Soda-Tax

Overview

Philadelphia’s “Soda-Tax” is the talk of the town, so for the sake of brevity, I’ll assume you’ve heard of it. It taxes sweetened  beverages at 1.5 cents per ounce. Here is the scope of the tax, defined by philly.gov:

The tax is not just on sodas. This tax is on any non-alcoholic beverage, syrup, or other concentrate used to prepare a beverage that lists as an ingredient any form of caloric sugar-based sweetener, including, but not limited to sucrose, glucose, or high fructose corn syrup. Drinks considered “diet” or “zero calorie” are also taxed. Specifically, this tax is on any non-alcoholic beverage, syrup or other concentrate used to prepare a beverage that lists any form of artificial sugar substitute, including stevia, aspartame, sucralose, neotame, acesulfame potassium (Ace-K), saccharin, and advantame.
Philly Government

I’ll also assume that you’ve heard of the controversy surrounding the tax and you’re going to hear more of it here. The tax is highly regressive, disproportionately affecting lower income areas — the very constituency whom elected Mayor Kenney. The tax was proposed as a means to fund pre-K education and improve the city’s health in a convenient package, however, this has not been the case. I’m all for sensible regulation, in fact, we are in desperate need of more regulation. (Even Steve Bannon is coming around) Government action however, needs to be very meticulously planned and executed to avoid a backfire effect.

 

The Problem

 Source:  Tax Foundation

I don't want to badmouth Philadelphia or Mayor Kenney, but rather, discuss ways to make it better. Part of improvement lies in reflection. The soda-tax has fallen short on every metric. Amounts collected are lower than projected — about 15% lower. ($39.3 million instead of $46 million) As The Philadelphia Citizen noted, the night Pepsi announced their layoffs, Mayor Kenney’s team put out a press release with the headline touting 251 positions created by the Pre-K program — funded by the tax. The last sentence of the first paragraph notes that the average wage is $14.72 per hour. This is the average wage meaning some are lower. While job creation is a great thing, it is hard to make a career out of $15 per hour.

The county line also poses a problem; once crossed, there is no soda-tax. Anecdotally, I’ve heard stories from coworkers and friends who drive outside of the city to purchase their sugary drinks (same with cigarettes). Empirically, there is evidence to back this up. According to CNBC, referencing a study by Catalina:

 

Sales of carbonated soft drinks, the largest sweetened beverage category, fell 55 percent inside the city. Just outside it, sales rose 38 percent. Energy drinks, sports drinks, ready-to-drink coffee and tea and refrigerated juice drinks have all seen similar trends.
Catalina Study

Alan Butkovitz, City Controller, published a study with troubling findings. There are problems with the survey — the methodology is not sound and it is based on self-reporting, but combined with other metrics, we see an ugly picture . 9 in 10 businesses reported lower revenue since the soda tax took effect and 6 in 10 blame it on the soda tax. 

 

Some business reported a 50% drop in revenue in the first few weeks of 2017. Jeff Brown, CEO of Brown’s Super Stores, a local grocer group, reported a 15% loss in total revenue. Note, that is not beverage sales — that is a 15% shrinkage in the total business. As stated above, PepsiCo is laying off 80-100 workers in the city. Pepsi also stopped offering 2 liters and 12 packs of its soda brands.  Kenney was quick to point out that, of course, Pepsi could take a hit on its profit margins to prevent layoffs. From a Business Insider article:

"[Beverage companies] are so committed to stopping this tax from spreading to other cities, that they are not only passing the tax they should be paying onto their customer, they are actually willing to threaten working men and women's jobs rather than marginally reduce their seven figure bonuses." 
Mayor Kenney (Philadelphia Inquirer)

Is Mayor Kenney’s assessment accurate? Yes, although it is irrelevant. There is a deeper problem we need to address — one of profit over people, a race to the bottom. There are loopholes for corporations to exploit and obviously they will. Running under the assumption that the United States is a capitalist system (state-sponsored capitalism would be more apt, but I won’t split hairs here), the goal is to maximize profit, and that’s what PepsiCo is doing. I do not ethically agree with their decision, but under the current system, it is the logical conclusion.

 

The Gray Area

The soda-tax has also revealed the underbelly of Philadelphia politics and the pay-to-play system. It has recently come to light that Minister Rodney Muhammad, the leader of the Philly NAACP was on Mayor Kenney’s payroll as a consultant for the soda-tax — and supported the soda tax fully. There are several problems with this picture.

The most straightforward is the nondisclosure. On Mayor Kenney’s PAC payroll, Mr. Muhammad was listed as Rodney Carpenter. He was not forthcoming with his paid consulting position with the Mayor while supporting the soda-tax — despite having a $25,000 financial incentive to lobby for the tax.

The second problem is more a gray area than overtly unethical. When Mayor Nutter pitched the soda-tax, he found no support from the NAACP:

 

“because of serious concerns that the levy would disproportionately impact low-income families and communities of color.”
Anthony Campisi, NAACP spokesperson (From Philly.com article)

It has generally been agreed upon that the soda-tax will disproportionally impact low-income areas and perhaps even create “food deserts,” an area with no grocery stores in a reasonable distance, in poor pockets of Philadelphia. Part of this is due to transportation. Many of Philadelphia’s poorer citizens cannot leave the city to purchase soda, rather, they must purchase it at a bodega. These citizens are either unable to afford the beverage, hurting small businesses — or, will continue purchasing the beverages and will have less income. It is a sad truth that many of Philadelphia’s less affluent citizens are also African American, so why would the leader of the NAACP support a regressive-tax that will hurt the people he should be dedicated to serving? I count 25,000 reasons.  

The counter-point is: perhaps Mr. Muhammad is in the minority that believes the soda tax will improve community health and not hurt African Americans. So I would like to extend the benefit of the doubt on that point.

 

A Better Way

Obesity map.png

I full heartedly believe that people should drink less soda and other sugary beverages. Philadelphia is among the hardest hit by the obesity-epidemic with 68% of adults and 41% of children obese or overweight according to a 2009 study. The map shows that that obesity hot spots in Philadelphia are also its poorest neighborhoods.

However, as stated above, government action needs to be very carefully measured. Here are a couple possible alternatives to the Philadelphia soda-tax that will achieve the same goals of:

  1. Funding Pre-K education

  2. Improving community health

 

Public school education is implicitly biased. Schools are largely funded by local property taxes. Local property taxes vary widely, producing very uneven dollar amounts spent per student — the per capita metric for school funding. One way to reduce the burden on municipalities would be to legalize marijuana and fund education with taxes collected and also redistribute the money to make education more equitable.

 

If local property taxes continue as the primary funding source for education, here would be another option:

The Philadelphia government should offer steep tax incentives to local businesses which open in “food deserts” and another set of incentives to those that offer healthy beverage and food options. At the store level, some of the tax savings could be passed along to the consumers, enabling them to purchase more goods, but a fixed percentage of the money would be put into a pool to fund pre-K education. Because the store could offer products at a lower cost, ideally, revenue would increase and subsequently — tax dollars collected would eventually increase.

Tax-breaks would encourage more grocers to open in these areas, increasing the tax base. Perhaps some of this increased tax revenue could be used to fund a health clinic in the neighborhood.

These are complex issues with many caveats, but if the first months of the soda-tax are any indication, it is backfiring. Through partnership between municipal government and business, perhaps we can reach a compromise that will both benefit youth education and public health.

Ryan MartinComment