FILE - NH Water filtration, sanitation, purification, water system 8-14-2020

Equipment is seen Aug. 14, 2020, at a water filtration site in Merrimack, New Hampshire.

(The Center Square) – Gov. Chris Sununu is calling on Congress to lift a Trump-era tax requirement that he says is preventing New Hampshire and other states from upgrading water and sewer systems.

In a letter to Senate Majority Leader Chuck Schumer and Senate Minority Leader Mitch McConnell, Sununu asks legislative leaders to restore an exemption to contributions to the capital of a corporation provision of the Internal Revenue Code for regulated water and wastewater utilities.

The tax exemption was lifted as part of the 2018 Tax Cuts and Jobs Act approved by Congress and signed by then-President Donald Trump.

"The loss of the exemption creates a federal tax liability for regulated water and wastewater utilities and has already had negative consequences," Sununu wrote to legislative leaders.

He said court settlements involving contamination issues and large-scale water and wastewater improvement projects are now being taxed, which has become a disincentive to upgrading water and sewer systems.

He pointed out that the American Rescue Plan Act approved by Congress is providing states with federal funding for investments in water, sewer and broadband infrastructure.

"However, it makes little sense for Congress to give states the flexibility to provide grants for necessary infrastructure only then to levy a tax on those grantees, especially when providing a public benefit," he wrote. "We truly believe it was not the intent of Congress to disincentivize water utilities from expanding and improving in order to address a public need or contamination issues."

Others who signed onto Sununu's letter include Arizona Gov. Doug Ducey, Missouri Gov. Mike Parson and Oklahoma Gov. Kevin Stitt.

The Contributions in Aid of Construction exemption was created in 1996 by Congress as part of the Small Business Job Protection Act. It was intended to reduce costs for upgrading aging water and sewer systems.

But the Tax Cuts and Jobs Act, which was signed by Trump in 2017, lifted the exemption and allowed the funding to be treated as taxable income.

Members of the state's all-Democrat congressional delegation have also called for restoring the exemption and have signed onto legislation seeking to fix the problem.

Last month, New Hampshire Sens. Jeanne Shaheen and Maggie Hassan filed a bill in the U.S. Senate seeking to restore the CIAC exemption.

The lawmakers said the lifting of the exemption has added more than $1.1 million in federal taxes to water and sewer improvement projects in southern New Hampshire.

“Investing in water infrastructure means investing in public health, job creation and economic development," Shaheen said in a statement. "These critical investments must be made without sticking local communities with an unexpected bill."