The hot topic in Philadelphia politics is the controversy around a proposed 3 cents per ounce tax on sugary beverages. Mayor Kenney proposes to raise $400 million over the next five years from what will be the highest tax of its kind in the nation.

He wants to use the proceeds of the tax as follows: $256 million for universal pre-K, $39 million for community schools, $23 million for Council President Clarke’s plan to retrofit city and School District buildings for energy efficiency, $56 million to repay part of a $300 million proposed bond for rebuilding parks and recreation centers, and $26 million to the city’s pension system, whose unfunded liabilities are around $5.6 billion.

This is a complicated proposal both in terms of where the money will come from and where it will go: who pays and who benefits, what we can know and what we might learn. Let’s break it down.





The Good

The tax has the potential to pass (although not at its present rate) precisely because, unlike prior efforts, it seeks to build a constituency for the tax unrelated to the public health benefits of a reduction in soda and sugar consumption. Public health is a worthy cause but when it comes to raising revenue it is best to focus on what people will get, rather than on what they will not have. A reduction in diabetes brings few ribbon cutting opportunities; rebuilt recreation centers and new childcare centers are photo-op rich.

The Kenney tax speaks directly to the interests that he has touted from the campaign to the budget presentation: public infrastructure and services. Mayor Kenney is promoting a neighborhood policy agenda that reverberates with the majority of Philadelphians: universal pre-K so all Philadelphians are better prepared for school, and investments in neighborhood parks, libraries, and recreation centers, to improve the quality of community life.

The Kenney agenda is refreshing from two perspectives.

First, there is solid research that demonstrates the positive impact of quality pre-K, particularly for low-income children. The emphasis is on quality, however, and we will see if implementation is up to the task on that account. As I have said countless times in this column, implementation is policy.



Secondly, investments into public goods such as recreation centers and libraries have numerous multiplier effects, from construction jobs to housing values to public safety. Moreover, just as with pre-K investments, these public investments are oriented toward young people: where they play, how they occupy their time, and how we value them.

Deciding to use a soda tax to fund these efforts is a case of political misdirection. Like a good magician, you want to direct the audience away from one part of the stage to another, from the unpopular aspects of the tax and toward its popular outcomes. Council members will have to not simply vote it up or down, but identify or negotiate other revenue sources for pre-K funding. The soda tax may be bad economics, but it could turn out to be smart politics. Council members will be voting down pre-K, not voting down the increased cost of sugary beverages.





The Bad

Previous attempts at a soda tax by Mayor Nutter were defeated in City Council with then-Councilman Kenney opposing both efforts to pass the tax. The forces lined up against the bill are familiar: bottling companies, grocers and other retailers, and those labor unions (particularly the Teamsters who represent the drivers) directly affected, who fear the tax will erode job security.

The Kenney team is bandying about a great deal of faux populism, as they talk about Big Soda standing in the way of childcare. Making soda bottlers into anti-childcare ogres is silly and it could have political reverberations, particularly as the politics of the tax is highlighted in public hearings. Some of the targets for the tax include some of the most civically-engaged Philadelphians, including bottler executive Harold Honickman and inner city grocers like Jeff Brown from ShopRite.

Moreover, the Teamsters are telling anyone who will listen that the choice of a soda tax is really a matter of political revenge because they supported the wrong guy in the election (Tony Williams) and, like the carpenters union, they were on the wrong side of the Convention Center dispute with John Dougherty, Kenney supporter and electrical workers union head. Dougherty, it was reported, was at the sit-down with Kenney and Honickman to establish communication.

Do the Teamsters have a point? Hard to know. But it’s clear that intentional or not, a message got delivered. And they are feeling somewhat isolated among city labor unions right now. The building trades will support anything, like recreation centers, that increases real estate development; SEIU will support the expansion of service worker employment, such as childcare centers, and the public unions have never met a tax they would not support.

Deciding to use a soda tax to fund these efforts is a case of misdirection. It may be bad economics, but it could turn out to be smart politics. Council members will be voting down pre-K, not voting down the increased cost of sugary beverages.

The proposed tax at the point of distribution would have a direct impact on the bottlers, but would be passed on to grocers and ultimately consumers. It’s foolish to think the tax will be fully absorbed by the distributors and not passed on in some measure. The question is, what will the pass-through rate be, and to what extent will it effect jobs, business receipts, and household budgets?

Moreover, how much will such a tax actually raise and, if it is successful as a sin tax, will a declining level of revenue function as a stable source of funding for childcare or any other projected use? We had these debates during the $2 per pack cigarette tax hearings. It is a real debate to have and we will undoubtedly have it in the form of dueling economic projections.

If you are an opponent of the tax, you attack it as regressive because, as with all taxes on consumption, the lower your income the greater the impact of the tax. Opponents of the tax will also point to the double whammy of its regressivity: It is hardest on lower income households because they drink more soda.

Opponents will also point to the issue of suburban-urban revenue leakage. A mobile urban resident will shop across the city line to buy soda and—while they are at it—other groceries. In a low margin business, food retailers have reasons for concern. Moreover, if the tax is high enough, an illegal market will emerge as it has with cigarettes, depressing the revenue projections further.

Higher costs on a single item in a relatively contained geography is, by nature, a faulty tax strategy. It will generate revenue but the revenue will likely decline over time and it may create other retail consequences. In the long term people figure out work around strategies in what they buy and where they shop. There is a reason that the states contiguous to Pennsylvania are lined with discount liquor and wine stores: If you don’t have to shop at the State Store, you drive across one of the Berlin Walls (we call them bridges) and do your shopping there.





