Tax Incentives Find New Purpose for Conserving Water in American West

The San Luis Valley, a high desert farming region in southern Colorado, is a land of daunting natural constraints, especially its scarce water reserves. Pragmatic ingenuity is being applied here to overcome them, including a new easement program that uses federal and state tax benefits to conserve groundwater.

In November, Ron Bowman, owner of the 1,900-acre Peachwood Farms, signed Colorado’s first groundwater conservation easement. The landmark legal agreement enables Bowman to gain a substantial tax credit based on the value of 2,000 acre-feet of water he used annually. In exchange Bowman is prohibited from pumping groundwater to irrigate his fields.

Easements to conserve groundwater, while new, work the same as easements that have been negotiated for decades to conserve environmentally sensitive land. A landowner’s water is valued through an appraisal. The easement restricts what can be done with the water. The easement is then purchased or donated to a land trust or government agency, which is responsible for enforcing its stipulations. The value of the donated easement can be deducted from federal taxes and some state taxes. In Colorado, the benefit to the landowner is a state income tax credit.

Though the San Luis Valley is not the first to use easements to conserve groundwater — Nebraska’s Central Platte Natural Resources District has had them for 15 years — the San Luis Valley’s experience struck a chord, becoming the water-sector equivalent of a viral hit. The lawyers, land trusts, farmers, and water districts working in the valley are at the forefront of a new form of groundwater protection in the American West.

“I think it’s a brand new tool that has a lot of promise in terms of being able to conserve groundwater in perpetuity by reducing the draw on the aquifer,” said Peter Nichols, a water lawyer in Colorado who co-drafted the model easement that Peachwood Farms used.

The San Luis Valley is an apt place to start what amounts to a last-ditch program to reduce groundwater consumption. Hemmed in by the sawtooth Sangre de Christo Mountains to the east and the San Juan Mountains to the west, the broad valley is the headwaters of the Rio Grande, a river pummeled by a warming climate. Even with rising temperatures, the growing season is just three months for the alfalfa, potatoes, barley, and hemp that are planted here.  At nearly a mile and a half of elevation, a crop-killing frost can strike at any time.

Along with the formidable weather, water is a major factor limiting production. Valley farmers pump more water from the basin’s aquifers than can be sustained. After a catastrophic drought a generation ago, the state demanded that they use less, setting in motion a two-decade quest for groundwater balance. Easements are the latest step in a developing strategy to meet Colorado’s water conservation directive.

Farmers across the drying American West are taking notice because groundwater depletion is a top-line political issue in nearly every state from the High Plains to the Pacific Coast. California officials are implementing the Sustainable Groundwater Management Act to align supply and demand in its major farming valleys. Last November, voters in Arizona’s Cochise County approved new restrictions to counteract declining groundwater levels that had caused rural wells to dry up.

Groundwater conservation easements could be a solution, and the concept is starting to spread rapidly. Nichols is working with the Ogallala Land and Water Conservancy, in Clovis, New Mexico, to develop groundwater conservation easements in that state. The conservancy was founded in 2021 with the goal of using easements to protect the shrinking Ogallala Aquifer.

Attorneys, environmental groups, water groups, and land trusts in Texas were attracted to the easement model following a presentation at the Texas Land Conservation Conference earlier this month by Ladona Clayton, the executive director of the Ogallala Land and Water Conservancy.

Clayton said the talk was a sensation. “Interest has suddenly exploded for me,” she said. “There’s not a quiet moment since I did that.”

Clayton is not resting while the conservancy assembles the paperwork for easements in New Mexico. In the last year she entered into three-year contracts to lease groundwater from 53 wells, saving nearly 13,000 acre-feet per year.

“Time was of the essence,” she said.

The Tools of Land Conservation But for Groundwater

The inflection point in the San Luis Valley arrived two decades ago. In 2002, amid a severe drought, groundwater levels plunged. Two years later the Legislature approved a mandate to bring the basin’s aquifers back in balance. Doing so would also ensure sufficient water would flow down the Rio Grande to New Mexico and Texas, as is required by federal compact.

