Tax Policy – Federal Proposal to Levy Excise Tax on Spring Water Extraction
Representative Debbie Wasserman Schultz (D-FL) is proposing to levy a federal excise tax on spring water extraction—also known as a severance tax. Her bill, Save Our Spring Act of 2020, would impose a tax of $0.06 per gallon of water extracted from springs or underground water sources for use as bottled drinking water.
Revenue from the proposed tax would be transferred to a trust fund and appropriated, according to section 1452 of the Safe Drinking Water Act (SDWA), to community water systems.
The federal proposal comes amid a highly contested debate in north Florida on whether to grant an extraction permit in Ginnie Springs, over concerns about the spring water supply and risk of water depletion. A similar excise tax on spring water extraction was proposed in Florida. (For our analysis of that proposal, click here.)
The central issue with both the state and federal proposals is that a severance tax on spring water extraction makes little sense considering the goal of saving the nation’s spring waters.
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 bill only proposes taxing a single form of water usage, which undermines the supposed environmental effect of the tax and makes it inequitable. According to the International Bottled Water Association, bottled water usage represents only 0.004 percent of water use in the U.S—and this figure includes water from municipal sources, which would not be taxed under the proposal. For comparison, the United States Geological Survey estimates that irrigation represented 42 percent of withdrawals of fresh water in 2015.
No tax would be imposed on other types of water usage, such as agricultural irrigation or mining. In fact, irrigation is federally subsidized by keeping the price of water and irrigation equipment 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.
The structure of the proposed federal excise tax is similar to taxes on oil and natural gas extraction— although this bill would impose a federal tax on water extraction, whereas severance taxes on oil and gas are normally levied at the state level. The federal government does not levy a severance tax on oil and gas but does levy an oil spill liability excise tax, which is set to expire by the end of 2020.
Extraction of such nonrenewable resources is commonly taxed at the state level with 34 states imposing a tax or fee on the extraction. However, these taxes differ notably from those on water because water is renewable. 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, for instance, 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 its extraction tax is used to reclaim land affected by exploration, drilling, and production of oil and gas.
Passage of this bill would mark the first time a severance tax was imposed on a renewable resource, opening a new frontier in tax policy without clear justification. The Save Our Springs Act lacks the conventional justification for levying a severance or excise tax. The narrow design of the levy would target only a few companies in a single industry, 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.
Addressing water depletion is an honorable goal but cannot be solved with nonneutral and inequitable taxation of a few companies. If the goal of the proposal is new revenue for spending priorities, lawmakers should fund that with broad-based stable taxes at low rates.
Source: Tax Policy – Federal Proposal to Levy Excise Tax on Spring Water Extraction