project to the extent 
                that a qualified borrower or qualified issuer takes any 
                action within its control which causes such proceeds 
                not to be used for a qualified project. The Secretary 
                shall prescribe regulations specifying remedial actions 
                that may be taken (including conditions to taking such 
                remedial actions) to prevent an action described in the 
                preceding sentence from causing a bond to fail to be a 
                clean renewable water supply bond.
                    ``(E) Environmental impact.--A project shall not be 
                treated as a qualified project under subparagraph (A) 
                unless such project is designed to comply with 
                regulations issued under subsection (m) relating to the 
                minimization of the environmental impact of the 
                project.
    ``(e) Maturity Limitation.--A bond shall not be treated as a clean 
renewable water supply bond if the maturity of such bond exceeds 20 
years.
    ``(f) Credit Included in Gross Income.--Gross income includes the 
amount of the credit allowed to the taxpayer under this section 
(determined without regard to subsection (c)) and the amount so 
included shall be treated as interest income.
    ``(g) Special Rules Relating to Expenditures.--
            ``(1) In general.--An issue shall be treated as meeting the 
        requirements of this subsection if, as of the date of issuance, 
        the qualified issuer reasonably expects--
                    ``(A) at least 95 percent of the proceeds of such 
                issue are to be spent for 1 or more qualified projects 
                within the 5-year period beginning on the date of 
                issuance of the clean renewable water supply bond,
                    ``(B) a binding commitment with a third party to 
                spend at least 10 percent of the proceeds of such issue 
                will be incurred within the 6-month period beginning on 
                the date of issuance of the clean renewable water 
                supply bond or, in the case of a clean renewable water 
                supply bond the proceeds of which are to be loaned to 2 
                or more qualified borrowers, such binding commitment 
                will be incurred within the 6-month period beginning on 
                the date of the loan of such proceeds to a qualified 
                borrower, and
                    ``(C) such projects will be completed with due 
                diligence and the proceeds of such issue will be spent 
                with due diligence.
            ``(2) Extension of period.--Upon submission of a request 
        prior to the expiration of the period described in paragraph 
        (1)(A), the Secretary may extend such period if the qualified 
        issuer establishes that the failure to satisfy the 5-year 
        requirement is due to reasonable cause and the related projects 
        will continue to proceed with due diligence.
            ``(3) Failure to spend required amount of bond proceeds 
        within 5 years.--To the extent that less than 95 percent of the 
        proceeds of such issue are expended by the close of the 5-year 
        period beginning on the date of issuance (or if an extension 
        has been obtained under paragraph (2), by the close of the 
        extended period), the qualified issuer shall redeem all of the 
        nonqualified bonds within 90 days after the end of such period. 
        For purposes of this paragraph, the amount of the nonqualified 
        bonds required to be redeemed shall be determined in the same 
        manner as under section 142.
    ``(h) Special Rules Relating to Arbitrage.--
            ``(1) In general.--Except as provided in paragraph (2), a 
        bond which is part of an issue shall not be treated as a clean 
        renewable water supply bond unless, with respect to the issue 
        of which the bond is a part, the qualified issuer satisfies the 
        arbitrage requirements of section 148 with respect to proceeds 
        of the issue.
            ``(2) Exceptions.--
                    ``(A) In general.--For purposes of paragraph (1)--
                            ``(i) the proceeds of an issue qualify for 
                        a temporary period of 5 years beginning on the 
                        date of issuance of the issue (or, if a longer 
                        period is approved by the Secretary under 
                        subsection (g)(2), such longer period),
                            ``(ii) the credit allowed under subsection 
                        (a) shall be disregarded for purposes of 
                        computing the yield on the issue,
                            ``(iii) section 148(b)(3) (relating to 
                        exception to definition of `investment 
                        property' for certain tax-exempt bonds) shall 
                        not apply,
                            ``(iv) the bonds shall not be treated as 
                        private activity bonds for purposes of section 
                        148(f)(4)(A) (relating to rebate exception for 
                        amounts in a bona fide debt service fund),
                            ``(v) section 148(f)(4)(C) (relating to 
                        exception from rebate for certain proceeds to 
                        be used to finance construction expenditures) 
                        shall apply to the available construction 
                        proceeds of an issue, and
                            ``(vi) section 148(f)(4)(D) (relating to 
                        exception from rebate for certain small 
                        issuers) shall not apply.
                    ``(B) Additional rebate spending exception.--For 
                purposes of paragraph (1), an issue of clean renewable 
                water supply bonds shall be treated as meeting the 
                requirements of section 148(f)(2) (relating to payment 
                of rebate amounts) if the proceeds of the issue are 
                used to pay capital expenditures for one or more 
                qualified projects in accordance with the following 
                schedule--
                            ``(i) 10 percent within 6 months,
                            ``(ii) 30 percent within 1 year,
                            ``(iii) 60 percent within 2 years, and
                            ``(iv) 100 percent within 3 years.
            ``(3) Regulatory authority.--The Secretary may prescribe 
        such regulations as are necessary or appropriate to carry out 
        the purposes of this subsection, including regulations which 
        specify additional exceptions to the requirements of section 
        148 for clean renewable water supply bonds.
