Bottled water tax proposed in Michigan

The Lt. Governor of Michigan has proposed a 10 cent per bottle tax on water to help fund education (Lt. Governor John Cherry press release of 12/14/09). Per Lt. Governor Cherry, it makes sense to tax one resource to fund another (Mlive.com 12/14/09). Is this a good idea? Based on principles of good tax policy and budgeting - no.

Equity - why a tax on bottled water and not other bottles or other acquisitions of water?

Economy in collection - there will be costs to both businesses and the government of collecting and auditing this new tax.

Neutrality - the tax will affect taxpayer decisions on whether to buy bottled water and where to buy it.

Appropriate government revenues - while the government should be able to estimate how much it will generate from a new bottle tax, the fact that the tax is tied to a specific use and one that is unrelated to bottled waters (education), makes this earmark a problem for the budget process. I've written about the problems of earmarking before (San Jose Mercury News, 3/21/08).

Complexity - as a new tax, new forms and processes would be needed. It might also be difficult to define bottled water - does that mean pure water? What if a few vitamins are added or flavoring?

Minimum tax gap - people will be encouraged to buy water outside of the state if convenient to do so (they live on the border of another state).

The tax does meet the transparency principle assuming the tax would be added to a buyer's bill.

Constitutionality - it is not unusual for state constitutions to have a variety of prohibitions that will defeat some taxes unless the Constitution is first changed. The likely unconstitutionality of a Michigan water bottle tax has been noted by The Tax Foundation (12/17/09 blog post) and others.

This is not the first time states have suggested or enacted odd taxes:

• Chicago's bottled water tax
• New Mexico TV/video game tax

While Michigan, like other states, is facing budget shortfalls, desperate measures, such as a bottled water tax, are not the best way to go. They should look more broadly at reform, which should include consideration of polluter pays taxes. A polluter pays tax on all plastic bottles might make sense. If Michigan already imposes a deposit on plastic bottles, a system is already in place to assess such a tax. Also, it is likely that general fund dollars today are being used for waste disposal including plastic bottles. But, this still seems like a small measure in light of larger tax and budget problems.

What would you suggest for Michigan?