Economy & Business

Philadelphia’s Soda War

Dr. Pepper soda cans are for sale at a grocery store in Pasadena, Calif., February 14, 2018. (Mario Anzuoni/Reuters)
A tax on sweetened beverages harms businesses and achieves none of its goals.

Philadelphia’s outlandish soda tax is what Democratic-party politics looks like when it lets its freak flag fly. So many classic elements are there: (failed) social engineering and “think of the children!” on one side, paid for with a punitive tax on poor people and destroyed businesses, which means destroyed jobs, which in turn means lives upended. What lives? Greedy capitalists with monocles, maybe? No, they’ll be fine. Think of ex-cons trying to regain their footing in society.

To review this debacle, in 2017 Philadelphia, seeking to fund a universal pre-K program, slapped mammoth sin taxes on Coke and Pepsi (and even Diet Coke and Diet Pepsi). Sweetened sodas (but not natural fruit juices) were hit with a huge tax of 1.5 cents per ounce, raising the price of a two-liter bottle of soda by roughly 67 percent. Philadelphia hoped to raise money and decrease obesity with one ingenious move. Who could have predicted what happened next?

The health benefits turned out to be nil. “The tax was ineffective at reducing consumption of unhealthy products,” reports a new study by Stephan Seiler of Stanford, Anna Tuchman of Northwestern, and Song Yao of the University of Minnesota. Poor Philadelphians were hardest hit by the tax because residents with the means to leave the city to make their soda purchases — the well-off — did so. A 42 percent decrease in soda sales within city limits was more than made up for by a large increase in soda sales in stores within two miles outside Philly. And the expected gusher of revenue didn’t quite materialize either, as receipts fell about 15 percent short of projections. “In summary, the tax does not lead to a shift in consumption towards healthier products, it affects low income households more severely, and it is limited in its ability to raise revenue,” the study said.

Philadelphians without access to the suburbs declined the city’s push to get them to drink less-fattening beverages. “We find no significant reduction in calorie and sugar intake,” the authors concluded. (A different study in the U.K. found that those who consume the most sugar are the least likely to reduce soda consumption.)

Apparently poor people in Philadelphia are willing to pay the extra price for a sweet drink. What they aren’t doing is switching to water. How can such a huge tax increase lead to no decrease in sugar consumption? The study didn’t explore federal SNAP benefits, sometimes called food stamps, which can be used to purchase soda, suggesting a case of the federal government’s subsidizing what Philadelphia’s government is taxing. A 2016 study found that sweetened beverages are the favorite item people buy with SNAP benefits, accounting for nearly 10 percent of such spending. The way the soda tax is structured — it’s levied at the point of distribution to circumvent the state’s prerogative to levy sales tax — it shows up as a simple price increase in Philadelphia, meaning soda is still considered a non-taxable item for SNAP users. It may be unwise for SNAP recipients to spend so much of their resources on soda, but people have a way of making the decisions they want to make regardless of nudging from politicians.

So it came to pass that the federal government is giving poor Philadelphians benefits with which to buy soda that is being taxed as though it were liquor by Philly’s municipal government. Unexpected side effect to that detail: Now that beer is, in some cases, cheaper than soda in Philadelphia, alcohol sales are up sharply.

A back-of-the envelope 2017 study found that supermarkets were suffering $80,000 a month per store in lost beverage sales, but because of consumers’ bundling their purchases, the total loss attributable to the tax in sales of all items was $300,000 a month per store. Other, untaxed drinks also suffered sales declines within the city, suggesting people were simply saving up their shopping trips for when they left town.

Back down on street level is where the statistics really hit home. A ShopRite close to the city limits has already closed; its owner, Jeff Brown, says overall store sales (not just beverage sales) are down 15 percent at his locations within Philadelphia since the soda levy went into effect, leading him to reduce his workforce by 200. Brown has made a point of hiring more than 600 people with criminal records. One such employee, Anthony Jackson, told The Wall Street Journal, “I’d probably be dead, to be honest” if one of Brown’s ShopRite stores hadn’t taken him on. “The Brown family saved me. They showed me something different, that I could be a man in society,” he added. The mayor of Philadelphia, Democrat Jim Kenney, fired back that Brown is “a crybaby, basically.” Is Jackson a crybaby too, then?

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