By Robert P. Inman
City Council is holding hearings and gathering the views of Philadelphians on Mayor Kenney's proposal of pre-K education that would be paid for by a 3-cent-per-ounce tax on sodas. The estimated $96 million raised from the tax annually would allow 6,500 additional children to receive a pre-K education each year.
James Heckman. the Nobel Prize-winning economist, has estimated the social benefits of pre-K in higher lifetime earnings and lower crime and welfare spending to be $12 per dollar invested in each child. That is a benefit for Philadelphians of $1.15 billion every year. Happily, there seems to be no disagreement that pre-K is a good idea.
The issue is: How to pay for it?
If not Kenney's soda tax, the only other options are to increase the rates of Philadelphia's other major taxes: the gross receipts tax, the wage tax, or the property tax. No tax is perfect, but from my research I conclude that the mayor's proposed soda tax is far and away the preferred alternative.
My estimates suggest that Kenney's tax would reduce soda consumption by $150 million to $188 million a year, about $100 to $125 per resident. Evidence from Mexico's recent experience with a comparable tax shows that consumers substitute bottled water for soda. The estimated impact on the beverage industry would be lost sales ranging from $140 million to $178 million a year.
What would happen if we raised the gross receipts tax rate by enough to fund the $96 million needed for the pre-K program? This would require almost doubling that rate, returning it to where it was in 1999. I estimate that such an increase would mean a loss of sales across the city's whole economy of about $3.5 billion, a fall in aggregate economic activity of about 5 percent. Why would the impact on sales from the gross receipts tax be so much worse than from the soda tax? Because it would double a tax rate on all business activity in the city.
Damage would also be much greater if we were to use the wage tax, either increasing current rates or (equally so) postponing the city's promised rate reductions, which are expected to add jobs. To raise the required pre-K funding, wage tax rates would need to rise from their current rates of 3.9 percent to 4.1 percent for residents and 3.4 to 3.6 percent for nonresidents. I estimate a loss of 8,750 city jobs from such an increase - or a loss of future jobs if we postpone all the rate reductions in the city's current five-year plan. The beverage industry has estimated a loss of 2,000 jobs from the proposed soda tax. Again, a tax increase on the city's entire economy would be far more damaging than the soda tax, even when compared with the beverage industry's own estimates.
The final option would be to raise property tax rates. To raise the same revenue as the soda tax, the property tax rate would have to increase from the current average of 1.4 percent to 1.5 percent, which I estimate would reduce city home values by $2,100 per home, using Philadelphia's median home value of $122,000. This would be a 1.7 percent drop in value, enough to wipe out the next two years of real (excluding inflation) appreciation in city home values as estimated by Zillow. The soda tax is likely to have no significant impact on city home values, since its burden is on consuming soda only, not on living in the city.
An additional concern frequently raised is that the soda tax would fall disproportionately on lower-income families and is therefore regressive. Evidence from Mexico shows that lower-income families move their budget away from soda to alternative drinks, while the rich do not. That softens the relative burden.
If we take Bernie Sanders' view that what matters most for citizen welfare is lifetime wealth and economic opportunity for all, then the soda tax has undeniable benefits. Because of reduced rates of adult obesity, health costs would be less, incomes higher, and lifetime functioning significantly improved. A Brookings Institute study has estimated that the lifetime benefits of reduced obesity are worth $92,000 to each child whose health is improved. Assuming that the lost consumption benefits today from drinking less soda are two-thirds of the average resident's reduced spending of $125 per year - a fair assumption given that less spending on soda can go to other things the family values - then this annual loss in consumer benefits of $83 a year will never be more than $2,800 over the resident's lifetime. All the tax need do is help one in 33 of our children attain a healthier lifestyle to turn the soda tax into "no tax at all" over a child's lifetime.
Whether from the point of view of economic efficiency for the city's whole economy or expected tax fairness over our children's lifetimes, the soda tax is clearly the best tax from the perspective of all Philadelphians. When coupled with $12 in benefits for every dollar of dedicated revenues, it is a policy package City Council should embrace.
Robert P. Inman is the Richard K. Mellon Professor of Finance at the Wharton School of the University of Pennsylvania. email@example.com