About five years ago, Cleave Simpson, the general manager of the Rio Grande Water Conservation District, approached the region’s conservation groups with a challenge. Conservation easements had a long history in the valley as a tool to protect land from development. Could they be repurposed for groundwater protection?

“If all of us could eventually somehow agree to a restriction, we could improve our aquifer system,” Simpson said, recognizing one of the leading conundrums of behavioral economics and natural resource management. “But how can I incentivize folks to agree to a reduction in their groundwater withdrawals?”

Simpson put this question to Colorado Open Lands and the Rio Grande Headwaters Land Trust, two groups that work on land conservation easements. Sarah Parmar, director of conservation at Colorado Open Lands, said that farmers wanted flexibility with groundwater — to continue to grow crops but to use less water at the same time. To develop a model conservation easement, Colorado Open Lands contacted Peter Nichols and Allan Beezley, two lawyers specializing in land and water rights.

The list of groundwater protection tools is lengthy: fallowing agreements, groundwater leases, cap and trade, contracts that buy land for a one-time payment and cease farming. All the tools differ in terms of legal enforcement, funding source, length of the contract, and how they are administered. Conservation easements have two substantial benefits over their competitors, proponents say. Tax benefits mean that a funding source is already secured, one that is not subject to annual budget battles in the statehouse or Congress. And easements do not need to be renewed; they protect groundwater in perpetuity.

One of the challenges with this approach, Nichols said, is an accurate valuation. Land appraisals are common and relatively simple compared with valuing the non-use of groundwater. In the Peachwood Farms easement, the appraiser compared the value of irrigated farmland against land that is not irrigated.

The Peachwood Farms easement is no half measure either. Under the agreement, the entire 1,900-acre property will eventually forego irrigated agriculture and will be bought out by the water conservation district. Instead of rows of alfalfa or canola, the land will be returned to a natural state over a 10-year period. Some groundwater will be required in the first years, to establish native grasses and shrubs, Parmar said. And several of the fields will be leased during this transition period to produce barley for a local brewery.

An all-or-nothing groundwater approach is not the only path. Nichols said that farmers could pursue easements that would allow limited irrigation, relinquishing most of their groundwater pumping rights but keeping enough to maintain some farm production on their acreage. Parmar sees this as a viable alternative.

“Because a conservation easement can be tailored and written for a specific farm operation, our hope is that — and we’re in lots of conversations with other farmers about doing this — is to actually help them to permanently reduce their water use, but not go out of farming entirely,” Parmar said.

The easements mandate an endpoint — a reduction in groundwater pumping — but farmers determine the route. They could switch to a less water-intensive crop. They could install more efficient irrigation. Or they could fallow land. The choice is theirs.

If the benefits of groundwater conservation easements — the tax incentives, the flexibility, the ability to continue farming — are so clear, why aren’t there more?

Parmar, who has worked in land conservation for 15 years, said that organizations can be shortsighted.

“I think that there’s just been these silos that have existed between the land conservation communities and the water management communities,” Parmar said. “And I think we’re starting to work together and talk more to find more solutions, and that collaboration and engagement is, I think, what finally led to this. But it’s probably way overdue.”

Bowman, now retired, has owned Peachwood Farms for eight years as an investment property, growing alfalfa, hay, hemp, and canola on roughly 1,900 acres. He was not born in the San Luis Valley, coming to the area later in life. In his view, families that have lived in the valley longer should be the ones to continue farming. It’s one reason he was willing to sign the conservation easement.

Preservation of agriculture in the face of a tempestuous climate and unforgiving hydrology is a driving force for Cleave Simpson. Not only the general manager of the water conservation district, Simpson is a state senator and a fourth-generation farmer. He feels these changes every day.

“Agriculture is the [valley’s] biggest economic driver by far,” Simpson said. “All of our communities, our culture, our economies are all built around irrigated agriculture.”

Communities that laid their foundations more than a century ago now must adapt to an era of scarcity, Simpson said. All of the management tools today, groundwater conservation easements included, are intended to avert a disruptive transition.

“I routinely said, ‘If we’re very thoughtful about this, ag is going to change in the valley,’” Simpson said. “It can change incrementally, if we’re thoughtful about it. Or it will change fundamentally if we’re not careful.”