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With the City of Philadelphia last week passing its so-called “soda tax,” or a tax on sweetened beverages, it becomes the first big U.S. city and the second in the country to do so after Berkeley, Calif. Philadelphia’s move is expected to embolden other U.S. cities contemplating such a tax as they battle concerns about the adverse health effects of sugary sodas on their residents.
A handful of U.S. cities are planning to put such a tax on the ballot in coming months, and they are encouraged also by the prospect of the tax dollars it would bring in. The likely impact of such a tax on reducing beverage consumption and the consequent health benefits are uncertain, but the road to those goals will be long, according to experts at Wharton and the University of Pennsylvania.
A difference in consumption would be visible in a year or two after the soda tax kicks in, predicted Karen Glanz, professor at the Perelman School of Medicine and also director of the University of Pennsylvania Prevention Research Center. However, it would take three or five years at least to measure the impact on disease risk factors, she added. The flip side is if beverage consumption falls, the city’s tax revenues generated by that would also fall, as seen with tobacco taxes, she noted.
According to Wharton marketing lecturer Jason Riis, the “public relations” impact of the tax is more significant than that of “economic incentives” on consumers’ buying behavior. He noted that the harmful effects of sugared soda have been in the headlines for a while as Philadelphia’s soda tax proposal made its way through the legislative process. “Many people feel the bigger impact [will be] on changing consumption behavior,” he said.
Glanz and Riis discussed what the tax means for the city, consumers and the beverage industry on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
On Monday, Philadelphia mayor Jim Kenney signed into law the “sweetened beverage tax” along with the budget for the 2017 financial year. The tax covers sodas, energy drinks and juices with less than 50% fruit juice, and would be levied at the rate of 1.5 cents per ounce. It is expected to collect $91 million a year. The revenue from the tax would fund “quality pre-K (or kindergarten) expansion, community schools, reinvestment in parks and recreation centers, and help pad the city’s general fund,” according to a press note from the Philadelphia City Council. The tax will be implemented from January 2017.
“If [the soda tax proposal] had been just on health grounds, it would have been a much tougher battle within [the Philadelphia] city council.” –Jason Riis
Other U.S. cities that are contemplating levying a soda tax include San Francisco and Oakland in California and Boulder, Colo. A similar attempt in New York City in 2010 under then mayor Michael Bloomberg failed in the face of intense lobbying by the beverage industry. Four years ago, Bloomberg also proposed a “soda ban” to prohibit the sale of sweetened beverages greater than 16 ounces, but courts struck it down. Riis said the “next battleground” would be the state of Alabama, where obesity rates run high.
The American Beverage Association in a statement described the Philadelphia levy as “a regressive tax that unfairly singles out beverages – including low- and no-calorie choices,” and said it would take legal action to stop it. Riis noted that manufacturers of the products like Coca-Cola and PepsiCo and their distributors spent an estimated $5 million on advertising against the soda tax.
Glanz said the original proposal in Philadelphia was to tax such drinks at three cents an ounce. But the “horse trading that goes on at City Council” over the past two weeks changed that in the final bill, she added.
However, the city has added a tax on artificially sweetened beverages – or diet beverages – at 1.5 cents an ounce. That means those who find sugar drinks costlier with the new tax would have less of an incentive to switch to diet beverages, Glanz explained.
Mechanics of the Tax
The soda tax is a business tax levied on distributors based on the inventory they deliver into the city, Glanz explained. She noted that the distributor, and not the consumer, pays the soda tax in both Berkeley and Philadelphia. Some of that tax could be absorbed by the distributor or the store owner, she said. The trickle-down effect on consumption patterns is uncertain at this stage, she added. Riis said he expected the soda manufacturers to pass on much of the tax to consumers in the form of higher prices.
To be sure, much focus is on how the soda tax revenues would be spent. The Philadelphia bill passed 13-4, but many legislators secured some of the projected soda tax collections for their “pet uses,” said Glanz. However, the city has been transparent about how exactly it would use the monies. It released a chart that projected the collections over five years, where 49% of it (or $44.6 million) would go to pre-K schools, and 9% would go to community schools.
Berkeley, which introduced its one-cent tax on sugar-sweetened beverage products in November 2014, had said it would invest some part of the soda taxes they collect in “health communications” and “behavior-change programs” to drive more healthy consumption habits. “Berkeley realizes that the potential gains of the soda tax would be eroded if distributors or retailers absorb some of it,” said Glanz. One report on the results of the soda tax in Berkeley shows a modest impact in reduced consumption, she added.
Does the Tax Work?
According to Riis, tobacco taxes and the emphasis on tobacco’s harmful effects have resulted in reduced consumption in the U.S. over the years. Taxes account for more than 55% of the price of a retail pack of cigarettes, according to estimates by Philip Morris. The impact of the taxes has been largest on teenagers, where worries run high about the effects of early smoking and the development of addiction, he added.
In the case of cigarettes, “teenagers have less money so they feel the taxes in a bigger way,” Riis said. “[It’s] not clear that that will be the case with sodas, though, where the tax is considerably smaller and the price premium is considerably smaller.”
As it happens, consumption of sugared soda in the U.S. has fallen over the years. Riis noted that in the late 1990s, the average American consumed 1.2 or 1.3 cans of sugared soda daily, but that has since come down to one can. However, that is still way too much and accounts for more daily sugar intake than was recommended last month by the Food and Drug Administration, he added.
Glanz said sugary sodas have been shown to be one of the biggest contributors of sugar to the diet. The calories associated with these beverages give rise other concerns as well, she added. Based on residential household incomes, “Philadelphia … is a poor city, and disproportionately the poorer groups are fatter and have more health conditions.”
“This is a market that is manmade from the start. In theory, it could be unmade but that would be a very, very long haul.” –Karen Glanz
The impact would depend on the volume people buy, said Glanz. A two-liter bottle, which is the normal family size, would cost about a dollar extra, she added. But a can in a restaurant may cost 20 or 30 cents more, and people may not even notice it, she said. “From a public health perspective, those are probably the consumers that you want to have an impact on – the ones that are consuming a large amount of it,” said Riis. In any event, he didn’t expect a dramatic change in the consumption rates any time soon.
Riis had more hope for weaning children away from the soda habit. “Children form habits but they depend on their parents for supply,” he said. If more parents decide to rethink letting their children drink a couple of cans of soda a day, the habit could change much more quickly, he added.
Health vs. Taxes
Health concerns get second billing to tax revenues, it appears. Riis noted that in Philadelphia, the tax has been talked of “as a revenue-generating mechanism and not as a health story,” although many city councilors have been persuaded by the health aspects of it. “If [the soda tax proposal] had been just on health grounds, it would have been a much tougher battle within [the Philadelphia] city council,” he said.
Glanz agreed with Riis, and said the soda tax “probably wouldn’t have won the day here [in Philadelphia].” She explained why pitching the health benefits would be a hard sell for a soda tax. For one, some consumers perceive it as a violation of their right to make a free choice, she said. Businesses latch on to that, saying that the tax would hurt their revenues, she added.
Health advocates cannot expect a tax to help undo a soda habit, but it is one of the few policy tools that are available to persuade people to consume less soda, said Riis. Glanz pointed out that there is “nothing natural” about the product. “In fact, some 120 years ago, some clever manufacturer created Coke with a great secret recipe and it was marketing that helped feed and fuel the taste for this,” she said. “It feeds into our taste buds; we like things that are sweet and fizzy. This is a market that is manmade from the start. In theory, it could be unmade, but that would be a very, very long haul.”