The Unknown

While Kenney is selling the revenue uses more than the health impacts of his soda tax, the public health issues are still part of the conversation for many residents. And depending on what happens, it is possible we can learn a lot from all of this.

Kenney’s political coalition is all about the linkages between new urban progressives (social diversity, lifestyle tolerance, and healthy living) with traditional row home Philadelphia (worried about public services, job security, and meeting their household budget).

If you are for the soda tax, you want to keep this coalition together by emphasizing public services; if you are against the soda tax you try to derail the coalition by speaking to increased costs and the loss of jobs. In both instances, the health issues remain as a rather muted subtext to the whole issue. Yet it is worth lifting the issue up a bit to understand its consequences.

Extra taxes on sodas and other sugary beverages over and above a more generic sales tax are being proposed in other cities, generally based on public health concerns. There are already more than 30 states that have a tax on sodas and there is one city (Berkeley, California) that has such a tax. Do such taxes have the desired impact on public health outcomes?

Remember, if you see the tax through the lens of public health, regressivity is not a significant problem; in fact, for some, it is the point. You want the added costs to diminish use, particularly among the poor. The public health issue is simple to make, but sometimes more complex to prove: We have an obesity crisis; obesity poses a significant public cost; one way to fight the problem is to add costs to obesity promoting foods in order to discourage use; and then use some of those proceeds to put into public health programs.

The Kenney team is bandying about a great deal of faux populism, as they talk about Big Soda standing in the way of childcare. Making soda bottlers into anti-childcare ogres is silly. Some of the targets for the tax include some of the most civically engaged Philadelphians, including bottler executive Harold Honickman and inner city grocers like Jeff Brown from ShopRite.

The public health argument has three issues to confront: why sugar beverages and not other sugary foods; how much of the tax is enough to discourage soda consumption; and will consumers simply gravitate to other fattening options if the tax inhibits soda consumption? There is a body of research that looks at two of these issues, although it is not all that conclusive.

Sugary beverages have become the public health culprit because their consumption rates are so high, their calorie intake so significant, and they do not create a sense of being filled up, the way other foods do. Public health workers I know tell me that it is nothing for inner city residents to consume more than a gallon of soda a day. Therefore public health officials have viewed sugary beverages as a critical focal point in the obesity fight.

Would it make sense to tax high calorie manufacturing of all kinds in an effort to try to get the food industry to change strategies, rather than picking on one type of beverage? Yes. But that fight gets to the heart of a food problem hard wired into a whole system of industrial agriculture and industrial food manufacturing. Soda is obviously only one small component of the problem. This is an agribusiness and corn subsidy issue that no single city or state can take on. It would be hard to find a commodity—apart from oil—that has transformed the world more than sugar.

In general, studies say that you can reduce soda consumption with added costs, although many such taxes are not high enough to have that effect. But some studies show that even a penny per ounce will have the desired reduction. What is more complicated is the research on substitution effects; do buyers move their dollars to lower taxed but just as high caloric foods? Some studies show that does happen but the research on this is really pretty scarce.

If the tax goes through, the city will become an important laboratory for studying the effects of consumption patterns and their health consequences. I would hope that a private foundation would see the opportunity to do just that and in partnership with a pubic health program like the one at Drexel, begin the work.





The Unnecessary

If we go back to the list of items Kenney wants to fund with this tax it is easy to see that this is not about a 3 cent per ounce tax. Some of the items can be funded in other ways, including the recreation and park bond. Moreover, some of the capital, like the small contribution to the pensions, is so disconnected from the size of the problem, it cannot be taken serious. And the small amount for community schools does little to answer the larger questions of Philadelphia’s education crisis.

Higher costs on a single item in a relatively contained geography is, by nature, a faulty tax strategy. People figure out work around strategies in what they buy and where they shop. There is a reason that the states contiguous to Pennsylvania are lined with discount liquor and wine stores: If you don’t have to shop at the State Store, you drive across one of the Berlin Walls (we call them bridges) and do your shopping there.

The soda tax is really a stream of revenue for pre-K. And if it is viewed that way, then a 1 or 1.5-cent tax will do the trick. Kenney and Council can accept a much smaller tax, which will still not sit well with grocers, bottlers, and the Teamsters but will be enough to fund a significant amount of childcare programs. Council President Clarke will need something for his program, but he too will compromise.

Mayor Kenney is a product of Philadelphia politics. He knows that the 3 cents tax was a negotiating number. He has none of the royal presumptions of Governor Wolf, whose numbers always sound like gifts from Sinai.

A much bigger issue than this tax involves how Kenney plans to govern. He knows that Harrisburg is bound in a stalemate that could last well past the November 2016 elections. Money for education and early childhood education will not be forthcoming at the level Governor Wolf wants at least until 2017—if then.

So far, Kenney’s answer to revenue for new programs has been threefold: debt, philanthropy, and the sin tax on sugary beverages. He will need a much bigger playbook that involves reengineering government and developing more effective ways of managing public assets. Moreover, he will not be able to avoid the elephant in the room forever: pension fund liabilities.

While the soda tax debate heats up, let’s keep in mind that Mayor Kenney has eight years to work out these issues. Let’s wish him the best while reminding him that the clock is ticking.

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