Bottled Water Tax in Chicago

The Chicago City Council passed a 2008 revenue ordinance that in addition to some increases to existing taxes, adds a new "bottled water tax." This 5 cents per bottle tax applies to retail buyers and is collected by dealers and wholesalers starting January 1, 2008.

The tax is expected to raise $10.5 million (Sun Times, 11/14/07).

The tax was originally proposed at 25 cents per watter bottle by Alderman George Cardenes. The revenue was intended to address a shortfall in water and sewer funds believed to be partially due to people drinking less tap water. (CBS2, 8/14/07)

Is a bottled water tax a good idea?

If there are costs of using bottled water that are not included in the price that society ends up paying (negative externalities), then a tax helps to make the price of the item reflect the truer cost. There are costs to Chicago of bottled water. These apparently include a drop in funds for the tap water they produce. Undoubtedly, there are also disposal and recycling costs. Beyond Chicago, there are costs of the materials used to produce the bottles (including petroleum) and pollution costs involved with delivery.

If the concern is with disposal of plastic bottles, the tax is too narrow as other products are packaged in plastic bottles, such as soda. However, it appears that some of the rationale for focusing on water is that the City Council knows its tap water is fine to drink, making the bottled water an unneeded item.

Is the tax well designed?

1. If bottled water is creating costs for Chicago, then a tax or fee to address it make sense. However, before creating a new tax that will create new compliance and administrative costs for taxpayers and tax collectors, alternatives should be explored. For example, could the city just produce less tap water to meet reduced demand, thereby reducing its costs? Given the likely high fixed costs of producing clean water, this may not have been an option. Also, while the city might be able to increase the cost of tap water, that would put the cost on those who did not cause the problem and perhaps make the problem worse (more people may start buying bottled water).


2. If disposal of plastic is the problem, then the tax - as a "polluter pays" tax, is too narrow.


3. While 5 cents per bottle is simple, it may lead to larger water bottles being sold in Chicago.


4. While Chicago is a big city, people may still find it relatively easy to buy their water bottles outside of the city limits.


5. Could the tax be construed as an additional sales tax on bottled water? If yes, is that allowed under state and city law?


6. Could the tax be viewed as creating unfair competition for city water? A tough question, perhaps. The tax is likely within the city's taxing powers, and it is trying to cover costs it has under its obligation to provide water. A correlation between the drop in water funds and increase in bottled water sales with the new tax covering that shortfall and no alternatives to the city, likely brings it within their operating powers and responsibilities.
   
7. The tax seems to have been designed to be simple. All bottles are taxed the same and the collection chain seems straightforward.

Will other cities or states follow Chicago's lead? Some are focusing on the "luxury" nature of bottled water and the message sent when government funds are used to buy bottled water for employees when the local water is perfectly fine to drink. In fact, on Nov. 16, 2007, Illinois started a policy that state agencies may not purchase bottled water with state funds. In February 2006, San Francisco Mayor Gavin Newsome expressed concern over the $500,000 of city funds going to bottled water when the local drinking water is fine. One solution he had was for the city to bottle its own water. Since then, he decided to just forbid the use of city funds to buy bottled water. The Executive Order the mayor signed in June 2007 includes some interesting data about the usage and cost of bottled water.

Does a bottled water tax help move Chicago's tax system into the 21st century? I don't think so. This sounds like a seized opportunity without consideration of what overall reforms would be best. While polluter pays taxes can help promote economic efficiency by taxing activities that result in costs to society and to governments, and freeing up other tax dollars to be kept by taxpayers, the bottled water tax is too narrow. Many products are packaged in plastic bottles and other materials that are harmful to the environment. More work is needed.