Soda Taxes

The Philly Soda Tax May Be Legal, But It's Still Bad Policy

The State Supreme Court won't overturn the tax, so lawmakers should do it instead.


Richard B. Levine/Newscom

The Pennsylvania Supreme Court ruled this week that Philadelphia's 1.5-cent-per-ounce tax on soda and other sugary beverages does not conflict with state law.

A group of city merchants and representatives of the beverage industry had challenged the so-called soda tax on the grounds that it amounts to double taxation, since consumers are already charged a state sales tax on sweetened drinks. Under Pennsylvania law, localities are not allowed to tax anything already taxed by the state. The state Supreme Court rejected that claim in a 4-2 ruling, concluding that the soda tax is applied at the wholesale level and therefore does not conflict with the state sales tax, which is charged at the final point of sale.

"The payer of the beverage tax is the distributor, or in certain circumstances, dealers, but never the purchasing consumer," Chief Justice Thomas Saylor wrote for the majority.

That logic might hold up in the realm of law, but real-world economics show that consumers are paying both the sales tax and the soda tax, which is passed down the supply chain. The tax adds about $1 to a two-liter bottle of soda, and more than $2 to a six-pack of cans.

Consumers are responding to those new incentives by travelling outside Philadelphia to do their shopping. A report by Catalina, a market research firm, found that soda sales inside city limits have fallen by 55 percent since January 1, when the tax took effect; while sales outside the city have grown by 38 percent. That means the tax is costing not only consumers, but city businesses who have lost customers because of it—a completely predictable outcome.

And it's not just soda sales being hit. The tax also applies to fruit juices and sports drinks.

"This duplicative tax has shown to be a financial burden for both consumers, who the tax is getting passed onto, and employers," says Gene Barr, president of the Pennsylvania Chamber. "Taxes that single out particular industries drive customers to other areas to purchase these goods, which can lead to business closures and a loss of revenue that is difficult to overcome."

According to Ax The Bev Tax, a coalition of city businesses, the tax has cost 1,200 jobs across various industries.

About the only people happy with the Supreme Court ruling are, predictably, the city officials who sold the tax as a way to generate $90 million for schools and pre-K programs. Mayor Jim Kenney, in a statement, said the ruling "offers renewed hope for tens of thousands of Philadelphia children and families who struggle for better lives in the face of rampant poverty."

But the city's plans for the soda tax money have already had to be pared back once, because the tax generated about 15 percent less revenue than expected in 2017. And as Baylen Linnekin noted last year, "spending tens of millions of dollars to expand pre-K in a city where even the most optimistic reports show city schools already fail to educate children and are routinely broke may not be the best idea."

This week's ruling is a reminder that legality is not the only measure of good policy. The soda tax should be reconsidered by city officials or blocked by the state legislature, which has the authority to overrule local taxes.

State lawmakers, include some Philadelphia Democrats, have opposed the tax. State Sen. Anthony Williams (D-Philadelphia) authored an amicus brief for the state Supreme Court, urging them to rule against the city.

"I don't like a regressive tax. I don't like it billed as it is, which is helping the poor," Williams tells Billy Penn, a Philadelphia-based alt-news website. "No, you're taxing the poor to help themselves."

State Sen. Scott Wagner (R-York), this year's Republican gubernatorial nominee, took a shot at the soda levies during a campaign event this week, calling for a state to cap the tax.

The Pennsylvania Chamber is urging state lawmakers to pass House Bill 2241, which would prohibit municipalities in Pennsylvania from imposing soda taxes.

Whether lawmakers will do anything about the tax remains to be seen. Although Pennsylvania's legislature is technically a year-round body, the fall session in an election year is not very active, historically.