Dispatch from Philadelphia: The City Prepares for a Soda Tax

Some retailers plan to pass the new cost of sugary beverages on to their customers. Others are holding out for a lawsuit.

Food Policy, Nutrition

It’s been two weeks since Philadelphia approved a 1.5-cent-per-ounce tax on sugary beverages, and the city’s streets are still littered with traces of battle. In South Philly, a Canada Dry truck idles in front of a Rite Aid. Plastered to its roll-up door, a sign declares “No Philly Grocery Tax” in orange-and-black letters. “Prices could more than double,” the sign warns.

Meanwhile, five blocks away, a T-shirt bearing the same warning hangs in the window of Bertolino’s Pharmacy. Owned by the same family since it opened in 1925, Bertolino’s has survived nearly a century of transformation in Philadelphia. Past the aisles of canned vegetables and mac and cheese, deodorant and razors, greeting cards and gift wrap, a back office pays tribute to that history. Black-and-white photos of the store’s early years share the walls with framed feature stories about the store’s success, and a shelf lined with antique medicine bottles lies opposite a wall covered with photos of family and graduates in their mortarboards.

Tom Bertolino, a middle-aged man in a polo shirt and sandals who now runs the store, gestures to a small back room of the office filled with a crates of Sprite, two-liter bottles of Diet Coke, and some Arizona Iced Tea. Under the new tax, he says, that room will be emptied, his soda inventory limited to whatever can fit into the store’s three refrigerated cases currently stocked with technicolored soda and juice. He suspects he won’t need the extra inventory once the price on soda increases at his distributor, because the distributor will pass that tax along to him, and he’ll have to raise prices, too, passing the tax on to the customer. “I’m not going to eat [the tax],” he says. And once customers are paying more for soda, he expects they’ll buy less.

Even as business owners’ thoughts turn to the practical, the potential effects of the soda tax remain murky. Many grocers are still considering whether to absorb the tax or pass it on to their customers. And while Mayor Jim Kenney and his coalition have won a key public health battle that could lead to similar taxes in cities nationwide, Philadelphia is bracing for the same kind of legal challenge that felled New York City’s ban on large fountain sodas. Amid so much uncertainty, it’s hard for anyone to know what comes next.

“We will figure out what the new normal is and go from there,” says Dwayne Wharton, director of external affairs for The Food Trust, a Philadelphia-based nonprofit that advocates for healthy and affordable food access nationwide. He describes the soda tax as “a tremendous victory for the city and public health community,” but acknowledges that a lot of even experts don’t know about how it will play out. Wharton points out that even in Berkeley, California, where voters passed a similar soda tax in 2014, results have varied across the community and are far from conclusive. But there are certain lessons worth drawing from Berkeley’s experience.

Pass-Throughs and State Lines

As is the case in Berkeley, Philadelphia’s soda tax is aimed at distributors, meaning there are various possible outcomes for how the tax burden will be passed along the supply chain. Early studies of the Berkeley tax have shown conflicting results; the National Bureau of Economic Research found that less than half of the price increase was passed along to consumers, while a University of California, Berkeley study found that about 70 percent of the tax was passed through. A U.C. Berkeley media release explained that this variance might be attributed to when, how, and what types of stores were sampled. Soda prices tended to remain lower at chain drugstores, for example, where the tax is more easily absorbed.

There are likely to be similar divisions in Philadelphia, where the bulk of soda is sold at supermarkets, local grocers, beer distributors, and in restaurants. As is the case in Berkeley, many folks here expect to see reports of consumers crossing city lines to avoid whatever portion of the tax that does pass through to the retail level—just as smokers have reportedly done in droves since Philadelphia implemented its cigarette tax in 2014. One employee at Philadelphia’s Moore Beverage says he’s even heard of a New Jersey retailer that has put up signs encouraging Philadelphians to cross the bridge into the Garden State for their soda fixes.  

That enticement is likely to draw in plenty of Philadelphians with access to cars or who live on the edges of the city. After all, Pennsylvania’s strict liquor laws already prompt many to buy their booze in New Jersey or even Delaware. “I’ll pop over the bridge to get my gas, get my cigs, get my liquor, and get my soda now,” Bertolino says, adding, “It doesn’t pay to shop in the city.” He says his cigarette sales dropped by 80 percent after the tax was passed, down to one or two cartons sold a week. He expects about the same from soda.

David McCorkle, president and CEO of the Pennsylvania Food Merchants Association (PFMA), argues that a dwindling customer base would jeopardize the supermarkets and grocers that have opened in Philadelphia in the last decade under the Pennsylvania Fresh Food Financing Initiative. “This is not the kind of urban experiment we expected to be participating in,” he says.

Daniel H. Grace, secretary-treasurer of the Teamsters Local 830, believes that the tax “will be devastating” for his members, too. “We stand to lose as many as 2,000 regional jobs among all area Teamsters locals,” he wrote in a statement to Civil Eats. “Furthermore, the tax is slated to go into effect in January, which is traditionally the slowest time of the year for beverage sales, which means our job losses will be felt almost immediately.”

