Here, the store brand gallons are $.79 - .99 per gallon. The name brands are $1.79 - 2.19 per gallon. The sport bottle sizes, which is where the demand is, are well over $4.00 when bought individually, and well below the gallon price (per gallon) when bought by the case.
If the guy's invention were to proceed, the demand for water would go sky-high, especially here in the west where water is generally a scarce commodity, and therefore the price would sky-rocket. And, you're right, the government geeks would pull their hair trying to figure out how they're going to get their piece of money stream.
By the way, Diesel is tinted red to show that is not taxed the same as regular diesel fuel, and that is why it is to used only for non-road use: tractors, generators, etc. If an on-road vehicle is found to be using red diesel, the fine is very steep.