In the News Column - March 11, 2016

Proposed soda tax is higher for fountain drinks

Mayor Kenney made waves this month by proposing the highest sugary-drink tax in the nation - three cents per ounce.

But closer scrutiny of his plans shows the administration is aiming even higher when it comes to fountain drinks, served across the city at restaurants, stadiums, convenience stores, and theaters.

The city wants to tax those at 4.5 cents per fluid ounce.

The higher rate, uncovered through an analysis of the soda-tax legislation introduced to City Council last week, came as a surprise to groups already arguing that three cents is too much.

"We certainly don't appreciate being blindsided with this on the back end," said Melissa Bova, director of legislation for the Pennsylvania Restaurant Association, whose members mostly serve fountain drinks. "For us, it's really frustrating."

The Kenney administration has pegged several key initiatives, including universal prekindergarten, to passage of the sugary-drinks tax, which it estimates would reap $400 million over five years.

In rolling out the plan this month, and in describing it since, Kenney and his team have made no distinction between the rates for bottled and fountain drinks, saying the proposed tax was three cents per ounce.

Responding to questions about the legislation's higher rate for fountain drinks, Kenney spokeswoman Lauren Hitt said Friday, "It's three cents per ounce on bottled drinks."

At the same time, she suggested there might be wiggle room on the fountain-drink rate.

"We are certainly open, and have been open, to hearing from all sides of the debate on this," she said.

While bottled drinks are mainstays at many of the city's corner and grocery stores, other businesses rely heavily on fountain drinks - think Wawa, the Wells Fargo Center, Wendy's. An economist hired by the American Beverage Association to review Philadelphia's proposed tax estimated that about 20 percent of the city's total sugary-drink sales come from fountains.

The separate rate for those drinks can be found by crunching the numbers in Kenney's legislation, which lays out different rules for bottled beverages and the syrup used in fountain machines.

The bottled drinks would be taxed at three cents per ounce. But the syrup would be taxed at 27 cents per ounce. That ounce of syrup, when mixed with water in a standard fountain machine, yields six ounces of soda. Thus, each ounce of fountain soda would be taxed at 4.5 cents.

"Because people use basically the same equipment whether you're sticking Dr Pepper in it or Coke . . . [manufacturers] all kind of stick with the same mix ratio," said economist Kevin Dietly, who does analyses for the beverage industry and has reviewed the Kenney proposal. "If you purchase a gallon of syrup, you're doing so with the intent of being able to produce six gallons of beverage."

The city is in mostly uncharted waters by proposing a soda tax - only Berkeley, Calif., has successfully enacted such a levy - and even further into those waters by proposing to tax fountain and bottled beverages at different rates.

Berkeley taxes all sugary drinks uniformly. That city calculates the tax on fountain syrup based on how many ounces of drink it would yield, per the manufacturer's instructions.

At face value, Philadelphia's proposed tax could add 36 cents to the cost of a 12-ounce can of soda - and 54 cents to the cost of a fountain drink of the same size.

But because the tax would be levied on distributors - not at the point of sale - it's not immediately clear how much of the increase would be passed on to consumers.

A study done three months after Berkeley's one-cent-per-ounce tax took effect showed that on average, consumers there were paying about half of the increase.

Bova, of the restaurant association, said she expected some Philadelphia restaurants would pass the entire cost on to consumers while others would absorb a portion. But, she said, because restaurants' profit margins are so slim, its unlikely any would be able to eat the entire increase.

Noting that Philadelphia already has a 10-percent tax on liquor sold by the drink, Bova said the city is unfairly targeting restaurants.

"This is a raw material for our business. This is something we have to purchase," she said. "So to tax us at a higher rate certainly doesn't make any sense."

Others, too, said they were unaware until recently that the plan would tax fountain drinks at a higher rate. Leaders of the newly formed No Philly Grocery Tax Coalition - composed of small-business owners, the American Beverage Association, and the union whose truck drivers deliver soda - said they only made the discovery when Dietly, the beverage group's economist, dug into Kenney's legislation.

"For the businesses where fountain drinks are a mainstay, this will be another blow which will ultimately result in decreasing tax revenue to the city should the tax be enacted," Larry Miller, the group's spokesman, said in a statement.

As for how the city settled on a 27-cent tax on each ounce of syrup for fountain drinks, Hitt pointed to the sugary-drink tax legislation twice proposed by Kenney's predecessor, Michael Nutter, and twice rejected by City Council.

That legislation, too, set a higher rate for fountain soda - though the distinction also was not highlighted by Nutter's administration or publicized at the time.

Asked Friday if the Kenney administration realized Nutter's formula resulted in a higher rate for fountain soda, Hitt said only that officials felt "precedent had been set" and knew the rate would be discussed during Council's budget hearings.

She added that administration officials are open to discussion on the fountain-soda rate, because lowering it wouldn't necessarily change their revenue projection of $400 million from the tax over five years.

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