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Philadelphia’s tax on drinks with a sugar-based sweetener or artificial sugar substitute is not bringing in as much revenue as originally projected. As a result, the city will enroll fewer children in its pre-K and community schools programs. Why is soda tax revenue dictating school enrollment? That’s a good question, and one more states and localities should consider when designing these taxes and dedicating the revenue to specific services.
“If you want less of something, tax it” is generally true, but not the whole story of every excise tax. Yes, governments tax cigarettes to stop people, especially young people, from smoking. But governments don’t tax gasoline to stop people from driving; they do it so those using the roads help pay for them (i.e., the tax acts as a “user fee”). Marijuana taxes probably fall somewhere in the middle. States that legalized the drug don’t want to encourage its use but also are not exactly disappointed with all the new revenue they’re collecting.
Different taxes can accomplish different goals. That’s why it’s imperative that governments clearly define their goals before designing and levying these taxes.
Two methods for taxing soda illustrate this distinction. If the government’s goal is reducing obesity and the other negative side-effects of sugar consumption, then they should tax the drink’s sugar content. Taxing sugar would make sugary beverages more expensive and thus encourage consumers to purchase healthier alternatives—and that might then encourage producers and sellers to stock healthier options.
However, if the government’s goal is solely to raise revenue then it should tax beverage volume and tax as many drinks as possible. Philadelphia did this (at 1.5 cents per ounce) because its principal goal was not improving residents’ health but funding education programs.
It’s common for states and localities to dedicate part of cigarette or marijuana tax revenue to popular programs like health care or education because it makes passing the tax an easier political lift. But it’s rare that an excise tax is the sole source of revenue for such a large program as in Philadelphia. And worse, this is a bad match because education costs are in no way related to soda purchases. In fact, they’re trending in opposite directions.
As one year’s worth of data already show, soda tax revenue is not easily predicted and more importantly may not increase over time. In contrast, education spending tends to go up because it is politically popular, as noted above, and is subject to demographic and economic factors outside policymakers’ control. For example, cost factors include the number of eligible children (particularly the number in poverty and the number who speak English as a second language) and the cost of hiring teachers (partially determined by the labor market and cost of living). These factors can help push costs up in a diverse and relatively expensive city like Philadelphia.
Philadelphia Mayor Jim Kenney wants to expand access to education and particularly pre-K programs. That’s a worthy goal. Pre-k programs have been shown to have positive effects on school readiness, especially for economically disadvantaged children, and lead to better life outcomes (such as higher incomes) for the children enrolled in them.
But relying on the city’s soda tax to fund these education program is problematic. The revenue raised is likely to have a volatile (and possibly negative) trend over time, in part because the tax can be easily avoided by purchasing beverages outside Philadelphia. That said, the tax did raise $80 million in its first year. It can be part of the solution. It just should not be the sole revenue source for the mayor’s education programs, or as the gap between revenue and spending continues to grow, more and more students will miss out on these educational opportunities.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Matt Rourke/AP Photo