Report: Philadelphia’s soda tax ‘failing’
August 11, 2017

Report: Philadelphia’s soda tax ‘failing’

Cook County residents should be wary in the wake of Philadelphia’s disappointing experiment in soda taxes.

A new report finds Philadelphia’s new soda tax, which went into effect January 2017, to be disappointing both consumers and government officials.

The nonpartisan Tax Foundation found Philadelphia overestimated how much revenue a soda tax would generate and underestimated how much the tax would distort the beverage market.

Philadelphia’s story

According to the report, Philadelphia expected to receive $46.2 million in soda tax revenue from Jan. 1 to June 30, 2017. But actual revenues were 15 percent below this expectation, reaching about $39.5 million, or $6.7 million lower than the city originally anticipated.

The revenue shortfall arose from changes in both consumer behavior and corporate practices.

As the report notes, taxes on goods push prices upward. The Tax Foundation suggests Philadelphia underestimated the mobility of its citizens. In other words, they failed to appreciate how much Philadelphia residents would be willing to purchase soda outside the city rather than pay the tax.

Higher soda prices also make soda more expensive relative to other goods, incentivizing consumers to purchase other products instead of soda. The report draws on a 2012 study that found consumers facing taxes on sugary drinks are more willing to substitute alcoholic beverages in place of soda, mitigating reductions in caloric intake.

Philadelphia’s 1.5-cent per ounce tax on soda is 24 times higher than its tax on beer. The taxation gap is so stark that, within Philadelphia’s borders, some sweetened drinks are more expensive than beer.

As consumers fled the Philadelphia soda market, businesses suffered. Coca-Cola blamed the soda tax for costing the company 40 Philadelphia-area jobs, and PepsiCo announced it would lay off 80 to 100 workers, blaming Philadelphia’s tax on sweetened beverages, according to Billy Penn. And due to the decrease in sales, thanks to the tax, Pepsi ceased distribution of its 12-pack packages and 2-liter bottles of beverages to its Philadelphia retailers.

In a letter to the Philadelphia finance director, City Controller Alan Butkovitz compared the soda tax’s shortfalls to that of the city’s cigarette tax, according to Billy Penn. Both failed to deliver the promised revenue to schools.

Chicago’s story

Despite the legal struggle, Cook County finally implemented its penny-per-ounce sweetened beverage tax Aug. 2. Cook County expects to receive $67.5 million in tax revenue for the remainder of 2017 and another $200 million in 2018. Cook County Board President Toni Preckwinkle claimed that if this revenue were not received, county agencies would have to cut their budgets by 10 percent across the board, according to NBC 5 Chicago.

The Cook County tax may live on, but if Cook County’s situation is as dire as Preckwinkle claims, agency heads should not relax yet. Philadelphia’s struggle with its soda tax demonstrates that the sweetened beverage market is elastic and revenue from taxing it is not reliable. If the soda tax fails to meet Cook County’s expectations, officials will have to compensate by cutting spending, raising existing taxes or finding new taxes to levy.

Like Philadelphia, Chicago had experience with disappointing revenue from “sin taxes” before it approved its soda tax. Since Illinois taxes on cigarettes doubled in fiscal year 2013, cigarette tax revenues have fallen short of the state government’s expectations. The 2016 report of collections from the Illinois Department of Revenue reveals cigarette taxes brought the state about $807 million in fiscal year 2016, about $123 million less than the state anticipated it would make when it implemented the cigarette tax hike.

It’s time for Chicago to learn from history. Singling out goods to tax fails to raise reliable revenue, and it causes problems for residents and businesses.

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