Tax Policy – Maine’s Water Extraction Tax Proposal Is Poor Tax Policy

Lawmakers in Maine’s 129th legislature have proposed a bill (HP 797) to impose an excise tax of 12 cents per gallon on water extraction performed by each bottled water operator that extracted more than 1 million gallons of groundwater or surface water in the previous calendar year. This plan purports to stimulate the economy of rural Maine, and credits new revenue to the Water Trust Fund.

Specifically, 65 percent of the revenue would be earmarked to develop high-speed broadband infrastructure. The remaining 35 percent would be directed to provide tuition grants for postsecondary education for up to two years.

The proposal for a water extraction tax, which is not a new idea in Maine, is poor tax policy because it is nonneutral and unstable, and it would open the way to taxing renewable resources.

Three previous bills in Maine’s legislature attempted to impose similar excise taxes at various rates and for various purposes; all were rejected. In 2009, HP 191 was proposed to tax water at one cent per gallon; in 2015, HP 127 would also have imposed a water extraction tax of one cent per gallon; and in 2017, HP 356 aimed to tax water at a rate of one cent per 25 gallons extracted. Revenue allocation varied for each bill. The proposals included programs to finance watershed and water quality protection, lake water quality monitoring, water testing, tax relief for local residents and municipalities, and programs for K-12 education.

A tax on water extraction would mark the first time the Maine legislature taxed a renewable resource, opening a new frontier of tax policy without a clear justification. That is not the only reason why taxing water extraction is questionable public policy. Although it easy to administer such a tax on a very small base of producers, it is a highly discriminatory tax that targets a small number of companies in a single industry without the normal justifications for an excise tax. This violates the principle of tax neutrality because the tax is so narrowly targeted upon certain companies. Furthermore, taxing such a small base of companies violates the principle of tax stability by attaching government programs to a volatile and uncertain revenue source depending on the operations of a small handful of businesses.

Poland Spring is the only company in Maine that would be subjected to such taxation. As a landowner, however, the company currently owns the rights to access water according to Maine law. The public expenditures planned for the water tax are not directly related to Poland Springs or even to water usage generally, putting this tax in contradiction with the benefit principle of tax policy.

The company currently has three bottling plants operating in Maine, where they have hundreds of jobs. Ironically, the stated purpose of the bill is to secure the economic future of rural Maine. However, the bill attempts to do so in a way that could negatively impact rural jobs and reduce the economic competitiveness of Maine’s rural communities.

The arguments in favor of traditional severance and extraction taxes are not justified in the case of water extraction because water is a renewable resource.

Severance and extraction taxes are often imposed on the extraction of nonrenewable natural resources, such as crude oil and natural gas, on the grounds that it encourages resource conservation. Sometimes the tax is imposed to “price-in” the externalities caused by extracting and using such resources, and the tax revenue gained can be used to mitigate the effects of those externalities. Furthermore, revenue generated from a severance tax might be used to address intergenerational inequity given that resources, once depleted, are not accessible for future generations. However, these issues are not relevant with regards to drinking water extraction because water is a renewable resource that is not being depleted.

In addition, taxing one form of water usage creates a nonneutral tax code with respect to water-related economic activity. There is no tax imposed on other types of water usage such as agricultural irrigation, power production, mining, and golf course irrigation. In fact, such water usage is sometimes subsidized by governmental utility authorities as a matter of public policy so that the water price can be kept artificially low. On the other hand, bottled water companies bear the full cost of their bottling infrastructure and transportation.

If rural broadband infrastructure and post-secondary education are state priorities, they should be funded by a stable and neutral revenue source. The logic behind traditional extraction taxes does not apply to the bottled water industry. Furthermore, the funding for efficient infrastructure and education should aim to meet the benefit principle of taxation. That is, people should pay taxes based on the benefits they receive. Taxing the extraction of water does not make sense as an excise tax and does not make sense as a mechanism to finance rural broadband and public education.

 


Source: Tax Policy – Maine’s Water Extraction Tax Proposal Is Poor Tax Policy