Tax Foundation analyzes performance of Philadelphia’s soda tax. Revenues unsustainable. Cities should avoid them.

Sin taxes have long held appeal for governments looking for new revenue without significant backlash. After all, the tax can be sold has having a laudable dual purpose: raising money for popular programs while discouraging negative behavior. Alcohol and tobacco taxes have been the top choices. Washington has been among the leaders on both. More recently, soda taxes have come to the fore as a way to combat obesity and, yes, raise money.

In June 2016, we asked whether the soda tax in Philadelphia would launch a trend among metros. A year later, Seattle adopted a tax on sugary beverages, which we discussed in our post “Sweetless in Seattle.” The Tax Foundation reported at the time that Seattle wanted residents to kick the can. The Tax Foundation wrote,

The tax will be implemented in 2018 and establishes a “Sweetened Beverage Tax Community Advisory Board” to budget the estimated $15 million annual tax revenues that will be raised from the tax. Primarily, the funds will go to education readiness and healthy eating programs in Seattle such as Fresh Bucks, which rewards low-income residents who use federal food stamps at local farmer’s markets. This program is supported partially by expiring federal grants, according to the ordinance.

Although the ordinance declares sugary beverage consumption as a large contributing factor to obesity and health issues for low-income households, soda sales have declined substantially in recent decades. In fact, a recent Fortune report notes the growing demand for bottled water over other beverages. As soda sales wane, revenues from the tax will likely decline as well, making it an unstable source of funding for healthy living programs like Fresh Bucks.

Now we can see the effects with more certainty. The Tax Foundation has analyzed the Philadelphia experience with the soda tax. The experience has not been good.

Levied on distributors, the 1.5 cent-per-ounce beverage tax went into effect on January 1, 2017.

The tax, which is 24 times the state excise tax rate on beer, has received mixed reviews among constituents. Some Philadelphians support the tax for the programs it funds. Meanwhile, local business owners and workers have filed lawsuits against the tax.

From an operational standpoint, the tax rollout continues to create problems for the city as collections have come in less than projected. In July, city officials lowered beverage tax revenue projections by 14 percent, leaving the pre-kindergarten programs that the tax promised to fund in jeopardy.

Furthermore, soda taxes are regressive, hurting low-income earners the most.

We recommend reading the analysis to get a better understand of the factors behind the tax’s underperformance. In sum, the Tax Foundation concludes:

A number of cities like Seattle and San Francisco have enacted soda taxes, and states occasionally propose them. Generally, these policies are aimed specifically at combating obesity and the consumption of sugar-sweetened beverages. The stated goal of the Philadelphia soda tax as a revenue-raising measure differs from other areas, and it makes the city’s underperforming tax collections all the more noteworthy.

Despite constituent support for the programs funded by the tax, the actual revenue for programs remains unstable due to poor collection performance, with potential that those revenues will continue to fall. The legal battles and consumer angst the tax has attracted make the tax unattractive as well. Other localities wishing to avoid these travails should seek funding for programs with broader-based, more predictable tax instruments.

Sound advice.