Are Sweetened Beverage Taxes a Potential Municipal Revenue Generator?
Struggling municipalities may ask if they are permitted to enact a “soda tax” similar to that recently enacted by the City of Philadelphia. The Pennsylvania Supreme Court held that the Sterling Act authorizes Philadelphia to tax distributers of sweetened beverages. Philadelphia structured its levy as a one and a half cent tax per fluid ounce of sweetened beverage. This equates to an additional dollar per every two liters of soda. Distributers (individuals or companies selling to dealers) who choose to skirt the tax may be subject to additional fines and penalties for non-compliance. For repeated infractions, the city also reserves the right to revoke a distributer’s Commercial Activity License. Distributers include all companies nationwide who sell to dealers in Philadelphia.
Other municipalities, which are subject to the Local Tax Enabling Act (LTEA), may not have the same power. The court noted that the LTEA “has been increasingly circumscribed by legislative amendments and court decisions to the point where the Act is now primarily an express grant of power to levy certain taxes with maximum rates set by the legislature.” Thus, unless the General Assembly approves, municipalities other than Philadelphia will not likely be able to tap into this potential source of revenue.
From its effective date in January of 2017, Philadelphia has seen a $79 million benefit from the tax for 2017, causing other local taxing bodies to take notice. The projected funds were earmarked for pre-kindergarten programs, parks, libraries, and other public works programs. Unfortunately for the city, the tax netted about 15% less than projected and the programs destined to receive the funds were slightly shorted, so the city needed to reconfigure some of its financial distribution.
Catalina, a market research firm, may have the answer for why revenue was under-realized. After surveying Philadelphians, the firm discovered that locals have started travelling outside the city limits for their fill of sugary drinks. Consequently, the firm found that carbonated beverage sales, normally the most popular affected item, fell by 55% within the city. Outside the city, sales correspondingly rose by 38%. Other beverages affected by the tax saw similar sales patterns.
If Philadelphia’s goal was to encourage healthier habits by incentivizing people to skip sugary drinks, it may have worked. Catalina also found that bottled water sales increased by 13% within the city. The city’s spokesmen stated that it is too soon to predict the long-term effects of the tax on sweetened beverage consumption within city limits, but that its revenue from the first year is a good indication that the tax will continue as a steady source of income for public benefit programs. Nevertheless, the city does expect a downturn in revenue as some consumers turn away from the higher prices.
Other cities across the U.S. have joined the bandwagon to tax sweetened beverages. Before Philadelphia, only Berkeley, California had adopted a long-term tax on sweetened beverages (NPR reports that other major cities including New York and San Francisco had previously tried, and failed, to maintain a sweetened beverage tax). Now, a total of five municipalities have joined the ranks of Berkeley and Philadelphia to raise revenue and health standards by taxing sugar and its derivatives. Among them are Oakland and Albany, California; Boulder, Colorado; Cook County, Illinois; and Seattle, Washington. Vox reports that before 2013, there were smaller taxes on sweetened beverages mainly aimed at generating revenue, rather than the larger cities’ efforts which are more geared toward regulating health.
Municipalities considering enacting their own versions of a sweetened beverage tax may, however, face an uphill battle. Between the resistance from locals who do not want to pay more for their favorite drinks and pushback from giants in the sweetened beverage industry including manufacturers and the American Beverage Association, the financial startup costs for creating a tax may be substantial. The Philadelphia Inquirer reports that Philadelphia spent $1.7 million to hire outside counsel for the litigation surrounding its tax. While around $500,000 of those funds were donated from the Laura and John Arnold Foundation, the city still faced substantial costs to get approval for the tax from the Pennsylvania Supreme Court.
Municipal taxes are also subject to state rescission. Philadelphia’s tax still faces potential removal from the Pennsylvania House. There is also pending legislation to preempt local entities from enacting taxes on food or beverages. The bill would ban municipalities from creating their own taxes separate from the standard 6% sales tax in Pennsylvania. It is therefore unlikely that the General Assembly will approve soda taxes outside of Philadelphia.
This article was written with contribution from Sarah Rothermel, 3rd year law student at Widener Law Commonwealth.