For the past four decades, Palo Alto residents have been paying taxes to a water district without getting a drop of water in return.

The property tax, known as the "State Water Project" tax, is one of three that Palo Alto residents pay to the Santa Clara Valley Water District, the county's primary water agency. The other two taxes pertain to the "Clean Safe Creeks" program that county voters approved in 2000 and for flood control. Because the water district is the county's chief steward of creeks and main flood-protection agency, the city doesn't dispute either of these taxes.

The state-water-project tax is another matter. Palo Alto gets its water from the San Francisco Public Utilities Commission, rather than the water district. This has made the tax for the water infrastructure difficult to swallow for city Utilities Department officials, who have long been urging the water district to revise its funding structure. The City Council is set to dive into the issue later this month, when it holds a public discussion on the topic and then follows up with a closed session to consider potential litigation against the water district.

According to a recent Utilities Department report, Palo Alto residents pay about $1.6 million in property taxes to the district every year for the water project. At the same time, Palo Alto's water rates are going up because of the rising cost of getting water from San Francisco, which relies on the Hetch Hetchy system. That system is currently undergoing its own expensive upgrade, with the city paying its share of the cost. With the price of wholesale water on the rise, the city's rates are expected to increase by 12 percent again this year, according to the most recent projections.

Given these costs, Palo Alto officials have argued for the past five years that the local residents should not also be paying the Santa Clara Valley Water District tax to offset the costs that should be borne by other cities. Gary Kremen, a Palo Alto resident and the founder of Match.com who last year won a seat on the water district's board of directors, is leading the charge to eliminate what he considers an unfair arrangement.

On Feb. 4, Kremen took his argument to a meeting of the city's Utilities Advisory Commission, where he found many sympathetic ears.

"Imagine you were living in Palo Alto and you paid your property taxes, but no one allowed your kids to go to JLS or Nixon or Terman (middle schools)," Kremen said. "That's kind of the case here. No one is allowing us to get water from the Santa Clara Valley Water District."

He noted that the northern part of the county has "only 14 percent of the population and we're paying over 25 percent for the state water tax for water we're not given and for these de minimis benefits," which mostly relate to conservation programs.

The utilities commission didn't take any formal actions, but several members were more than a little surprised to learn about the long-standing arrangement.

"I don't know how I was living in Palo Alto for all of these years and didn't know that I was paying a tax for which I wasn't getting any tangible benefits," Commissioner James Cook said during the Feb. 4 discussion. "If it's true, it's totally outrageous to me."

Palo Alto isn't the only city grappling with this dilemma. Steve Jordan, a board member at the Purissima Hills Water District (which like Palo Alto gets its water from San Francisco), expressed a similar frustration. The Purissima district, Jordan told the utilities commission, also shares "the joy of paying the state water budget tax and not getting any water." He also noted that several years ago, when the district's needs exceeded its allocation from the SFPUC, it requested water from the county water district and was denied.

Jordan said that his water district would be happy to work with Palo Alto's attorneys on the issue.

State law gives the county water district the right to levy property taxes to pay for its obligations for the water infrastructure. But the district's decision to use this mechanism to pay for 100 percent of these obligations has continuously rankled officials who believe that at least some portion of the costs should be collected through the water rates. That way, it's the communities that rely on the water district's water that foot the supply costs.

So far, the city has little to show for its years of complaints. In 2011, Utilities Director Valerie Fong brought up the issue in a letter to the district. She noted that much like the local water district, the San Francisco Public Utilities Commission will also be upgrading its infrastructure and expecting its customers to pay their proportionate shares.

"It is troubling to imagine a situation where the citizens and businesses of Palo Alto might bear a disproportionate share of the burden by paying both via property taxes and SFPUC rates," Fong said.

City Manager James Keene made a similar point last month in a letter he submitted to the water district. The Feb. 10 letter urges the district to revise its rates to "address the inequities in assessing North County taxpayers the full cost of a system that they cannot and do not use, while similarly situated South County taxpayers are exempted and the remainder of water customers disproportionately benefit through subsidized rates."

James Fiedler, chief operation officer for the Santa Clara Valley Water District, defended the practice and told the commission that Palo Alto benefits from the district's programs, even if it's not a water customer. One project that the district is looking at is the creation of an intertie linking the Hetch Hetchy system with the water district's system on the west side of the county. This way, each supplier would be able to serve as backup for the other.

"There may be some potential benefit for Palo Alto and to Purissima Hills if such a system were put in place," Fiedler said.

He stressed that the tax can only be used to pay for the district's obligations for water received from the State Water Project, a system approved by voters in 1960. He also highlighted the district's role in recharging the county's groundwater basin and in spearheading water-recycling programs. The district's imported water can be used to recharge groundwater, reducing the probability of surface subsidence and ensuring that there are groundwater supplies available for emergencies.

Palo Alto has consistently countered that it doesn't pump groundwater from its wells and hasn't done so since the 1960s, when it began its arrangement with San Francisco. A recent report from Jane Ratchye, assistant director at the Utilities Department, also emphasized that the city owns its own emergency-supply wells, including the one recently built at El Camino Park.

At the Feb. 4 meeting, Fiedler defended the district's use of the tax and invited Palo Alto officials for discussions about recycled-water projects for which the city's funds can be used.

"We believe there is a benefit that Palo Alto citizens receive from that tax," Fiedler told the commission. "But nonetheless, our board is committed to having an ongoing dialogue to help cost-share the expansion of recycled water in Palo Alto as a way to really provide some equalizer that helps address some of your concerns and stability of water usage."

Keene told the Weekly that the city has a great relationship with the water district, particularly on things like flood control, clean creeks and water recycling. On Feb. 25, Keene, Mayor Karen Holman and utilities staff met with water-district officials, and there was a clear interest, Keene said, in moving ahead with water-recycling efforts and other projects that would be "of benefit to Palo Alto."

But while Keene said the meeting ended "positively," there wasn't a "substantive shift" in the district's stance on the tax.

"It's still problematic for us that the tax levied on our citizens is for something that we don't receive," Keene told the Weekly.