In unsurprising news, Philadelphia Mayor Jim Kenney’s budget proposal reduced the projected revenues from the city’s beverage tax by about 15 percent. For a multitude of reasons, revenues have not met expectations.
Soda tax revenue was already earmarked as the funding source for new pre-K seats, community schools, and other programs. As a result of missed revenue targets, these planned initiatives are adversely affected and have been scaled back. The unpopular soda tax was initially sold in part as a way to finance these programs that generally enjoy widespread support from voters. So far, the record shows these taxes cannot reliably be counted on to generate the projected amount of revenue.
Philadelphia became the first city to pass a sweetened beverage tax in 2016, and the 1.5 cent-per-ounce tax on the supply of sweetened beverages to retail dealers came into effect in January 2017. Other jurisdictions such as San Francisco, Seattle, and Cook County (Illinois) quickly followed suit. These efforts have also been beset by problems and the Cook County tax has already been repealed.
The weaker-than-projected revenue in Philadelphia is not a new development. With higher taxes on sweetened beverages, including diet beverages, consumers shift to other products or purchase the higher-priced items in other jurisdictions.
Originally, the beverage tax was projected to generate average monthly revenue of $7.7 million starting in March 2017. The tax failed to reach that level in any month through December, only exceeding $7 million in September, when it raised $7.6 million. Instead, from March through December the average revenue was just under $6.7 million, about $1 million shy of initial projections.
For fiscal year 2019, revenue projections were revised down to a monthly average of $6.5 million. For the entire year the Mayor’s budget now estimates the tax will raise just over $78 million, one percent less than the preceding year. In the proposed budget, the tax would account for 1.7 percent of the city’s total tax revenue.
In order to persuade the public to accept the tax, it was described as going almost entirely to popular programs such as pre-K and community schools. As the Tax Foundation has noted, in practice 49 percent of soda tax revenues go to local pre-K programs, while 20 percent go to fund government employee benefits or city programs. Even so, pre-K and community schools do rely on the beverage tax for significant financing, and are adversely affected by the meager revenue generation.
The number of free pre-K seats had been scheduled to expand to 6,500 by fiscal year 2023, but this has been reduced to 5,500. The number of community schools was dropped from the scheduled 25 down to 20. The Philadelphia Inquirer also reports that Finance Department officials have said that planned projects on parks, libraries, and recreation centers will be scaled back as well.
Lackluster revenue is not the only source of uncertainty hanging over the beverage tax and the programs it is supposed to finance. The Pennsylvania Supreme Court indicated in January that it will consider the legality of the tax. The plaintiffs, among them a collection of retailers and the American Beverage Association, argue that although the tax nominally is levied on distributors, it is passed on to consumers. Because consumers already pay sales tax, this group claims this amounts to double taxation, which is prohibited by the state’s Sterling Act. If the case is decided for the plaintiffs, it could portend a wave of court challenges to soda taxes. Even if the case is decided in favor of Philadelphia, the uncertainty has already slowed the rollout of the promised programs to be funded by the beverage tax.
Philadelphia’s beverage tax has been consistently falling short of original revenue projections, and new estimates have been drastically reduced. Because the beverage tax was tied to popular programs to help cement its passage, those programs are now facing funding shortfalls due to weak revenues. Looming legal challenges add even more uncertainty to the picture. Beverage taxes are not an effective or reliable way to fund programs, and cities considering them should look to the experiences in Philadelphia and Cook County, Illinois for reasons to think twice before proceeding.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, E21 delivers a short email that includes E21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the E21 Morning Ebrief.