Tax Policy – Bottled Spring Water Target of Taxes Once More
In December 2019, identical bills HB 861 and SB 1112 were introduced in Florida’s House of Representatives and Senate. The proposals would tax water extraction (excluding production from public water systems) at a rate of 12.5 cents per gallon. The revenue from the tax would be deposited in the Wastewater Treatment and Stormwater Management Revolving Loan Trust Fund. Several other bills (SB 1798, SB 1096, SB 1098) have been introduced which, if enacted, would charge either a large one-time fee for extraction permits or a small fee per gallon in order to increase monitoring of extractions.
According to the sponsor of SB 1112, Sen. Annette Taddeo (D), the 12.5 cents tax matches what water companies, bottling water supplied from public water sources, pay per gallon.
While the idea of a water extraction tax is not new, it surfaces amid a debate over the sustainability of Florida’s spring water supply and concerns about water depletion. The stated political goal of the tax is protecting Florida’s waterways. However, an excise tax on spring water extraction would not be an appropriate policy tool to achieve this.
First, only a few water bottling companies would be subject to this tax as the bill does not include bottling operations sourcing water from public water systems. Second, the bills only propose taxing a single form of water usage. No tax would be imposed on other types of water usage like agricultural irrigation or mining. In fact, these activities are sometimes subsidized by keeping the price of water artificially low. In other words, the proposal does not mitigate any concerns related to water depletion but would instead create a nonneutral tax code with respect to water-related economic activity, and impose taxation on an extremely narrow set of companies.
By including water extraction in existing legislation about extraction taxes, lawmakers imply that water extraction can be compared to extraction of other natural resources like oil and gas. While extraction of such nonrenewable resources is commonly taxed, they differ notably from water because water is renewable. Thirty-four states impose a tax or fee on the extraction of nonrenewable natural resources.
Oil and gas, once extracted, are not available to future generations, which can justify a tax to address intergenerational inequities in resource use or to encourage preservation. This is the case in Wyoming, which places severance tax revenues in a trust fund, investing the money to use for future economic downturns as a sort of intergeneration transfer.
Further, a tax on extraction is sometimes imposed to price-in externalities related to the extraction or use of a resource. The revenue from such a tax can be appropriated to mitigate those externalities. In North Carolina, revenue from their extraction tax is used to reclaim land affected by exploration, drilling, and production of oil and gas.
SB 1112 and HB 861 lack the conventional justification for levying a severance or excise tax. Additionally, Florida would make history by being the first state to tax a renewable resource, and it would do this in a highly nonneutral manner. The narrow design of the levy would target only a few companies in a single industry in Florida, which makes the tax highly discriminatory and violates the principle of neutral taxation. It also creates revenue uncertainty given that narrow taxes tend to be volatile due to their dependence on the activity of a small number of businesses. For instance, if one water extraction operation stops, much of the revenue could disappear, resulting in budget instability, and government programs that receive the tax dollars from water extraction becoming underfunded. Instead of raising revenue from a volatile source like spring water extraction, lawmakers should fund spending priorities with broad-based stable taxes at low rates.
The future remains uncertain for the bills to impose taxation on water extraction due to Florida’s constitutional requirements. According to the Fiscal Impact Statement, the tax increase likely needs support from two-thirds of each chamber to pass. Lawmakers should keep in mind this is flawed tax policy.
Source: Tax Policy – Bottled Spring Water Target of Taxes Once More
Upstate Tax Professionals