Philadelphia Soda Tax Blamed for Reduced Sales and Layoffs

Philadelphia Soda Tax Blamed for Reduced Sales and Layoffs

Could a soda pop tax impact your business?  In January, 2017, Philadelphia’s controversial sweetened beverage tax, commonly referred to as the soda tax, went into effect.   The beverage distributors are charged a 1.5% per ounce tax on sweetened drinks.  The drinks include soda pop, sports drinks, energy drinks, presweetened coffees, teas and sweetened water.  The city also taxes diet drinks.   As result of the soda tax,  the costs of that consumers are paying increased by 1.5% per ounce.

The Mayor of Philly is pleased that pleased  that the the City Council approved the tax last July.    The projected tax revenues allowed an extreme $91 million to be added to their 2017 budget.    Full details on the tax can be found on the City of Philadelphia’s website.

Soda Tax:  Some Like It, Some Don’t

Proponents of the tax believe it not only helps the city raise money; the soda tax promotes healthier drink  choices.   Retailers are not happy because their stores sales have been reduced as result of the higher cost.   In some cases, the tax on the sweetened beverages costs them more the product itself.    Despite what the Phillys mayor thinks should happen, in the for profit business world, increased costs get passed on to consumers.

As would be expected, the consumers that enjoy sweetened beverages and soda are not happy about the increased costs.   Sales in the retail segment have decreased.  Consumers are not buying as much soda or other sweetened beverages.  In some cases, they are reportedly opting to do their shopping outside of Philly city limits so that they can purchase cheaper beverages that are not subject to the tax.       At this point, it does not appear the restaurant industry has been hurt much by the tax.  This could be because most people still want a drink with their meal.

 

Gatorade is a Pepsico product that is subject to the new tax.

Reduced Sales and Layoffs

On February 2, 2017, Bloomberg news reported that Philly soda sellers are saying that the soda tax had reduced their sales by as much as 50 percent. The reduced sales are translating into layoffs.

On March 5, 2017, the New York Post reported the following layoffs that are being blamed on the soda tax:

  • PepsiCo blamed a 43 percent drop in business on the new tax.  As result, PepsiCo will be laying off 80 to 100 employees from Philly distributions plants.
  • Canada Dry laid off 25 workers
  • The retailer, ShopRite expects to let go of 300 employees from six Philadelphia stores.  ShopRites customers preferred large, inexpensive bottle so generic sodas.  Their customers received a big sticker shock because the price went up so much due to the tax being based on the number of ounces.

 

Mayor’s Thoughts on the Layoffs that Have Resulted from Reduced Sales

The Philadephia’s mayor’s office anticipated that soda and sweetened beverage sales would decrease about 27 percent.  The mayor, a Democrat, seemed to hope that the beverage companies would not pass the tax onto customers. In mid-February as soda distributors began to report layoff plans, Mayor Jim Kenney told the Philadelphia Inquirer, “Beverage companies] are so committed to stopping this tax from spreading to other cities, that they are not only passing the tax they should be paying onto their customer, they are actually willing to threaten working men and women’s jobs rather than marginally reduce their seven figure bonuses.”

 Mayor Kenny does not seem to realize that when sales are reduced, expenses must be reduced.  Most for profit companies will reduce expenses that are directly tied those sales.   Business centers that do not make adequate profits do not remain in business.    In this case, the demand for sweetened beverages in Philadelphia has decreased. Thus, not as many employees are need to distribute the products.   This decrease in demand is in addition to change in consumer preferences

Philadelphia’s soda tax passed in June 2016 and went into effect in January of this year. The 1.5-cent-per-ounce soda tax is expected to raise about $91 million annually.

 

What will the soda tax collected be used for?

According to preliminary numbers that have been released by the Department of Revenue, Philly collected $19.1 million dollars of sweetened beverage  tax revenue between January – March.   The city of Philadelphia plans to use the soda tax revenue to fund pre-kindergarten expansion, the renovation of  parks, libraries and recreation centers.  The soda tax will provide funding for pension plans that are facing a deficit.   The soda tax will also be used for paying back bonds.

Supporters of the soda tax are arguing that the Philadelphia layoffs are simply a case of companies trying to prevent other cities from passing soda taxes, by painting the taxes as dangerous for business.  “[Beverage companies] are so committed to stopping this tax from spreading to other cities, that they are not only passing the tax they should be paying onto their customer, they are actually willing to threaten working men and women’s jobs rather than marginally reduce their seven figure bonuses,”  Democrat, Philadelphia Mayor Jim Kenney told the Philadelphia Inquirer in mid-February, as soda distributors began to report layoffs plans. 

Bottom Line:

Other cities are watching how the soda tax “situation” works out in Philadelphia.  They may want to implment a sweetened beverage tax if the benefits outweighs the impact of lost sales revenue.

Business owners that rely on sweetened beverage sales should  be aware that there is a risk that this tax could be implemented in other cities.    When doing business planning, a sweetened beverage tax could be an opporunity or a threat



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