Would you believe that when the government levies a tax, people react accordingly?
The city of Philadelphia passed a 1.5 cent per ounce tax on soda and other sweetened and “diet” beverages, and if their goal was to reduce soda consumption, they succeeded.
According to some estimates, consumption of soft drinks has fallen 50 percent. Of course, “consumption of” really means “purchases of” – as we don’t know if people are purchasing soda outside of the city to avoid the tax. Common sense tells us many are.
For example, Denmark dropped their “fat tax” (a tax of $2.7 per kilogram of saturated fats in a product) after it had been in effect for just over a year because they found people simply ventured across the border to purchase their snacks.
Given the sticker shock many Philly residents felt, it’s likely they did the same. Just look below at some examples – like a $5.99 6-pack of Propel flavored water being hit with a $3.04 tax. And that’s before sales tax.
Predictably, the drop-off in sales caused by the excessive tax is leading to job losses. Philly.com reported that Pepsi is going to lay off about a quarter of their entire workforce in the city as a result. The company, which employs 423 people in the city, sent out notices Wednesday and said the layoffs would be spread over the next few months. The layoffs come in response to the beverage tax, which has cut sales by 40 percent in the city, PepsiCo Inc. spokesman Dave DeCecco said.
“Unfortunately, after careful consideration of the economic realities created by the recently enacted beverage tax, we have been forced to give notice that we intend to eliminate 80 to 100 positions, including frontline and supervisory roles,” DeCecco said.
And that’s just Pepsi! Bob Brockway, chief operating officer of Canada Dry Delaware (responsible for selling 20 percent of Philly’s sweetened beverages) announced plans to reduce his workforce by 20 percent.
There’s also a lesson in the Laffer Curve here, as the drastic decline in sales has caused the tax to garner far less revenue than was projected. PhillyMag notes that “to meet their revenue goals, the city needs to collect about $7.6 million a month, but a recent report says the city will bring in only $2.3 million in soda tax revenue for January.”
So who do they blame for the failure of the law thus far?
“The soda industry sunk to a new low today,” city spokeswoman Lauren Hitt said. “They are literally holding hostage the jobs of hard-working people in their battle to overturn the tax. Pepsi reported nearly $35 billion in gross income and $6 billion in profit last year…. The idea that they can afford to do that but ‘must lay off workers’ should make every Philadelphian very skeptical of whether these layoffs are actually due to the tax.”
Philly’s Mayor Jim Kenny accused soda companies of “price gouging” after seeing their new prices post-tax, as if he isn’t the man single handily responsible for it.
This is a level of economic illiteracy almost unparalleled. If Kenny were to propose raising Philly’s sales tax to 10 percent, we’d all agree everyone would be paying out 10 percent more for everything, no? So when he imposes a 1.5 cent tax per ounce on soft drinks, why is it a shock the price of soft drinks increases by that amount?
Given that this tax can account for almost half the product’s cost in some cases, soda companies would have to operate at a loss in those areas. The fact that they banked “$6 billion in profit last year” is irrelevant. Hitt only cited that number because the average reader will see it and think “wow, that’s a lot!” Profits are irrelevant; margins are what’s relevant, and there’s a zero percent chance companies will volunteer to operate at a loss on their products, even if it’s in only one city.
Once again the government is swinging a bat at business – and then crying foul when their target ducks.
[Note: This post was authored by Matt Palumbo. Follow him on Twitter @MattPalumbo12]