Philly’s new tax on soda makes prices bubble up

Economist John Cawley was at a research conference in Philadelphia when he happened upon a sweet natural experiment in the making.

An expert in risky health behaviors linked to obesity, Cawley read a newspaper article about how an upcoming tax on sugar-sweetened drinks would be challenging to implement in the Philadelphia International Airport, which straddles the city border: soda would be taxed in some terminals but not others.

“The story even had a map, showing the city border running through the airport,” Cawley said. “I thought, ‘Oh my gosh, this is a perfect natural experiment.’”

Cawley, professor of policy analysis and management and of economics, has now published the results of that experiment; it offers the first evidence of the effects of Philadelphia’s soda tax, which was implemented Jan. 1.

The research, co-written with Barton Willage, a doctoral candidate in economics, and David Frisvold of the University of Iowa, appeared Oct. 25 in JAMA: The Journal of the American Medical Association.

Philadelphia’s tax of 1.5 cents per ounce on sugar-sweetened beverages is one of several passed by cities throughout the United States. These taxes have been controversial; Cook County, Illinois, recently repealed its tax, which had only been in place a few months.

In some cities, the goal is to increase prices and dissuade people from drinking soda to benefit their health. In others, the goal is to raise funds. The Philadelphia tax was imposed to pay for three programs that otherwise would not have received funding: expanded pre-kindergarten, community schools and a capital program to rebuild the city’s libraries, recreation centers and parks. 

The Philadelphia tax, and a similar one in Berkeley, California, is levied not on consumers but on distributors. Until now, it has been unclear just how much of Philadelphia’s tax on distributors would be passed on to consumers in the form of higher retail prices, said Cawley, who is co-director of Cornell’s Institute on Health Economics, Health Behaviors and Disparities.

Distributors could just pay it themselves to avoid a decrease in sales, Cawley said. “Or producers like Coke and Pepsi could say, ‘We’re not going to let cities use this tax to decrease our sales; we’re going to bear the brunt of it. We’ll just sell our soda cheaper to distributors, and that’s how we’ll keep retail prices the same,’” he said.

But in Philadelphia, just 36 days after the tax went into effect, stores raised their retail soda prices by a whopping 93 percent of the tax. “I was surprised by how much of the Philadelphia tax was passed on to consumers in such a short period time,” said Cawley.

And some untaxed airport stores, technically located in Tinicum, Pennsylvania, also raised their prices by exactly the amount of the tax after the taxed stores did, the study found. “It was impossible to predict in advance whether the untaxed side of the airport would limit the pass-through of the tax on the Philadelphia side, or whether the untaxed side would take advantage of Philadelphia’s tax to raise prices themselves,” says Cawley.

The 93 percent “pass-through” to Philadelphia consumers was significantly higher than occurred in Berkeley, California; previous research (including some by Cawley and Frisvold) showed that only 43 to 69 percent of the Berkeley tax was passed on to soda drinkers there.

Cawley and his team collected data in December before the tax took effect, and then again in January and February. Each time, they bought 20-ounce bottles of regular Coke or Pepsi at 31 stores. To make the comparison between the two sides of the airport as ideal as possible, the team bought soda only at newsstands, restaurants and retailers with outlets on both the taxed and untaxed side of the airport. “Every store we looked at on the Philly side had at least one exact match on the Tinicum side,” he said.

This study can’t answer whether consumers drank less as a result of the tax; the team is collecting sales and consumption data in Philadelphia to try to answer that question.

Other research suggests that consumers do, in fact, decrease their purchases in response to higher prices, Cawley said.

The research was funded by the Global Obesity Prevention Center at Johns Hopkins University and the Robert Wood Johnson Foundation.


Editor's note: This story has been updated to clarify that Philadelphia's tax was intended not to change consumer behavior but rather to raise money for unfunded programs.  

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Rebecca Valli