    ``(i) Definitions.--For purposes of this section--
            ``(1) Bond.--The term `bond' includes any obligation.
            ``(2) Governmental body.--The term `governmental body' 
        means any State, territory, possession of the United States, 
        the District of Columbia, Indian tribal government, and any 
        political subdivision thereof.
            ``(3) Local water company.--The term `local water company' 
        means any entity responsible for providing water service to the 
        general public (including electric utility, industrial, 
        agricultural, commercial, or residential users) pursuant to 
        State or tribal law.
            ``(4) Pooled financing bond.--The term `pooled financing 
        bond' shall have the meaning given such term by section 
        149(f)(6)(A).
            ``(5) Qualified borrower.--The term `qualified borrower' 
        means a governmental body or a local water company.
            ``(6) Qualified desalination facility.--The term `qualified 
        desalination facility' means any facility that is used to 
        produce new water supplies by desalinating seawater, 
        groundwater, or surface water if the facility's source water 
        includes chlorides or total dissolved solids that, either 
        continuously or seasonally, exceed maximum permitted levels for 
        primary or secondary drinking water under Federal or State law 
        (as in effect on the date of issuance of the issue).
            ``(7) Qualified groundwater remediation facility.--The term 
        `qualified groundwater remediation facility' means any facility 
        that is used to reclaim contaminated or naturally impaired 
        groundwater for potable use if the facility's source water 
        includes constituents that exceed maximum contaminant levels 
        regulated under the Safe Drinking Water Act (as in effect on 
        the date of enactment of this Act).
            ``(8) Qualified issuer.--The term `qualified issuer' 
        means--
                    ``(A) a governmental body, or
                    ``(B) in the case of a State or political 
                subdivision thereof (as defined for purposes of section 
                103), any entity qualified to issue tax-exempt bonds 
                under section 103 on behalf of such State or political 
                subdivision.
            ``(9) Qualified recycled water facility.--The term 
        `qualified recycled water facility' means any facility that is 
        used to reclaim wastewater produced by the general public 
        (including electric utility, industrial, agricultural, 
        commercial, or residential users) to the extent such reclaimed 
        wastewater is re-used for a beneficial use.
    ``(j) Special Rules Relating to Pool Bonds.--No portion of a pooled 
financing bond may be allocable to any loan unless the borrower has 
entered into a written loan commitment for such portion prior to the 
issue date of such bond.
    ``(k) Bonds Held by Regulated Investment Companies.--If any clean 
renewable water supply bond is held by a regulated investment company, 
the credit determined under subsection (a) shall be allowed to 
shareholders of such company under procedures prescribed by the 
Secretary.
    ``(l) Information Reporting.--Issuers of clean renewable water 
supply bonds shall submit reports similar to the reports required under 
section 149(e).
    ``(m) Regulations.--The Secretary shall prescribe regulations to 
carryout this section, including regulations promulgated in 
consultation with Director of the Environmental Protection Agency to 
ensure the environmental impact of qualified facilities is 
minimized.''.
    (b) Reporting.--Subsection (d) of section 6049 of such Code 
(relating to returns regarding payments of interest) is amended by 
adding at the end the following new paragraph:
            ``(9) Reporting of credit on clean renewable water supply 
        bonds.--
                    ``(A) In general.--For purposes of subsection (a), 
                the term `interest' includes amounts includible in 
                gross income under section 54A(f) and such amounts 
                shall be treated as paid on the credit allowance date 
                (as defined in section 54A(b)(4)).
                    ``(B) Reporting to corporations, etc.--Except as 
                otherwise provided in regulations, in the case of any 
                interest described in subparagraph (A), subsection 
                (b)(4) shall be applied without regard to subparagraphs 
                (A), (H), (I), (J), (K), and (L)(i) of such subsection.
                    ``(C) Regulatory authority.--The Secretary may 
                prescribe such regulations as are necessary or 
                appropriate to carry out the purposes of this 
                paragraph, including regulations which require more 
                frequent or more detailed reporting.''.
    (c) Clerical Amendments.--The table of sections for part IV of 
subchapter A of chapter 1, as amended by this Act, is amended by 
inserting after section 54 the following new item:

``Sec. 54A. Credit to holders of clean renewable water supply bonds.''.
    (d) Issuance of Regulations.--The Secretary of Treasury shall issue 
regulations required under section 54A of the Internal Revenue Code of 
1986 (as added by this section) not later than 120 days after the date 
of the enactment of this Act.
    (e) Effective Date.--The amendments made by this section shall 
apply to bonds issued after the date of the enactment of this Act.

Summary: Amends the Internal Revenue Code to allow holders of clean renewable water supply bonds a tax credit of 25 of the annual credit amount as determined by the Secretary of the Treasury. Defines clean renewable water supply bond as any bond issued by a governmental body or an entity qualified to issue tax-exempt bonds that is used for capital expenditures for projects involving a qualified desalination facility, a recycled water facility, or a groundwater remediation facility. Sets forth rules for maturity limitations, arbitrage, and expenditures, including a requirement that 95 of the proceeds of a bond issue be spent on one or more clean renewable water supply projects within five years from the date of a bond issuance.