Philly Soda Tax Might Not Be Regressive Even If It Doesn’t Reduce Sugar Consumption
Following up on Brian’s post: Let’s imagine a city with two families, the Riches and the Poors. The Riches earn $100,000 a year and the Poors earn $10,000. Each household consumes two 12-ounce sugar-sweetened beverages a day, and the city imposes a 1.5-cent-per-ounce tax on sugar-sweetened beverages. 365 x 2 x 12 x $0.015 = $131.40. Assume no behavioral adjustments (i.e., the tax doesn’t reduce sugar consumption by anyone). Also, assume full pass-through of the tax (i.e., each household bears the entire $131.40 out-of-pocket cost.)
Is the sugar-sweetened beverage tax regressive? On first glance, yes: the Riches pay $131.40/$100,000 = 0.13% of income, and the Poors pay $131.40/$10,000 = 1.314% of income. A tax that takes a higher percentage of income from the poor than the rich is the very definition of regressive.
But now assume that the revenues raised from the tax ($262.80/year) go entirely to fund universal pre-K. And since the Riches already send their children to private pre-K, let’s assume that all $262.80 is going to pre-K for the children of the Poors. Now is the soda-tax-plus-pre-K package “regressive”? Assume that the benefits of pre-K to the children of the Poors are equal to the amount spent ($262.80) (although research by James Heckman and others suggests that the benefits of pre-K are actually multiples of the amount spent). So the soda-tax-plus-pre-K package leaves the Riches $131.40 worse off and the Poors $131.40 better off (minus $131.40 for the cost of the soda tax plus $262.80 for the benefits of pre-K). Is a policy that makes the rich worse off and the poor better off in after-tax terms “regressive”? Seems hard to argue that it is.
A number of caveats:
— (1) Research suggests that not only do the poor spend more on sugar-sweetened beverages as a percentage of income, but they also spend more on sugar-sweetened beverages in absolute terms. Does that change the analysis? Not necessarily. My best guess based on the numbers is that low-income households bear a disproportionate share of the soda tax burden but reap an even more disproportionate share of pre-K benefits.
— (2) Not all the revenues from the Philadelphia soda tax will go to universal pre-K. The Philadelphia Inquirer reports that “nearly 20 percent” of revenues will go to “other city programs and employee benefits.” Does that also alter the analysis? Again, I’m not sure: even with some of the revenues siphoned off for other projects, I think it’s still the case that the benefits from programs funded by the tax flow primarily to lower-income Philadelphians.
— (3) Even if the soda-tax-plus-pre-K package makes life better for low-income Philadelphians, couldn’t the city do even better with a more progressive tax (e.g., a levy on ride-sharing services such as Uber)? Yes, of course (setting aside the debatable merits of taxing Uber). But the same can be said about virtually any policy. Even with the earned income tax credit (rarely described as “regressive”), we can imagine an alternative policy that would benefit low-income households more than the status quo. Is a policy “progressive” only if there is no imaginable alternative that would yield even greater benefits for those at the bottom of the income distribution?
A final caveat: While I’ve thought hard about various conceptions of progressivity/regressivity and about earmarked taxes (and am working with co-authors on projects addressing both topics), I am no expert on the particulars of the Philadelphia soda tax. So I won’t take a stance on Mayor Jim Kenney’s plans or say anything about the process by which the soda tax was enacted. My claim is limited to the following: A tax-and-earmark package may make low-income households better off — even if the tax itself falls disproportionately on low-income households — if the tax generates revenues that finance programs primarily benefitting those same households. And it strikes me as plausible that a soda tax, with a significant chunk of the revenues going to pre-K for children in low-income families, is a policy that fits that bill.
