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Experts, business community at odds on Kenney's soda tax

March 3, 2016

Kenneth Hilario, Philadelphia Business Journal


Mayor Jim Kenney introduced a soda tax that his administration estimates will generate approximately $95 million annually, but local businesses and experts are at odds about its impact.


On Thursday, Kenney delivered his first budget address of his mayoral term,introducing a 3 cents-per-ounce soda tax as a revenue source for universal pre-K. Kenney said it would not impact small business in Philadelphia.


"Small grocers, bodegas and convenience stores are already stocking and selling non-sugary beverages," Kenney said. "And they are doing that because customers preferences are already changing, even without a tax."


Local coalition Philadelphians Against the Grocery Tax, however, said the 3 cents-per-ounce tax would cause grocery costs to skyrocket, with small neighborhood spots and their customers bearing the bigger burden.


”This will be one more burden for overtaxed working families in Philadelphia,” spokesman Larry Miller said. “The mayor’s proposal comes even as low-income Philadelphians are facing an increase in Philadelphia Gas Works rates, as well as a proposed double-digit water rate hike.”


A 2-liter bottle of soda typically costs $1.50, but the tax would amount to $2.04, more than the cost of the actual bottle. The cost of a 12-pack of soda would nearly double to more than $8, according to Philadelphians Against the Grocery Tax coalition.


"Two bad things will happen: either they won’t be able to afford the high prices, or the higher prices will keep them from buying other products," said Enerolina Rodriguez, owner of Rodriguez Grocery in North Philadelphia.


"My business won’t be able to absorb these losses. This tax is unfair to small businesses like mine and to the working families who shop with us.”


A soda tax has been proposed in other cities, including Philadelphia, many times before. San Francisco considered a 2 cents-per-ounce tax, as did Philadelphia during the Nutter administration.


But Berkeley, Calif., is the only city in recent history that has been able to implement such a tax.


Berkeley's tax is only 1 cent per ounce, as opposed to Kenney's 3 cents-per-ounce tax.

"The initiative he laid out, we would be in 100-percent agreement with because it needs to happen, but what we disagree with is the funding mechanism," saidJohn Longstreet, president and CEO of the Pennsylvania Restaurant and Lodging Association, which has a local chapter Philadelphia Restaurant & Hotel Alliance.


"This drink tax, unfortunately, has the unintended consequence on impacting the people universal pre-K ... intended to help," Longstreet said.


He pointed to research that shows lower-income families are more likely to see their incomes affected by the soda tax – something Kenney also touched upon in his address although from a different angle.

"...the truth is that soda companies are the ones actually targeting their advertising at low-income, minority communities," Kenney said, hinting at the link between soda consumption and obesity.


Although the tax may dissuade people — including lower-income families — from buying soda, some local store owners support the tax.


“I support the soda tax because it’s funding programs that will help make my community stronger and, ultimately, increase business," said Julio Soto, owner of El Soto bodega on 15th and Tasker streets. "If customers decide not to drink sugary drinks, I can stock other drinks, but if the neighborhood I live in work in doesn’t have strong schools and safe streets, that’s a much bigger problem.”


Longstreet said restaurants, including mom-and-pop operations and other independent stores, would be impacted, since the average profit margin is between 4 percent to 6 percent, according to the National Restaurant Association.


"All of a sudden, they either have to charge so much for soft drinks [customers] would choose a glass of water instead, or they're going to have to absorb the cost with the distributor, which is going to further cut into that already slim margin," Longstreet said.


But Steve Wray, executive director of Economy League of Greater Philadelphia, said the impact would not be substantial to the business community.


"If you are going to put forward big transformational ideas, you have to find a way to pay for them," he said. "No tax is perfect, but this one is likely to have minimal impact on the city’s business climate and it advances crucial investments in education and neighborhoods that will fuel economic growth and opportunity.”


Kenney said it would not hurt the restaurant industry because it's already "trending away from the reliance on soda profits."


Rafael Ilishayev, co-owner of on-demand delivery company goPuff, echoed Kenney's sentiments and said it would not have a large, negative impact on business.


"The additional 3 cents will help the community, and we support the mayor," he said. "Any kind of tax increase is going to affect business, especially your bottom line. But with something like soda — soda is on the way out and healthier drinks are on the way in — I don't mind it."


Ilishayev said goPuff, which purchases products straight from suppliers, has seen a decline in soda compared to healthy drinks since it launched.


"Soda is definitely on the decline," said Ilishayev, who said people are still ordering it, but not on the same level years ago.


Sales of full-calorie soda in the country decreased more than 25 percent, according to the New York Times, which said soda consumption is experiencing "a serious and sustained decline."


Philadelphia is seeing this decline faster than the nation, NY Times reports, dropping 24 percent from 2007 to 2013 compared to the 20 percent national decline.


Susan Mudambi , professor in the marketing and supply c hain m anagementdepartment at the Fox School of Business, said consumers shouldn't be quick to act on the tax proposal, particularly since it's been shut down multiple times in the country and in Philadelphia.


"It gets a lot of people with strong opinions coming out," she said. "That's what makes it feel like it's not necessarily a proposal that is made with the expectation it's going to be enacted. It's a proposal proposed to get people talking about it."


Mudambi said Kenney is likely trying to get the conversation going on two topics: coming up with creative sources of income for the city, and opening a conversation about how soda is linked to childhood obesity and other problems common to Philadelphia.


"If I were going to give advice to consumers in Philadelphia, I would say don't expect this tax to be enacted any time soon," Mudambi said. "You don't need to go and stock up. It's unlikely to be passed."