As Coca-Cola and PepsiCo executives work to stop Mayor Kenney's proposed soft-drink tax, they are fighting the latest battle in a war to reduce the share that their products pay in taxes.
In the late 1990s, the Coca-Cola Co. paid 36 cents of every dollar it earned as income taxes, its annual financial reports show.
But for each of the last 10 years, Coca-Cola's overall tax rate has fallen below 25 percent.
The beverage giant accomplished this by shifting plants and earnings to lower-tax countries and by accepting "tax incentive grants" from nations ranging from Brazil to Swaziland, all eager to host Coca-Cola operations, its annual reports show.
PepsiCo also cut its income tax rates, from 34 percent in 1995 to 23 percent in 2010. "We intend to continue to reinvest earnings outside the U.S.," in lower-tax countries, PepsiCo said in 2005.
The mayor's proposal to levy a 3-cents-an-ounce tax on sugary drinks in Philadelphia to finance universal pre-K programs is just one of several pressures bearing down on the two big soda-makers.
At the top of the list: Both companies may have run out of ways to ease their tax burdens.
Last September, the IRS slapped Coca-Cola with a "statutory notice of deficiency," demanding that the company pay more than $3 billion in additional income taxes - plus interest, and maybe penalties - for under-reporting the company's "appropriate amount of taxable income" from 2007 to 2009. Coca-Cola is fighting the accusations in court and acknowledges that it could be forced to pay more for other years if the government wins.
PepsiCo's tax rate has begun creeping back up: After a major reorganization enabled it to temporarily reduce tax payments still further in the late 2000s, its effective income tax rate has risen one percentage point each year since 2012, reaching 26 percent in 2015.
Every tax dollar counts because Coca-Cola and PepsiCo are feeling an unprecedented profit squeeze. They used to be able to count on rapid growth in world markets, plus fat profit margins - still 10 to 20 cents on every $1 in sales for the companies - not counting what retailers, truckers, and tax collectors keep.
But total sales of Coca-Cola products have slipped an average of $1 billion a year since peaking in 2012 at $47 billion, and profits have flattened. At PepsiCo, total sales fell $4 billion last year to $63 billion; profits slipped, too.
Unlike with corporate income taxes, the proposed Philadelphia levy would hit consumers and store owners at the cash register.
Top soda executives are concerned: If the tax, as they warn, roughly doubles what sweet-toothed Philadelphians pay for cans and bottles, they worry that the drop in overall soda sales will accelerate here. And merchants squeezed by higher costs typically push distributors, packagers, truckers, and, ultimately, Coca-Cola and PepsiCo, to share the added cost by lowering wholesale prices.
It's no surprise that top soda executives, including Sandy Douglas, president of Atlanta-based Coca-Cola North America, have joined local soft-drink distributors such as Harold Honickman (formerly listed by Forbes Magazine as the richest man in Philadelphia for his control of regional Pepsi, Canada Dry, Dr Pepper, and Coors sales) in visiting the mayor to urge him to reconsider the tax.
Douglas was traveling and unavailable for comment last week, his assistant said. PepsiCo and Coca-Cola officials referred questions to the American Beverage Association, an industry group that represents soft-drink interests.
"Obviously this tax will fall on consumers," said association spokeswoman Lauren Kane, who questioned the fairness of comparing sales taxes to income taxes.
"Any industry facing a tax code singling them out in a discriminatory fashion would feel it was fundamentally unfair," Kane added.
Over a meal this month with soda representatives at the Lacroix Restaurant in the luxury Rittenhouse Hotel, the mayor was unmoved by the industry's arguments.
The soda lobby has succeeded in beating back efforts to tax or limit soft-drink sales in New York and San Francisco, and has questioned how well taxes have worked in Berkeley, Calif., and in Mexico, where public-health officials say the soft-drink tax has reduced consumption of drinks that play a high-profile role in the obesity epidemic.
The United Kingdom approved a soft-drink tax earlier this month.
Will the proliferation of soft-drink taxes drive industry profits down? Not if soda follows the road paved by the tobacco industry, where public stigma and higher taxes have led to increased industry profits and share values, notes Jonathan Feeney, a Berwyn-based food-stocks analyst for Athlos Research.
"When tobacco taxes went up in the 1990s, cigarette sales dropped, but the remaining hard-core heavy smokers willingly paid higher prices," Feeney said. Tobacco companies found that they could boost prices further, cut back on advertising, reduce distribution, and make higher profit margins even on reduced sales.
Although the link between soda and obesity is less clear than the role of smoking in lung damage, a "public-private partnership" in which governments profit from continued soda consumption through high taxes could be a good thing for the industry, Feeney concludes.
In Philadelphia, advocates are focusing on how the levy's $432 million over five years could help provide universal prekindergarten and school development projects. "We're not just making this a health-care campaign," as former New York Mayor Michael Bloomberg did in his own failed campaign against soft drinks, says Kenney spokeswoman Lauren Hitt.
By establishing the soda tax to help the city's chronically underfunded public schools, the mayor hopes to broaden the soda-tax coalition to include teachers, school employees, and students and parent advocates, just as the multinational soda manufacturers seek to stress the tax impact on local truckers, retailers, and soda drinkers.