After much searching I finally found the answer to my question "If you are adding a text label by double-clicking on a line however the padding feature does not apply. If you would like to use the padding feature with a text label you will have to create the label by dragging out a shape from the toolbox and placing it on the line." The process as described above is a workaround. This behavior (padding functionality) should also apply to those text labels added by double-clicking on a line.
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