This piece first published at Forbes.com: click here for link
After just a few months in office, Philadelphia’s new mayor accomplished something former New York City Mayor Michael Bloomberg only dreamed of: a soda tax.
Philadelphia’s Mayor Jim Kenney marketed the tax—with the help of a $1.6 million donation from Bloomberg—by touting the revenue potential and laying out how the city would use the additional funds. That’s in contrast to Bloomberg’s failed 2010 effort in New York that pushed a public health argument and prompted accusations the mayor was trying to create a “nanny state” as he advocated a tax and limit on the size of sugary drinks.
Philadelphia’s 1.5 cent-per-ounce tax on regular and diet soda will generate an expected $91 million annually, pledged to support universal early childhood education, parks and libraries, and 20 percent of the revenue will fund other city programs and employee benefits.
But the soda tax is more of a symbolic victory for proponents than a tangible solution to the city’s problems. Compared to Philadelphia’s $7.23 billion in fiscal 2015 revenue, the money anticipated from the tax is a drop in the bucket, and doesn’t offer any fix for the city’s pressing financial issues like a severely distressed pension system. But, it is a new revenue stream and Philadelphia’s playbook could be a model for other states or municipalities searching between the couch cushions for some incremental cash.
While New York touted the connection between soft drinks, obesity and diabetes, Philadelphia focused on the economic benefits of the newly-funded social programs to counter criticism of the tax’s regressive nature and claims that it would disproportionately affect low-income individuals.
Although other municipalities could follow the same path, another option is increasing existing “sin taxes” or broadening sales taxes to include services, said Rick Mattoon, senior economist at the Federal Reserve Bank of Chicago. So-called sin taxes – revenues levied from tobacco, alcohol or gaming – are popular as they generate cash and only tax part of the population, while discouraging bad habits. Tobacco is a prime example showing that taxes led to lower sales, especially among children.
Mattoon also notes that making changes to sales tax can pack a bigger punch. “You can generate more by looking at an existing sales tax than selectively taking a specific item and taxing it,” he said.
It’s doubtful a surge of distressed municipalities will line up to create a soda (or “pop,” to Midwestern communities) tax. Some states limit what municipalities can tax. Illinois, Michigan, New Jersey, New York and even Pennsylvania, to name a few—all known for having cities with distress—restrict what taxes can be levied.
And even if it’s a legally viable option, it’s difficult to implement. Washington state passed soda tax legislation in 2010, which was later repealed, and Berkeley in 2015 became the first US municipality to implement a soda tax. Philadelphia tried twice before for a soda tax and several other municipalities have been unsuccessful in commissioning similar measures.
The Philadelphia method could be executed elsewhere, but should be done with caution and realistic expectations. The soda tax is a narrow revenue generator, and municipalities should look to other sources if they’re looking for a windfall.