The 'unintended consequences' of Philadelphia's soda tax

In 2017, Philadelphia levied a 1.5-cent-per-ounce tax on "sweetened" drinks.  The city wanted to raise additional money to fund a universal pre-K program and reduce obesity.  What they got was entirely predictable to anyone with a basic understanding of economics.  Unfortunately, city fathers must have fallen asleep in economics class when the teacher explained the cause and effect of raising taxes on anything.

To economic ignoramuses, it's a seductive idea.  Sweetened drinks are wildly popular but lead to obesity, according to some studies.  Political leaders in the city began to salivate at the thought of all that cash pouring into their coffers from citizens who can't live without their Coca-Cola.  Besides, even if they drink less soda, that's a good thing.  They will switch to healthier alternatives like water.  They will lose weight.  And pre-kindergarten kids will get an early start on education.

And if you believe all that, I've got a bridge over the Chicago River I'd like to sell you.

National Review:

The health benefits turned out to be nil.  "The tax was ineffective at reducing consumption of unhealthy products," reports a new study by Stephan Seiler of Stanford, Anna Tuchman of Northwestern, and Song Yao of the University of Minnesota.  Poor Philadelphians were hardest hit by the tax because residents with the means to leave the city to make their soda purchases – the well-off – did so.  A 42 percent decrease in soda sales within city limits was more than made up for by a large increase in soda sales in stores within two miles outside Philly.  And the expected gusher of revenue didn't quite materialize either, as receipts fell about 15 percent short of projections.  "In summary, the tax does not lead to a shift in consumption towards healthier products, it affects low income households more severely, and it is limited in its ability to raise revenue," the study said.

Philadelphians without access to the suburbs declined the city's push to get them to drink less-fattening beverages.  "We find no significant reduction in calorie and sugar intake," the authors concluded.  (A different study in the U.K. found that those who consume the most sugar are the least likely to reduce soda consumption.)

In fact, it turns out the federal government – that's you and me – actually ended up subsidizing the purchase of soda by poor people through SNAP:

Apparently poor people in Philadelphia are willing to pay the extra price for a sweet drink.  What they aren't doing is switching to water.  How can such a huge tax increase lead to no decrease in sugar consumption?  The study didn't explore federal SNAP benefits, sometimes called food stamps, which can be used to purchase soda, suggesting a case of the federal government's subsidizing what Philadelphia's government is taxing.  A 2016 study found that sweetened beverages are the favorite item people buy with SNAP benefits, accounting for nearly 10 percent of such spending.  The way the soda tax is structured – it's levied at the point of distribution to circumvent the state's prerogative to levy sales tax – it shows up as a simple price increase in Philadelphia, meaning soda is still considered a non-taxable item for SNAP users.  It may be unwise for SNAP recipients to spend so much of their resources on soda, but people have a way of making the decisions they want to make regardless of nudging from politicians.

Another "unintended consequence" of the soda tax was – shockingly – a huge fall in soda sales for city businesses:

A back-of-the envelope 2017 study found that supermarkets were suffering $80,000 a month per store in lost beverage sales, but because of consumers' bundling their purchases, the total loss attributable to the tax in sales of all items was $300,000 a month per store.  Other, untaxed drinks also suffered sales declines within the city, suggesting people were simply saving up their shopping trips for when they left town.

Lost revenue, lost jobs – a simple lose-lose situation that was entirely predictable and was, in fact, predicted by opponents of the tax.  Meanwhile, residents of Philadelphia are voting with their feet and going elsewhere not only for their soda purchases, but most other groceries as well. 

When will they ever learn?