When you’re losing, it’s good advice to play another game. Or do as Philadelphia has done with its recent soda tax: Change the rules and move the goalposts.
Though the soft-drink tax was pitched primarily as a boon for pre-K education and, secondarily, for its supposed health benefits, only 49 percent of the funding actually is slated for pre-K. Apparently, it’s not just “for the children.”
As much as 20 percent will go to city programs and benefits for public employees, with an additional 9 percent earmarked for programs like the Community College of Philadelphia. The bait-and-switch goes to show that politicians who think they can engineer positive social outcomes by fiddling with the tax system make big promises but usually can’t be trusted to fulfill them.
The Tax Foundation, an independent tax policy research center, released a short primer on how Philadelphia’s soda tax has consistently fallen short in meeting revenue projections and details the political intrigue behind the changes. The foundation generally has a fiscally conservative bent and certainly does not speak kindly of soda taxes, but the facts it presents are stark, regardless of political ideology.
As the foundation documents, the soda tax is simply not collecting nearly as much as projected. In fact, even though tax receipts for the first month after it went into effect were twice the amount expected, that was only because of a low-ball figure built into the projections. In June, Philadelphia’s Office of the Controller acknowledged that not only would the tax need to net $10 million for July and August to meet its goal, but that $10 million was “a figure that appears to be significantly out of reach.” On average, during the four months the controller’s message covered, the tax had brought in only $6.4 million each month and thus was missing its original $7.7 million target by nearly 17 percent.
Philadelphia’s problem of lagging collections is compounded by the fact that the money has been promised to several programs. The controller recognized the problem, saying, “These shortfalls are potentially creating a multimillion-dollar burden on the city in order to pay for programs and initiatives like pre-K and [other public works].” The controller urged the city to adjust its goals or risk creating budget deficits in both the near and far terms.
On one hand, it is prudent bookkeeping to ensure that money is coming in as expected and to adjust expectations if it is not so the city’s expenditures can be adjusted as well. It also, however, makes for good politics. While the tax is fresh on their constituents’ minds, officials can point to the success of the first month’s artificially low projections, as they did. City officials and politicians get to claim credit for the tax’s superficial success early on but do not have to defend it later when the cracks start to appear because the public largely has moved on to the next news cycle.
It’s an unfortunate truth about politics that this kind of smoke and mirrors is common. Initiatives everywhere follow a pattern strikingly similar to Philadelphia’s — a phenomenon economists usually call “fund-raiding.” First, pitch a tax to fund something “good” and then use the money for whatever is more politically expedient. This has been the pattern with state lottery funds for education: they don’t result in a net increase in funding and instead only replace the existing funding for education, thus freeing money in the general fund for politicians to use however they want. It has been seen in the funds supposedly dedicated for renewable energy measures; money earmarked to fund research and development on green energy instead are often used to patch up holes in public budgets. And we’ve also seen the pattern in mining cleanup funds like the Abandoned Mine Lands Fund, which is meant to reclaim land but which actually ends up lining labor union pockets.
Given the wealth of evidence about fund-raiding, it should be a simple truth of politics that politicians can’t be trusted with taxpayers’ money.
Philadelphia demonstrates this by using pre-K money for other uses. Revising revenue projections is just a way for officials to move the goalposts so they don’t miss their target as badly as they otherwise would have.
The goals the soda tax is meant to serve may be laudable, but it’s worth asking why soft-drink consumers were singled out to pay for public programs from which many other people benefit. Philadelphia’s officials would do well to eliminate or severely scale back the soda tax and look for other ways to promote their city’s prosperity.
William F. Shughart II, research director of the Independent Institute in Oakland, Calif., is the J. Fish Smith professor in public choice at Utah State University’s Huntsman School of Business.
Josh T. Smith is a master’s student in economics at Utah State University and works as a policy analyst for Strata, a research center in Logan, Utah.