Cities Eying Food and Beverage Taxes Should Learn from Philadelphia’s Tax Mistake

Local governments considering the imposition of taxes on certain foods and sweetened beverage should take a long look at the tax disaster in Philadelphia. It’s been more than two years since Philadelphia began imposing a massive tax on sweetened beverages, and the bad news just keeps rolling in. Court documents now reveal that one of the tax’s biggest political backers, Councilman Bobby Henon, used it to kill jobs and punish a political enemy.

The tax — which raised the price of a two-liter bottle of soda by about two-thirds — was intended to generate revenue to fund Philadelphia’s universal pre-K program while discouraging soda consumption and reducing obesity. Win-win, right?

Not quite. A recent study found that demand for sweetened beverages in Philadelphia declined by 42 percent after the tax was implemented — just as its advocates had hoped. But the decline in sales within the city was entirely offset by cross-border shopping into neighboring areas that don’t levy the tax. As a result, the tax isn’t reducing calorie or sugar intake at all. There is even some evidence that since beer is now cheaper than soda in Philadelphia, the tax is encouraging more alcohol consumption.

As Philadelphians head to the suburbs to avoid the soda tax, grocery stores within the city have seen sales of other products plummet, endangering thousands of local jobs. Revenue from frozen vegetables, soup, yogurt, fresh bread, and cheese have all declined between 8 and 14 percent in Philadelphia since the soda tax was implemented, while sales in neighboring communities have increased. In 2017, a study found that supermarkets were losing an average of $80,000 a month from a reduction in beverage sales, but because customers were bundling their purchases outside the city, the total loss attributable to the tax was $300,000 a month per store.

Many of Philadelphia’s supermarkets and convenience stores are struggling to stay afloat, especially those near the city limits whose customers can easily hop across the border to avoid the tax altogether. A ShopRite store in West Philadelphia will close its doors in March after seeing a 23 percent loss in sales — and the owner blames the soda tax for making the business unprofitable.

Judging from the past, more store closures are coming. In Mexico, which implemented a similar soda tax in 2014, 30 thousand small grocers went under in the first half of 2016 alone and among those still open, 93 percent experienced a fall in profits.

A study released in December 2017 estimated that the soda tax had already cost Philadelphia 1,192 jobs, reduced the city’s economic output by nearly $80 million, and deprived workers of $55 million in labor income.

We now know that these negative effects were by design. Prosecutors have indicted City Councilor Bobby Henon, an early and vocal supporter of the soda tax, for using the tax to kill Teamster jobs after the union ran an ad critical of one of Henon’s allies.

But it’s not just about jobs and local businesses. Since the poor have a harder time traveling outside the city to take advantage of lower prices in the suburbs, the soda tax is falling squarely on the shoulders of the 26 percent of Philadelphians living below the poverty line. Research suggests that soda taxes are so regressive that low-income households wind up paying nearly twice as much as the wealthy. And, as local grocery stores shutter, so has consumer access to fresh fruits and vegetables. What does that say about improving dietary health?

On top of everything else, the flood of new revenue city officials had hoped for never materialized. In fiscal year 2018, the tax generated $77.4 million — far short of the $91 million initially projected.

Philadelphia’s soda tax has not only failed to deliver on its promises but is hurting the city’s most vulnerable citizens and endangering a core industry. It shouldn’t be surprising that even some of the officials who voted for the tax are now distancing themselves from it.

As local governments and food police across the country eye a potentially new source of tax revenue and try to justify these policies based improving dietary health, they should avoid the Philadelphia’s tax disaster. Education and consumer choice are better options.

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