Shelves are stocked with sugary drinks at Cousins Grocery Store in Philadelphia.

Shelves are stocked with sugary drinks at Cousins Grocery Store in Philadelphia.

Anna Orso/Billy Penn

Philly City Council OKs a soda tax, with a big complication

Philadelphia is on track to become the first major city in America to pass a soda tax.

Philadelphia is likely the first major city in the country with a soda tax, approved in an 11th-hour committee vote — and, in a surprise, its proceeds will bolster the city’s sagging coffers.

The levy is expected to bring in $91 million a year and will partially address the city’s fund balance, which this year went from $150 million to $70 million. And that’s basically a band-aid, since bond rating agencies have warned the city that its balance should be at least several hundred million. The money will also help subsidize pre-kindergarten expansion, the development of community schools and an investment in parks and recreation. But all those things took a backseat during negotiations today — to the surprise of Council, which as a committee nonetheless passed the measure — to adding desperately needed funds.

For the tax to take effect, the full council must vote again next week before Mayor Jim Kenney can sign it into law.

The move today is the first big win for first-year Mayor Kenney, a former council member who was once opposed to levying a soda tax for the fear it would hit the city’s low-income residents the hardest. Despite that, in his first budget address, he proposed a higher 3-cent-per-ounce tax on sugary drinks, though how it will be used in the early years — to add to the city’s fund balance — was a sudden surprise to council members today.

The only other city in America to have instituted a soda tax thus far is Berkeley, Calif., a liberal and much smaller city of 117,000 that has a significantly lower poverty rate than Philadelphia, a city of 1.5 million. Elsewhere in the country, at least 40 proposals to tax soda have been shut down since 2008, including two previous attempts in Philly.

In Berkeley, the reason for a 1-cent-per-ounce tax was largely to curb sugar consumption for health reasons. In Philadelphia, a tax on sugary drinks was billed as the only option for bringing in revenue to a city that’s raised taxes on property, sales, liquor and cigarettes in recent years.

“We all know we can’t raise property taxes again. We’ve already raised them four times in the last five years,” Kenney said during his budget address. “And it’s simply not fair to ask our homeowners or any other Philadelphian for that matter to pay more while large soda companies and wealthy distributors are making incredible profit margins.”

And now, the tax that’s been closely watched by other major cities and presidential candidates is one vote away from a potential ripple effect across the nation. Since the beginning, the thinking has gone like this: If Philly can overcome Big Soda, so can others.

What the soda tax will do

Mayor Kenney visiting a quality pre-K provider.

Mayor Kenney visiting a quality pre-K provider.

Via @PhillyMayor on Twitter

Philadelphia, the poorest big city in America, has a litany of financial problems itself. Its public education system lags behind those of a similar size, its expenses are set to outpace tax revenue in coming years and city leaders are staring down a ballooning $5 billion shortage on its pension obligations.

The 1.5-cent-per-ounce tax to be levied on distributors is expected to bring in $400 million dollars in its first five years — that cash isn’t going to fix the city’s problems.

But it will be a large part of the revenue that’ll fund the mayor’s proposed “universal pre-K” program, which is expected to add some 6,000 quality pre-K seats across the city. Since the campaign trail, Kenney has pushed pre-K as a program that’ll save the city money down the line as studies show it can increase interest in education for children and curb future crime.

Kenney’s spokeswoman Lauren Hitt broke down how the administration says the money will be spent in the first five years of the tax’ existence (noting that the revenue will kick in halfway through FY17):

FY17 – $30 million will go toward the mayor’s initiatives including pre-K, community schools and rebuilding parks and recreation centers. No money will go toward the fund balance.

FY18 – $41 million to the mayor’s initiatives, $30 million to the fund balance.

FY19 – $61 million to the mayor’s initiatives, $10 million to the fund balance.

FY20 – $73 million to the mayor’s initiatives, $1 million to the fund balance.

FY21 – $81 million to the mayor’s initiatives, no money to the fund balance.

The revenue from the soda tax was the crux of Kenney’s $4.1 billion budget plan, which also earmarks funds to develop “community schools,” or schools the administration will tap to be developed as neighborhood centers that offer health services, adult literacy courses and other resources for more than just the students.

The administration is also aiming to invest $300 million in the city’s parks, recreation centers and libraries, many of which badly need remodeling or structural updates.