The future might not be quite so grim, though. University of Pennsylvania professor of business economics and public policy Robert P. Inman told Billy Penn that Grace’s estimate is “off the bounds of realistic.” Still, there’s no certain measure of how many jobs will be lost, if any. That uncertainty breeds understandable concern.

Does Public Health Have to Mean Hurting Local Business?

Proponents of the tax have considered these possibilities as well, of course, and are already looking into ways to alleviate the burden on small businesses. For its part, The Food Trust plans to focus on marketing, which Wharton argues is key. If the beverage industry would promote healthier items rather than sugary sodas, he says, that would drive demand. “We all know if marketing and advertising didn’t work, people wouldn’t do it,” he says. So The Food Trust plans to  help grocers promote their healthier items with tactics like shelf talkers and floor graphics, which might help offset losses from soda sales. Similarly, the city council has also approved a tax credit of up to $2,000 for businesses that sell healthy beverage alternatives.

The point of the tax is to reduce soda consumption, not eliminate it. People are just as attached to soda as they are to cigarettes; and they won’t completely give it up just because the price goes up.

Just a half mile away from Bertolino’s Pharmacy, Julio Soto of El Soto grocery is less worried about losing his customer base under the tax. Earlier this month, he told the Philadelphia Inquirer, “It’ll be good for people if they decide not to buy so much soda from me … It won’t really hurt my business.” Ben Miller, owner of South Philly Barbacoa and the only restaurant owner to speak in front of City Council in defense of the tax, agrees. Granted, the only soda his tiny restaurant sells are bottles of Coca-Cola, so he’s not exactly in a make-or-break position. But, Miller says, even if he has to raise the price of each bottle by a quarter—and even if that means people buy less soda—he would make a better profit margin by selling them orange juice, coffee, or homemade agua fresca instead.

Jill Fink, owner of Mugshots Coffeehouse, notes that there are plenty of other products that retailers can stock that aren’t made with sugar or artificial sweetener. These are mostly what she stocks at the Fairmount coffee shop, along with a selection of Boylan sodas that will be subject to the tax. She, too, acknowledges that the tax will more significantly impact Philadelphia’s corner stores, but she hopes this will just prompt consumers to buy healthier options from those stores. There’s a potential market for those products, too. When she passes the tax from the Boylan sodas onto her customers, Fink says she hopes they’ll consider buying the teas sweetened with agave instead. “The nutrition argument is really the thing for me,” she says.

Crucially, both Fink and Miller also believe in the initiatives that the soda tax will fund including expanded prekindergarten and improvements to parks, libraries, and other public buildings. “Soda isn’t good for you, we all know that,” he says. “So I think it’s a clever way of doing something to promote public health and at the same time pay for some much needed programs.”

It’s exactly that mentality that has public health advocates hoping that Philadelphia’s soda tax will encourage similar measures in municipalities across the country. Jim Krieger, executive director at Healthy Food America, told the New York Times that the Philadelphia tax “is going to really provide momentum” to movements in cities including San Francisco, Oakland, and Boulder, Colorado. Rather than arguing for a soda tax on the grounds of public health, Kenney more or less ignored the health component and focused on how the tax revenue would reward the community. It’s a strategy that at least partially accounts for the success of the tax—and is likely to be replicated.

Pending Legal Challenges

But, first, both advocates and opponents might want to wait to see how the rest of this plays out given the legal challenge on the horizon. As the Philadelphia Inquirer reports, the American Beverage Association plans to challenge the tax in the courts on two fronts: “One, that it is a de facto sales tax and preempted by the state. And two, that it violates a law requiring similar items to be taxed at the same rate.”

Both the PFMA’s McCorkle and the Teamsters’ Grace welcome the lawsuit and expect it to succeed. “This Beverage Tax, in addition to being regressive, is also discriminatory because it targets only one industry,” Grace writes. “It’s also unconstitutional. The city’s weak argument—that the tax is on the distributors, not the end consumer—has no merit because the beverage distributors have stated publicly and repeatedly that they’ll have no choice but to pass on the tax to consumers. The net result is the city’s double taxation on one and only one consumer product, which also violates the state’s Uniformity Clause.”

At The Food Trust, Wharton admits that he’s worried about the pending lawsuit. Though he believes the tax rests on the side of the long-term greater good—a healthier society that spends less on healthcare costs—he notes that beverage industry has already poured nearly $5 million into the campaign against the soda tax. (The pro-tax side spent about $1.4 million in advertising.) That kind of money was hard to beat in the first round of this battle, he says, so he knows the pro-tax side can’t rest yet.

Back at his South Philly pharmacy, though, Bertolino doesn’t really think the lawsuit is likely to succeed even if he wishes it would. For him, business will carry on as usual come January. He’ll just be a little bit lighter on soda.

 

Photo by Amy McKeever.

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