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Proposed Soda Tax a Bad Deal for Philadelphia Residents

This Thursday, Philadelphia’s city council is set to approve a 1.5 cent per ounce tax on soda. The goal of the tax is to raise $400 million over the next four or five years in order to fund several of the Mayor’s projects. Primarily, the city will use the revenue from the tax for a universal pre-kindergarten program.

Proponents of the tax market it more as a means to bridge Philly’s ever-growing budget deficit than as a “sin tax” aimed at reducing obesity, but targeting a single category of products—sugary drinks—implies that they are in some way sinful and that the consumers and makers of such products deserve to be punished, or at least, they are not worthy of protection from unequal treatment. But, as I discuss in my new study, Soda Taxes: a Failed Experiment that Needs to End, it is the poor—not businesses—that will end up paying the bulk of the tax. However laudable the goals, the soda tax is simply another (albeit stealthy) way of extracting money from Philly’s residents. It might fatten city coffers, but a better long-term solution would be to save the millions of dollars the city loses each year to mismanagement, waste, and outright fraud.

Former Philadelphia Mayor Michael Nutter tried repeatedly to institute a soda tax as a means of reducing obesity without much luck. But current Mayor Jim Kenney seems to have found that the secret-sauce is pitching the tax as a means to improve the economic reality of Philly’s many families living below the poverty line. Of course, Nutter and other health advocates who have been banging on the ‘soda caused the obesity crisis’ drum over the years loosened the lid by portraying soda makers as greedy purveyors of a harmful product. According to Kenney, the tax is designed to “take some of that profit, to put it back into the neighborhoods that have been their biggest customers.” Though apparently convincing, Kenney is wrong. In reality, the individuals living in those neighborhoods will end up paying most of the tax.

Though Kenney and other proponents claim that the tax is not regressive because it will be paid by soda distributors, it is very likely that they will pass along most of the cost to customers in the form of higher drink or food prices. Not only has the industry flat out admitted it will raise the cost of soda in response to the tax, that is what it already did in the face of similar taxes elsewhere. After Berkley, California implemented a one cent per ounce tax on soda in 2015, prices for those drinks increased by seven-tenths of a cent per ounce—meaning that the industry passed 70% of the cost of the tax onto consumers. In Mexico, which introduced a nation-wide soda tax in 2015, the prices of drinks rose by more than the tax itself.

While it seems like basic logic that if the price of a good increases, people are less likely to buy it, research shows that this isn’t how it always works. Elasticity of demand (how people’s purchasing changes in response to price) varies among people and products. While some may switch to water or another drink in the wake of a soda tax, some may reduce purchasing of other items in order to continue buying soda. And when it comes to sin taxes—like those implemented on cigarettes, alcohol, and now soda, the poor are less likely to respond than their wealthier counterparts. For example, those in the two lowest income brackets in Mexico were the least likely to reduce soda purchasing in the wake of that country’s tax. Similarly, cigarettes are overwhelming consumed by the poor, despite the enormous cost imposed by tobacco taxes.

Some have argued that the soda tax, even if regressive, will ultimately benefit low-income families in the long run by funding pre-k care and other desirable ends like updating parks, upgrading school buildings, and increasing social services. While residents may be willing to accept a small soda tax in order to fund these projects, there’s no guarantee that the city council won’t raise it next year—as happened with Baltimore’s soda bottle tax. Even if they don’t, the revenue drawn from the tax is only a temporary fix: it doesn’t solve the underlying problem; the millions of dollars wasted each year due to mismanagement and outright fraud. And like a junkie needing a bigger hit to get the same high, lawmakers will soon be looking to raise existing taxes or create new ones.

Instead of putting yet another tax on the consumers of Philadelphia, the council should be looking for ways to better spend the billions it already collects. For example, a study published this year found rampant teacher absenteeism that costs the city more than $5 million a year. Similarly, so-called “ghost teachers,” who work for the teachers union, but never step foot in the classroom, still draw salary, pension, and health benefits from the city, costing the public $1.7 million a year. Overhauling the charter school system—certainly not a “simple” task—could save the city $200 million each year. These are just a few examples of how Philly lawmakers could fund the projects residents want without taking more money from already burdened families. But raising taxes is much easier than dealing with corruption and waste.