Soda tax revenues are falling in some cities. That can be a good and bad thing.
Preschool students, their teachers and parents demonstrate their support for Philadelphia's soda tax, which they say helps low-income children prepare for kindergarten. Cory Clark/NurPhoto via Getty Images
Tax soda, and people drink less of it. But successful soda taxes can create problems for the public health and development programs they support.
While research shows taxes on sweetened beverages like soda generally achieve their goal of reducing people’s consumption of the unhealthy products, experts say cities should consider the sustainability of such levies.
Only eight U.S. cities impose a tax on sugar-sweetened drinks. Proponents of those taxes say they help improve public health by reducing people’s consumption of sugar.
“Excise taxes can be great policy tools, if applied correctly,” Adam Hoffer, director of excise tax policy at the Tax Foundation, told Route Fifty last month. “They are typically used to target a product, and the revenue is then used to support the harms that are created from that product.”
Many cities, for instance, use revenue from so-called “soda taxes” to fund initiatives for improving the well-being of communities like health campaigns or public park upgrades. Philadelphia, the first major U.S. city to impose such a levy in 2017, uses nearly 40% of its sweetened beverage tax to fund the city’s free preschool program.
Between 2017 and 2022, $158 million of the total $409 million generated by Philadelphia’s soda tax went toward opening thousands of seats for preschool students, paying preschool employees and supporting preschool operations. Plus, a 2021 study from Rutgers University also found that the tax may have helped parents find more stable or higher-paying jobs because it allowed them to send their children to tax-funded preschool.
But from 2022 to 2023, revenue from the city’s soda tax dropped from $75.4 million to $73.4 million. Revenue decline, plus tax implementation delays due to a court case, has led to thousands fewer children enrolled in free preschool than projected.
Philadelphia Mayor Cherelle L. Parker, who was elected late last year, said she would maintain the sugary drink tax, despite her skepticism toward the tax in previous years. Parker, however, has not indicated if the tax’s revenue would continue to fund programs like free preschool.
Philadelphia’s experience highlights the dangers of relying on niche funding streams for major programs, Richard Auxier, principal policy associate at the think tank Tax Policy Center, told Route Fifty in an interview last month. And because soda taxes are designed to dissuade the purchasing of sugary beverages, the revenue from such levies could also take a hit in the long run, he said.
In Boulder, Colorado, revenue from its sugar-sweetened beverage tax fell from $229,451 in January 2021 to $220,010 this year.
And Seattle’s sweetened beverage tax revenue dropped from $23 million in 2018 to a projected $20.7 million this year.
A 2022 study from the University of Washington found that Seattle’s soda tax has paid off in some ways, such as funding the operation of food banks, child care subsidies for low-income families, purchase of fruits and vegetables for schools or child care facilities, and child health and early learning programs. But officials indicated earlier this year that falling tax revenues may force them to identify other funding streams to support those programs.
In large cities like Philadelphia, soda tax revenues may stabilize over time and serve as consistent funding sources, as residents who continue to buy soda are unlikely to leave the city limits to stock up, said Michael Lahr, co-author of the 2021 Rutgers University study.
But the results of some past excise taxes suggest otherwise. The Tax Foundation’s Hoffer said, “I would be hesitant to, say, use an excise tax to fund something long-term or something that you will need revenue for for a long time. Tobacco, for instance, has fallen over time.”
Anytime a program is funded by a specific tax, Auxier said that should raise red flags for policymakers. Officials should rather consider siphoning taxes like sweet beverage levies into their general funds, he said. Doing so can “achieve reductions in soda [purchases], but not have negative consequences for specific public programs.”
NEXT STORY: Biden pledges federal help for states in the Southeast stricken by catastrophic storm