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Should Bottled Spring Water Be Subject to Severance, Extraction, or Excise Taxes?

3 min readBy: Scott Drenkard

At the end of February, a bill (HB 5656) was introduced in the Michigan House to subject spring water bottlers to an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. of 4 percent of the wholesale price of the water they bottled. This same time last year, a bill in Maine (HP 0356) proposed a water bottlers taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. of $0.01 per 25 gallons extracted.

The impetus for both proposals was largely political, but this legislative activity opens a new frontier in state tax policy, as no states currently have extraction taxes on water bottlers. As states look to protect and steward their natural resources, do these types of taxes make sense?

Here are some rules of thumb:

Water is renewable, and that matters.

The structure of proposed water bottler taxes is similar to the way taxes on oil and natural gas extraction work. But one important attribute of oil and gas resources is that they are nonrenewable; once they are depleted, they are not available for future generations. For oil and gas, this non-renewability sparks the question of who deserves the right to extract the resource, this generation, or a later generation? Extraction taxes often are advanced as a way to put a governmental price on extraction today, and ostensibly save that revenue to share with future residents of an area. Wyoming, for example, places severance tax revenues in a trust fund, investing the money to use for future economic downturns, a sort of intergeneration transfer.

Drinking water extraction, by contrast, deals with a renewable resource that operates through the hydrological cycle. Extracting water today does not take water away from future generations. This makes the case for taxation to fix intergenerational problems less convincing.

No one pays for water; we pay for water delivery.

One of the arguments put forward by proponents of water bottler extraction taxes is that bottlers aren’t paying for the water they take, whereas residents that use a faucet pay for their water.

This isn’t quite right. In reality, no one really pays for water; we pay for water delivery. If I get water from the municipal water supply, I am paying the utility for the purifying of the water and infrastructure to get it to my faucet. If I pump water out of a well in my backyard, I am not paying for the water, I am paying to build the well and pump the water into my home. Similarly, the story of bottled water is the story of getting a natural resource delivered in a convenient package on a grocery store shelf. The end user is still paying for delivery, but just to a water company instead of to a utility.

The focus on bottled water is myopic.

One of the strange elements of this conversation is that proponents appear to only be focused on putting a tax on bottled spring water, but not on residential water delivery or water used in agriculture. In fact, agricultural water used for irrigation (which represents the vast majority of water consumption nationwide) is often given a subsidy by governmental water providers in that the prices charged often do not fully recoup the cost of provision and maintenance of that infrastructure.

With spring water bottlers, the bottling infrastructure and shipment costs are fully borne by the companies doing the bottling, and are passed on to the consumers when they purchase the water.

Final thoughts

While the intentions of proponents of these taxes might be respectable, the bottled water industry differs from other resource industries in notable enough ways that traditional extraction taxes are not justified.

Coincidentally, elsewhere in the tax policy world, officials have proposed applying hefty taxes on sugar-sweetened beverages with a stated aim of moving consumers to bottled water. Here, proposals to tax bottled water would push in the opposite direction. What those two proposals really have in common, of course, is that they would raise revenue for new spending. If that is the goal, it would be best to be honest about it, and fund that spending through broad-based taxes instead of targeted selective ones.