As a way to pump up a failing local economy and to also encourage healthy eating, the city of Philadelphia became the first city in the nation to pass a soda tax. The tax was passed last summer and went into effect January 1st. Recent register receipts show the tax adds up to 51% which meant overnight the cost of things like flavored waters shot up. This bill did not mean people just paid the higher price, and the taxes came rolling in. In practice, it meant sales dropped and major jobs were slashed across brands.
Two of the major employers in the area, Coca-Cola and Pepsi had to make sudden and unexpected cuts to their workforce. Sadly a bill that was supposed to help the local economy is forcing tough choices for the families now without jobs. Instead of trying to make healthy eating choices they are faced with worrying about how to keep any food on the table.
While many had concerns about the tax, it seems the last person to fully understand what it would entail was the mayor Jim Kenney. It makes sense to see prices rise on the heavily taxed items but he was quick to blame retailers for passing the taxes on to their customers. It is pretty basic economics that as the retailers are forced to pay the levies that the customers will also see extra costs. Perhaps Kenney expected the retailers to just pay the higher taxes out of pocket and not charge the customers. This is not how it works.
According to a recent report about the fumbling reply of Mayor Kenney:
“Philadelphia Mayor Jim Kenney fought hard to pass a new tax on soda and other sugary drinks. He won, and the 1.5-cents-per-ounce tax is now in place, affecting both merchants and consumers, because that’s how taxes work. Businesses pay the levies, and they offset the cost by charging higher prices. That is as basic as it gets. The only person who doesn’t seem to understand this is Kenney, who is now accusing business owners of extortion. “They’re gouging their own customers,” the mayor said.”
Mayor Kenney was not happy with the public backlash from residents about the sudden hike in costs. He even went as far as stating that the new taxes were not going to be seen by the customers, that the retailers were the only ones being taxed. He has accused retailers who began posting notices explaining the taxes and increased cost were misleading and wrong in passing on the higher costs.
The new tax was explained quickly in a recent report with an easy to follow example. Here is how the tax worked on a single purchase of some flavored water:
“…a receipt for a 10 pack of flavored water carried a 51% beverage tax. And since PA has a sales tax of 6% and Philly already charges another 2%, the total sales tax was 8%. In other words, a purchase which until last year came to $6.47 had overnight become $9.75.”
The idea that customers were not going to be impacted by the 51% tax seems outlandish. He is also almost confused that the hike in taxes changed the way people shop. Supermarkets are seeing a 30-50% drop in beverage sales. Since retailers do not benefit from the tax, this is a major profit drop. An owner of six ShopRite stores in Philadelphia will lay off 300 workers. Other retailers are reporting the need to let 20% of their staff go.
As retailers sell less, they also take fewer products from distributors. Philly Coke, the area Coca-Cola distributor, has already needed to lay off 40 workers as their sales dropped 32%. Pepsi described it’s laying off of 80-100 workers as an “unintended consequence” of the new tax. Pepsi product sales fell 40%.
When contacted about the job cuts and the negative impact of the tax on sales, the mayor’s office refused to look into the statistics and called them all “fake news.” A spokesperson for the mayor’s office, Mike Dunn stated:
“We have no way of knowing if their sales figures and predicted job losses are anything more than fear-mongering to prevent this from happening in other cities.”
Dunn went on to theorize that at some point shortly customers would adjust to the huge price jumps and again start buying the products at the previous level. He also shared the mayor’s confusion as to why the retailers passed the cost increases down to the customers.
Mayor Kenney lashed out against the reports about the job layoff and placed the blame on the soda companies. In an email Kenney said:
“I didn’t think it was possible for the soda industry to be any greedier. They 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.”
While both Coca-Cola and Pepsi took huge hits because of the tax, they are not the only companies seeing their product sales dropping rapidly. Canada Dry Delaware Valley, which is responsible for about 20% of the overall soda products sold in the city, saw a dramatic dip in sales as well. Their sales dropped 45%, and they laid off 35 workers in March.
Before the tax going into practice on January 1st, it was sold as the golden ticket to support and expand education in the city. It seems the assumption being that the overall sales rates would not change and that the tax money would suddenly solve all of the money problems facing the area. Instead of fixing the educational system, it seems the new failed tax exposed a lack of understanding in the mayor’s office of basic economics.