The Public Policy

Bottled Water Blues

Its latest tax is turning Chicago into a laughingstock.

By 12.30.07

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Chicago's impending bottled water tax has thrown the city into an uproar. A group of politicians, including Congressman Jesse Jackson Jr., staged their own version of the Boston Tea Party, by pouring bottled water into the Chicago River. The Illinois Retail Merchants Association, the Illinois Food Retailers Association, and other groups are threatening to challenge the law in Cook County Circuit Court after it goes into effect in the New Year. Retailers on the city's borders are stocking up on water in expectation of higher sales.

The law is a pet project of Alderman George Cardenas. It's intended to raise revenue (about $10.5 million annually, by city estimates), to discourage the use of environmentally harmful plastic bottles, and also to address Cardenas's ridiculous obsession.

The Alderman blames the city water and sewer department's $40 million budget shortfall on bottled water consumption, an allegation that -- pardon the pun -- doesn't hold water.

The 2007 water rates for Chicago and its suburbs is $1.33 per 1,000 gallons consumed; sewer rates are calculated at 83 percent of the water bill, or $1.10 per 1,000 gallons consumed. Chicago consumers would need to consume an additional 16 billion gallons of tap water a year to make up the budget shortfall -- enough to fill almost 25,000 Olympic-sized swimming pools.

As for the revenue estimates, they are also likely all wet. While politicians recognize that raising the cost of bottled water will discourage people from buying it, they anticipate a continuous, if not expanding, revenue base from bottled water sales in future years.

Thanks to existing loopholes, the bottled water tax won't collect a fraction of the money that the city expects. Under the new law, Chicagoans would be charged 5 cents per bottle of still water, but nothing for carbonated or fortified water, which are considered soft drinks and thus not direct competitors of Lake Michigan's finest.

The state of Illinois' Retailers' Occupation Tax Act states that "'soft drinks' means any complete, finished, ready-to-use, non-alcoholic drink, whether carbonated or not, including but not limited to soda water, cola, fruit juice, vegetable juice, carbonated water, and all other preparations commonly known as soft drinks of whatever kind or description that are contained in any closed or sealed bottle, can, carton, or container, regardless of size."

Coffee, tea, still water, infant formula, milk or milk products and drinks containing 50 percent or more natural fruit or vegetable juice are exceptions. (Isn't this beginning to sound like something out of Dr. Strangelove?)

HOPEFULLY, THIS WON'T lead the city to tax "soft drinks" in the future, but -- and, again, apologies for the pun -- don't hold your breath. After all, there's a lot of soda, fruit juice, and mineral water sold every day. And if the city doesn't ratchet up the soft drinks tax now, there are a lot of non-soft drinks that are vulnerable to taxation.

There's not a lot of wiggle room for infant formula alternatives, but if the city thinks you should be drinking tap water, what's to stop it from "encouraging" women to breast feed rather than use formula? Or "encouraging" you to not drink so many cups of coffee a day?

Mayor Daley's 2008 budget says the bottled water tax "promotes local water usage and encourages the consumption of high-quality water from the City's water system." Unsurprisingly, the City has a monopoly in this department -- after all, there's not a lot of choice in the tap water market.

What's going to happen to Chicagoans? In the short run, the tax will probably look a lot like the foie gras ban -- on the books, but generally unenforced. In the long run, bottled water use within city limits will likely decrease -- possibly in favor of tap water, but in many cases in favor of sugary soft drinks instead. This doesn't bode well for Chicago's growing obesity problem, but might benefit dentists and dieticians. Some people will buy low-tax water outside city limits.

The real problem lies in the city's mess of petty, interest-driven taxes, penalties, and exemptions. Maintaining a tax code with hundreds of variable tax rates for different goods necessitates a bureaucracy to monitor these taxes -- which is not where the city's money should be going.

If the city reformed the current tax code into a broad-based, evenly applied sales tax, the tax rate could be lower, less bureaucracy would be needed, and consumption patterns wouldn't be distorted by the tax code. It would also keep Chicagoans' rights from slowly trickling down the drain.

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About the Author

Nicole Kurokawa works at the Cato Institute in Washington, D.C.