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Feast or Fizzle

by Brittany Barbato

On Jan. 1, the day the Philadelphia Beverage Tax went into effect, Enzo Mandarano, owner of Cosimo’s Pizza Cafe in Chestnut Hill, placed a sign on his business’s door. It “regretfully” informed patrons of an increase in fountain drink prices and listed Mayor Jim Kenney’s contact information for questions and complaints.

Revenue from the tax on sugar- sweetened drinks is intended to help fund much-needed investments in the city’s education and public space, but at how great a cost to local businesses? Here is how the “soda tax” came to fruition, and its pros and cons both large and small.

A Philly first
In 2010, in hopes of improving the health of Philadelphia citizens, former Mayor Michael A. Nutter introduced the idea of a two-cents per ounce tax on drinks like soda, iced tea, sports drinks and coffee. The proposal was voted down by City Council. One year later, it would be denied again despite a new focus on using the revenue to support a struggling school district.

In fall 2014, voters in Berkeley County, Calif., approved a similar tax that went into effect in March 2015. One year later, a related study published in the American Journal of Public Health reported significant drops in sugar-sweetened beverage consumption, with some neighborhoods drinking as much as 26 percent less soda than the prior year. The results were astounding, and many health experts pointed to Berkeley as proof that soda taxes work.

In spring 2016, Mayor Jim Kenney asked City Council to consider a three-cents-per-ounce sugary drinks tax, known as the “soda tax.” According to Mike Dunn, deputy communications director for the city, the driving force behind the tax was, and is, the need for additional revenues to support three crucial initiatives: expanded pre-kindergarten, expanded community schools, and the revitalization of key community gathering spaces like parks and libraries. He says the city chose to focus on taxing sweetened beverages because the soft drink industry can spare the change. Dunn adds that the soft drink industry has “for decades, disproportionately reaped billions of dollars of profits from the very communities in Philadelphia that will benefit from these programs.”

Despite intense advertising against the tax by organizations like the American Beverage Association (ABA) last June, Philadelphia became the first major city in America to have a tax on sugary beverages. While the approved tax was lower than the original proposal (one and a half-cents-per-ounce instead of three), it expanded the scope to include artificially sweetened beverages including diet sodas.

Building a better future
In its first month of collections, the city received $5.7 million from the soda tax, more than doubling projections by the city’s budget office. With a goal of raising $91 million in total, proponents of the tax believe the economic effects will be long-term.

PHLpreK—the city’s free, quality pre-K program— launched in January with 2,000 seats. With revenue from the soda tax, it could expand to as many as 6,500 seats. Investing in pre-K is an investment in the economy. According to Pre-K for PA, for every dollar Pennsylvania invests in early childhood programs, more than $2 is circulated throughout local economies through employment and purchasing of goods and services. Plus, enrollment in high- quality pre-K has demonstrated a decrease in the likelihood of at-risk children committing a crime later in life, which reduces taxpayer costs associated with public safety, prosecution and incarceration. Community schools—public schools where a full-time coordinator works with the entire school community to identify and address pressing needs such as expanded medical services, after-school program- ming, and job training—will also benefit from soda tax revenue. The idea behind the initiative is something akin to holistic health care, but for education: by meeting the needs of the “whole child” and their neighborhoods, communities can eliminate larger barriers like violence, hunger or homelessness, which often keep students from classroom success.

“[The soda tax] is already bringing in revenue to support important investments Philadelphia is choosing to make in its children,” says Kathy Fisher, policy director at the Greater Philadelphia Coalition Against Hunger. “We have worked with the community schools’ office to share information on food insecurity and available food resources, and believe they are off to a good start in getting input to both prioritize and respond to community needs. This isn’t a sprint, it’s a marathon to build a better future.”

There are also more than 400 public spaces—including parks, libraries, recreation centers and environmental centers—eligible for revitalization with support from the tax revenue. Investment in public spaces historically improves public safety, increases educational opportunities and creates jobs.

At what cost?
For as much as initial revenue results have been lauded by the city and community organizations, many businesses say the negative impact on them has been drastic.

“Do I see a drop from Jan. 1, to now? Big time,” says Mandarano, who estimates a loss of 20 to 30 percent in beverage sales in the first two months of the year. And he’s not alone.

Supermarkets and distributors reported a 30 to 50 percent drop in beverage sales thus far. Jeff Brown, a fourth-generation Philadelphia grocer and founder and CEO of Brown’s Super Stores, Inc. (with six ShopRite stores in Philadelphia), told Philly.com he had to cut 5,000 to 6,000 employee hours and anticipates he may eventually lose employees both voluntarily and with layoffs.

ShopRite’s parent company, Wakefern Food Corporation, is a member of Ax the Bev Tax, a local coalition of business owners, restaurants, movie theaters and community organizations actively opposing the tax. “This is sadly playing out exactly the way we predicted,” says Anthony Campisi, the coalition’s spokesman. “People are very price-sensitive and once they figure out how easy it is to get to a place to save money, they won’t return.”

Dunn has a different point of view. He says the city always expected that soda sales would decline in the first month or so for distributors. They’ve seen this pattern before with the implementation of similar taxes on tobacco, liquor and amusement. “Initially people are upset and drive over the city line but then they do the math and realize the cost of gas or the pure inconvenience doesn’t make it worth it,” explains Dunn. “Customers who are refusing to purchase [soda] or purchasing out of the city will come back.”

Kevin Shivers, executive director for the National Federation of Independent Business (NFIB) in Pennsylvania, says it’s not just buying behavior that’s the concern. It’s the legality of the matter. “The city overreached their constitutional authority,” says Shivers. “And while revenue collections are beyond what was anticipated, the economic harm that’s going to be done is on a devastating trajectory.”

Prior to the tax going into effect, the city faced a legal battle with ABA and other businesses that also claimed the tax was illegal. Ultimately, the lawsuit was dismissed “in its entirety” by the Court of Common Pleas of Philadelphia. In February, the NFIB and several other associations filed an amicus brief to help reverse the decision, arguing such taxes are “illegal in part because they drain sales tax revenue from the state, and that the tax should be rejected because it penalizes consumers and the small businesses that serve them.” The filing also points out the possibility of a chain reaction—as other “cash-strapped” cities, like Chester and Harrisburg, may turn to the tax as a model to increase their own revenues.

“What’s next?” Shivers asks. “Fried food? Are we going to go after carbs? Where do you draw the line? It’s a slippery slope.”

A case study
While he doesn’t support the tax, Mandarano says he isn’t too concerned about a long- term impact on his business. He primarily put the sign on his door because he knew the cafe would get a lot of questions. “We weren’t sure how [the tax] was going to work, what products would be affected. ... We put the sign up so that if you really had a question then [you] could call the mayor.”

Talking to the mayor is exactly what groups like Ax the Bev Tax and NFIB want businesses to do. “Make your voices heard with City Hall,” says Shivers. “Tell them, ‘You need to go back and repeal the tax. It’s a bad public policy that’s having a destructive impact on workforce marketplace and economy.’”

Meanwhile, Dunn maintains it’s important to realize the soda tax is not actually a sales tax (a point upheld in the Court of Common Pleas decision) and there is no way of knowing if reported figures and predicted job losses are “anything more than fear-mongering to prevent this from happening in other cities.”

It remains to be seen: Will this tax go down in history as a progressive effort to revitalize a community or will it fizzle? While Shiver calls it, “A case study of a destructive tax policy brought about by city government,” only time will tell.

Published (and copyrighted) in Philly Biz, Volume 2, Issue 3 (March, 2017).
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