Last week, we ran an item highlighting some of the Nutter Administration's arguments in favor of the proposed tax on sugary drinks, which were being circulated among Council members. It did not take long for tax opponents to fire back. See below for a copy of some of the lobbyist-polished argements they're making to council.
Facts on the City of Philadelphia Beverage Tax Proposal
The City of Philadelphia’s Health Department is trying to explain away the negative economic impact of the proposed beverage tax. Unfortunately, the facts are not on their side.
First, the City “anticipates” that taxing sugar-sweetened beverages will force consumers to other, untaxed drinks and that the substitution effect will make up for any lost sales. In reality, consumers don’t behave this way. Research shows that losses in the taxed beverage categories will far outweigh modest increases for untaxed beverages.
Second, the City argues against its own stated purpose for the tax by claiming that stores may simply spread the tax across all beverages, so the prices of items that are taxed won’t be going up by quite as much. If that’s what really happens, then the tax is a lose-lose-lose proposition for consumers, retailers and the City. The City won’t achieve the health benefits it is claiming because everything will get more expensive, consumers will pay more for all beverages and groceries, and retailers, restaurants and beverage companies will still shed jobs as sales of all beverages drop in Philadelphia.
Finally, the City asserts that most people won’t shop for beverages outside the City and claims that most beverages are bought in convenience settings for on the go consumption. Clearly those that can shop outside of Philadelphia (they have a car and the time to do so) will do so in order to avoid higher prices. That just reinforces the regressive nature of this tax. The City’s claim about convenience consumption is simply wrong – for soda, for example, two-thirds of consumption occurs at home.
Made-up information and assertions can’t overcome the basic facts about this tax: it’s a major new burden on consumers, will affect the cost of their groceries, and will have serious economic repercussions on jobs and incomes in Philadelphia.
1. On “Substitution” the City says:
“[W]e anticipate that people will choose to purchase other, non-sugar sweetened beverages.”
“This substitution effect could make up for all the losses due to [the tax]”
“[I]ndustry’s estimates of job loss do not account for this substitution effect.”
- Regular soda drinkers don’t view diet soda as an alternative. The same goes for diet drinkers. Consumer behavior research bears that out.[Note:1] Raising the price of regular soda doesn’t result in more diet soda sales – regular soda consumption goes down and so does diet consumption, not as significantly, but it still goes down.
- Similarly, taxing fruit drinks will not drive consumers to buy 100% juices because in many cases they simply cannot afford them.
- Sophisticated economic analysis does take account of both the price effects and the substitution effects through the analysis of both own-price and cross-price elasticities of demand. In a study of a proposed New York tax of 1¢ per ounce of sugar-sweetened beverages, the tax was projected to reduce consumption of taxed beverages by 46%; the increase in consumption for non-taxed beverages was only 5% - hardly enough to “make up for all the losses.”[Note:2]
- The job losses are real – a small increase in 100% juices, bottled water and diet soda sales won’t offset losses many times higher for taxed beverages. Job losses are highest for retailers and restaurants located in Philadelphia; the drivers and bottlers that supply them will also suffer lost sales which will lead to lost jobs.
2. On Prices the City says:
“If retailers…spread the costs of the tax across all their products, the price of individual items… will not increase significantly.”
- The City’s rationale for using a beverage tax to close its budget gap is that it will improve residents’ health. Now they are arguing that it really won’t work because retailers will spread the tax across all products, not just those that are taxed – and then everything will cost more. Either way, $77 million will come out of the pockets of consumers during a difficult recession.
- No matter how retailers absorb the tax and how it shows up in prices, it is still Philadelphia consumers who will pay for it, either in the price of sugar-sweetened beverages, or in what they pay for other groceries like juice, milk, bread, eggs and produce. Prices on some or all grocery products will increase.
3. On Purchasing Behavior the City says:
“Some Philadelphians may choose to buy [sugar-sweetened beverages] outside of Philadelphia, but most are unlikely to do so.”
“Most sugar-sweetened beverages are purchased as a convenience item as people travel to and from work/school or during breaks in the day.”
- Philadelphians who have cars and that have the time can shop outside the City. That leaves those who have two jobs, working families, and those who rely on mass transit or walking to get to the store that get stuck paying the tax. The tax is regressive by design and gets worse when only wealthier consumers can shop elsewhere to avoid it.
- Ironically, it’s the family-sized juice drinks, teas, and mixes that will carry the highest tax burden. The tax would more than double the price on those types of products – again hitting working families the hardest.
- Convenience consumption of a single can or bottle accounts for a small part of total beverage consumption. In fact, about two-thirds of soda in bottles and cans is consumed at home – not “on the go.”[Note:3] It should not be surprising, then, that 12-packs of cans and 2-liter bottles are common formats for purchasing soda.
- The tax also affects sales at restaurants and stores that sell fountain beverages, so every meal that includes a fountain drink would be affected by the tax.
The Administration seeks to explain why a beverage tax is a good thing for Philadelphians. However, its arguments don’t reflect consumer behavior research or the realities of the marketplace. The best course of action for the City is to find a way to balance its budget instead of placing the burden on the backs of the City’s working families.