The majority of City Council members supported the initiatives of Kenney’s administration and most could get behind what was sold as the major benefit of instituting a soda tax: Expanding access to pre-K. The concern wasn’t what the money was going toward — it was who it was going to impact. Today’s testimony introduced a potential stumbling block for Council members, some of whom said they were surprised to learn parts of the tax would go toward the city’s fund balance. The administration says $41 million of soda tax revenue funds would be allocated as such over the next five years.

A regressive tax?

Screen Shot 2016-06-08 at 7.03.55 PM
Via Teamster.org

Soda taxes are inherently regressive, and not solely because they represent a larger portion of income for a person living in poverty like a sales tax. Low-income consumers are proven to purchase more soda and sugary beverages and a tax on sugary drinks will hit small corner stores and bodegas harder than grocery stores, the latter of which is more scarce in low-income neighborhoods.

It’s why City Council President Darrell Clarke, arguably the most powerful man in the city, came out against Kenney’s 3-cent-per-ounce plan last month, calling it “divisive” and saying “it’s not going to be a three-cents-per-ounce-tax.”

“If I have a kid in pre-K,” Clarke, who makes $162,000 per year, said during a hearing, “I don’t think the taxpayers should pay for that. I think I should pay for that.”

Clarke was concerned the city’s low-income residents would be footing the bill so the city could subsidize pre-K for children with wealthy parents. Those concerns are what led to discussion of taxing diet sodas, which middle- and upper-income residents consume at a higher rate than low-income.

Councilwoman Maria Quiñones-Sánchez, who has been vehemently against the soda tax proposal, said Wednesday prior to a vote that she’s still concerned the levy will negatively impact residents in her district.

“This will have a disparate impact in minority communities, communities of color and low-income communities,” she said.

It’s also what led Councilwoman Blondell Reynolds Brown to introduce her own revenue model, a 15-cent-per container tax that would have been flat and would have taxed every container, save for baby formula and milk products. The thinking was this tax would hit all consumers the same, no matter what type of beverages they most often drink. But her plan fizzled out.

The idea that Kenney’s plan is regressive was one of the main tenets used by opponents of the soda tax who claimed City Council members can’t say they want to help the city’s poor while voting in favor of a tax that will impact them more than others.

The other argument of the opposition was that the tax could lead to a significant loss in jobs. The Teamsters in Philadelphia claimed they stand to lose 2,000 jobs in the region if the soda tax were to be implemented, however they haven’t offered any math to show where those 2,000 lost jobs would come from.

What’s next

Council President Darrell Clarke during Wednesday night's late Council meeting.

Council President Darrell Clarke during Wednesday night's late Council meeting.

If you’ve been watching the networks in Philadelphia over the last several months, rest assured that an end to the ad blitz is coming. Commercials and advertisements purchased largely by the American Beverage Association, which came out strong against the tax, appeared across the region in an effort to spur grassroots opposition to Kenney’s plan.

A group called “Philadelphians Against the Grocery Tax” plastered materials across the city billing the tax as such. Though the tax doesn’t apply to food, some experts say prices across stores could increase to make up for the increased prices passed on by distributors.

Big Soda spent at least $45 million (and counting) opposing the soda tax in other cities across the country the last several years. It’s possible its tab in Philadelphia could reach $20M, in large part because Philadelphia’s success in passing a soda tax could have a ripple effect on the rest of the country. Both Democratic presidential candidates weighed in on the issue, with Hillary Clinton supporting it and Bernie Sanders opposing.

“Success begets success,” Howard Wolfson, an adviser to former New York City Mayor Michael Bloomberg, told The Inquirer. “I think if Philadelphia is successful, it will spur even more cities to look at this in a serious way, and I think a lot of eyes are on Philadelphia right now.”

Their fight isn’t over. The city expects some legal action to come out of the passage of the soda tax, though officials in Berkeley expected a challenge that never came. However, the American Beverage Association mounted a successful legal challenge in New York City against Bloomberg’s law banning large soda containers.  

The city’s legal team has said that if a legal challenge is mounted, they expect it would happen before the end of the year. A lawsuit could be filed against the city on the basis the city doesn’t have the authority to pass a soda tax or whether it violates Pennsylvania’s uniformity tax clause.

“There has never been a controversial law,” Richard Feder, chief deputy city solicitor, said, “where somebody doesn’t say, ‘That’s illegal we’re going to sue.’”

After that, if the tax is upheld, soda consumption in Philadelphia is expected to decrease, some say by as much as $100 to $125 a year per resident. Some experts anticipate years down the road a soda tax can result in decreases in diabetes and obesity.

But in the short term, the revenue will add to the city’s fund balance and go toward pre-K, community schools and parks and rec.

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