Chicago Bottled Water Tax and Blog Action Day 2010

October 15 is Blog Action Day serving the purpose of trying to get bloggers to all blog on the same topic on this day. The 2010 topic is water. There is a lot of important information at the above link about global water problems and the shocking number of deaths every day due to unsafe water.

I'm using this day to comment on the recent case that upheld the Chicago 5 cent bottled water tax against challenges of it being an unconstitutional occupations tax and of violating the uniformity clause of the Illinois Constitution.

I wrote about this tax when it was enacted in 2007 - see 11/27/07 post and 3/20/08 and an April 2008 AICPA Tax Insider article. I noted that the tax is odd in that it is per bottle regardless of the size of the bottle; there is some reference to an environmental justification yet there is no tax on all bottled beverages; and there were non-tax alternatives to trying to get people to drink the city water rather than bottled water.

The tax was challenged by the American Beverage Corporation (Appellate Court, First District, 1-09-1511 (9/23/10)). Chicago won on the challenges because ...

1. Occupation tax - prior case law has held that "A tax on tangible personal property is not considered an occupation tax when the ordinance enacting it declares its legal incidence falls on the purchaser, rather than the seller." ABC argued that because collection falls upon the retailer/distributor, the practical effect was that it was an occupation tax. The court disagreed noting, among other things, that the tax was imposed on the transfer of the tangible object.
2. Uniformity clause - two factors were relevant here. First, there is a difference between taxed bottled water and other untaxed goods, such as carbonated or flavored water. Second, is the need for a reasonable relationship between the rule and its purpose. Per the court, "the City enacted the bottled water tax to raise revenue in a manner that discourages consumers from buying noncarbonated bottled water, both to conserve energy from nonrenewable sources and to reduce the discharge of toxic contaminants and litter. The classification is reasonably related to those purposes and therefore satisfies the second prong of the uniformity clause."

So, while upheld as valid on a legal challenge, I don't think it holds up under a tax policy analysis. Consider:

• Equity - the tax is regressive.
• Neutrality - is might encourage people to not buy bottled water, but I think it might instead make them want to buy it in larger bottles (tax is 5 cents per bottle) as a tax minimization plan.
• Simplicity - while the law is not too complicated, partly because it is per bottle rather than size of bottle, the Chicago tax system would be even simpler without the tax.

What do you think?