Philly Soda Tax Flattening Beverage Sales

PHILADELPHIA — Philadelphia’s tax on sweetened beverages is only nearly six weeks old and it's already taking a toll on drink distributors and grocers.

Canada Dry Delaware Valley — local distributor of Canada Dry Ginger Ale, Sunkist, A&W Root Beer, Arizona Iced Tea and Vita Coco — said business fell 45 percent in Philadelphia in the first five weeks of 2017 vs. the same period last year, reported Bloomberg. Similarly, total revenue at Brown’s Super Stores, which operates 12 ShopRite and Fresh Grocer supermarkets, fell 15 percent at its six retailers in the city.

"In 30 years of business, there’s never been a circumstance in which we’ve ever had a sales decline of any significant amount," said Jeff Brown, chief executive officer of Brown’s Super Stores. "I would describe the impact as nothing less than devastating."

Philadelphia became the first major city in the United States to institute a soda tax when the city council granted final approval to a 1.5-cents-per-ounce tax on sugar and diet beverages June 16, as CSNews Online previously reported. The tax passed in a 13-4 vote and went into effect Jan. 1. The tax doubles the price of 12-pack cans and 2-liter bottles.

Canada Dry Delaware Valley Chief Operating Officer Bob Brockway said he expects his business will decline by at least a third over the course of the year. He distributes more than 20 percent of all soft drinks in Philadelphia market. The executive said to offset the sales drop in Philadelphia, he’ll have to lay off 30 of his 165 employees in the area in March, Bloomberg reported. Depending on summer sales, the layoffs may continue.

According to Brockway, the sales declines are hurting grocery stores and bodegas in poor neighborhoods, where shoppers tend to buy in bulk, more than convenience stores. A 12-pack of cans for $2.99 is subject to a $2.16 tax and a $1.89 single-serve 20-ounce bottle, on the other hand, is only 30 cents more expensive now.

City officials say that because the levy is assessed at the distributor level, it isn’t technically a sales tax. The reason that some prices have doubled is because distributors have chosen to pass along the increase to their customers, they say, the news outlet reported.

Beverage sales at Brown’s Super Stores are down 50 percent, according to Brown, adding that beverages are the biggest category in a grocery store with 4,000 products. When consumers drive outside of the city to find cheaper prices, Brown said he’s losing the non-beverage portion of shopping carts as well.

Soda Tax Impact

The tax has accelerated declines in sweetened-beverage sales that were already in motion. According to trade publication Beverage Digest, per capita soda consumption in the U.S. hit a three-decade low in 2015.

"The consumer over the last 10 years has already told us that we need to develop brands and packages that are either good for you or better for you," Brockway said. "All that’s happening with this tax is that it’s accelerating that consumer dynamic."

Philadelphia’s sweetened-beverage tax proposal by Mayor Jim Kenney focused on the potential fiscal benefits of a tax, not public health, according to Bloomberg. The levy is expected to generate $409.5 million over five years. Of that amount, $314 million would go to programs such as expanding pre-kindergarten and renovating recreation centers and libraries.

Advocates of the tax say it’s far too soon to know what its impact will be. A 50 percent sales decline is significantly larger than what would be expected based on the results of previous sugary-beverage taxes in Mexico and Berkeley, Calif., according to Jim Krieger, executive director of Healthy Food America, an organization that supports soda taxes.

"This is just an attempt by industry to whip up the troops and try to turn back sound public policy," he said. "The bottom line is that the purpose of the tax was to raise money for important needs and to serve the residents of Philadelphia, and it’s doing precisely that."

The mayor’s office said a drop in revenue was to be expected early in the year. For distributors, declines are higher than forecast because retailers stocked up on pre-tax inventory, said Mike Dunn, a spokesman for Mayor Kenney. Retailer declines will likely subside some as shoppers become more accustomed to the new prices, stop driving out of the city to purchase groceries and substitute sugary drinks with more healthful, untaxed beverages, he added. 

Philadelphians for a Fair Future, a group that supported the tax, received donations from former New York Mayor Michael Bloomberg, whose philanthropy supports anti-smoking campaigns and other health initiatives. Bloomberg also gave more than $18 million to campaigns in support of the San Francisco and Oakland, Calif., soda-tax initiatives, according to finance records. 

The American Beverage Association, a trade group representing The Coca-Cola Co., PepsiCo Inc. and Dr Pepper Snapple Group, has challenged the tax in court.

Where Will the Bubble Burst Next?

Similar tax measures have been made across the country, from San Francisco and Oakland, Calif., to Boulder, Colo., to Cook County, Ill., home of Chicago. Next up to bat could be the state of West Virginia.

Following last year’s bumped tax on tobacco products, lawmakers are discussing a more ambitious tax reform, this time in the form of sugary drinks, reported MetroNews.

Advocates for the tax say it would encourage healthier choices and cut health care costs. In doing so, the reform could raise $89 million-$128 million a year for lawmakers to put toward the half-billion-dollar budget gap for the upcoming fiscal year. On the flip side, opponents say there’s already a beverage tax in West Virginia, that the tax is regressive, and that the government shouldn’t have a role in intentionally affecting consumers’ choices.

Currently, the House and Senate are focused on closing exemptions to the state’s sales taxes and broadening the tax base, the news outlet reported. Taking a step further, the Senate is considering legislation that would eliminate the state income tax and, possibly, making up the difference with a broad consumer sales tax.

As of now, there is division between the House, Senator and governor’s office as to the state’s next move, but that could change, suggested American Heart Association Government Relations Director Christine Compton.

"It’s a revenue generator, but it’s one of those things we saw like the tobacco tax. At first there was no appetite for that. No one wanted to raise taxes," she said. "But this is about an excise tax for consumers who choose to buy these products. So you don’t have to pay this. Whereas with a consumer sales tax that’s being talked about, everyone is going to pay that. So it’s much more regressive versus this type of excise tax that’s only on a product you can choose to use or choose not to use."

The proposed reform would tax an extra 2 cents an ounce on sugar drinks. "Anything that has significant sugar content — so we’re talking sodas, energy drinks, sports drinks, bottled drinks that have a significant amount of sugar. So things that are a mostly-milk product, a hundred-percent juice product and waters would not be taxed," Compton explained. However, non-nutritive "diet" drinks are exempt from taxes. 

Standing on the opposing side, Will Swann, legal counsel to the West Virginia Beverage Association, says it’s best for the government to stay out of people’s grocery carts. According to Swann, the association feels as if its products are being unfairly targeted as causes of obesity in West Virginia.  

"… We feel like we’re being singled out and compared to cigarettes, which is fundamentally unfair," he said. "The difference between a ginger ale and cigarettes is that if your child is sick and was dehydrated, you’d give your child a ginger ale and you’d be pretty glad to have them drink it."

Swann argues that sugary drink tax is regressive and is poor public policy. " … When we categorize something as regressive it means this tax impacts poor folks more than it affects the wealthy, and that’s bad public policy. These lower-income folks have to pay a larger portion of this tax to buy common grocery items," he commented.

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