May 21, 2019 3:42PM

Philadelphia Soda Tax

A recent New York Times article reports that today’s Democratic primary in Philadelphia partially represents a referendum on the city’s soda tax, even though it is not on the ballot. Incumbent Mayor Jim Kenney, the engineer of the 1.5 cents per ounce tax on sugary and artificially sweetened beverages which took effect in 2017, is facing two Democratic challengers who both support repealing the controversial tax.

Since its inception, the tax has faced vigorous opposition from a coalition of the beverage industry, grocery store owners, and Teamsters, as well as citizens and politicians who worried that it would unfairly burden the poor. Supporters have touted the tax’s revenue-raising potential and the public health benefits of taxing soda in a city with some of the highest obesity and Type 2 diabetes rates in the United States.

Kenney has always presented the tax as a revenue-raising measure and he reports that it has raised $200 million for education and infrastructure programs. While Kenney’s stated goal was never to change soda drinking behavior, many supporters of the tax have focused on the potential health benefits and studies have found mixed results of its impact on soda consumption in the city. From an economic standpoint there are, among others, three serious concerns about the tax’s ability to both raise revenue and reduce obesity.

First, as I discussed in 2016 shortly after it was passed, both the level and scope of the tax mean it has a dubious impact on reducing obesity. The tax is on soda consumption in general which burdens a majority of soda drinkers who are not obese instead of directly incentivizing people to avoid all behaviors that lead to excessive weight (a better alternative would be to price health insurance for the obese higher, but this is not allowed under the Affordable Care Act). And the 1.5 cents per ounce rate is estimated to decrease body mass index by .26 points, a tiny amount when considering that obesity is defined as a body mass index of 30. The tax is inefficient and it’s doubtful it has had any significant impact on obesity.

Second, it is likely that many soda drinkers have responded to the increased soda prices, but not necessarily by reducing their soda consumption. A paper by Mabel Andalon and John Gibson, which I reviewed in the winter 2017/2018 issue of Regulation, looked at Mexico’s nationwide soda tax and found that consumers substituted for cheaper brands of soda. Between 2012 and 2014 average soda prices increased by 11.9 percent, but the average price of purchased soda increased by half that rate, suggesting consumers simply bought lower-priced soda. This response is likely present in Philadelphia as well, where consumers are just as able to substitute to lower-price or even untaxed alternatives (in fact, the Times article reports that there has been a spike in the sales of powdered drink mixes which are not taxed). This undermines both the health benefits and (in the case of untaxed substitutes) the revenue raised.

Finally, people can simply avoid the tax by buying their sugary drinks in nearby localities without their own soda taxes. In the current issue of Regulation I reviewed another paper, by Stephan Seiler, Anna Tuchman, and Song Yao, that observed this exact taxpayer response in Philadelphia. The authors found that beverage purchases in Philadelphia decreased by 42 percent, but this reduction was fully offset by increased purchases outside of Philadelphia.

So, while the positive impacts of the tax are doubtful, the negative effects are felt most by Philadelphia stores and the poorest citizens who were already buying the cheapest sodas or don’t have the ability to buy their beverages outside of the city.

However, I mentioned in my 2016 post that there are some positives of the tax:

The program was not sold to voters as a public health measure, but rather as a means of raising new tax monies. The discussion of the tax and the public spending for which the revenues would be used was explicit.  And the tax is a consumption tax rather than a tax on the rich or corporations.  To be sure, the tax is on a very narrow consumption base and thus is distortionary, but at least the tax is visible. The voters will see the tax and the public services that result and can make an informed decision in the next election about the tax and its uses.

Of course, there are other issues up for debate in this primary and it is unlikely that the soda tax alone will make or break Mayor Kenney. But the tax’s transparency has allowed for an effective democratic process and voters will be able to weigh the soda-tax-funded programs relative to its incidence.

Written with research assistance from David Kemp.