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Philadelphia's soda tax offers lessons for Cook County

Klein's Supermarket, a family-owned grocery store near the iconic Rocky steps at the Philadelphia Museum of Art, doesn't sell as many sweet fizzy drinks as it once did.

Since the City of Brotherly Love's so-called soda tax went into effect Jan. 1, sales of affected beverages are down about 60 percent at the store, said co-owner Steve Klein. Like Cook County's penny-per-ounce tax, Philadelphia's measure applies to thousands of sugar- and artificially sweetened beverages, but at an even higher rate of 1.5 cents per ounce.

"Once it passed and people saw the price, some people would just leave their drinks at the register and say 'Forget it. I'm not going to pay that,'" Klein said.

That may sound familiar to some shoppers and retailers in Cook County, where the sweetened beverage tax went into effect earlier this month.

In the early going of Philadelphia's measure, revenues have come in lower than expected amid persistent legal challenges from the beverage industry. But city officials say they've still raised almost $40 million that's allowed them to expand pre-kindergarten for 2,000 children, among other programs.

Cook County is paying close attention.

"One of the good things about having them go first is we're able to adjust our expectations based on their experience," said Ammar Rizki, interim chief financial officer for Cook County.

Philadelphia's revenue from the first six months of the sweetened beverage tax, ending June 30, came in at about $39.3 million — about 15 percent less than the original projection of $46.2 million, though closer to the revised projection of $39.7 million announced in June.

When Cook County lowered its own projection in June for this budget year, it did so in part because of steeper than expected declines in sweetened beverage consumption in Philadelphia and in Berkeley, Calif., which has a similar tax, Rizki said.

Now Cook County expects to bring in about $42.2 million for three months of collections in the current fiscal year after missing out on July, a month of peak beverage consumption, due to the tax being held up in court, Rizki said.

The county expects the tax to bring in $200.6 million over a full year, but will adjust that figure as needed as revenues come in, he said.

Opponents of the tax regard Philadelphia as more of a cautionary tale for Cook County than a how-to manual. Some retailers and wholesalers in Philadelphia say they've experienced significant declines in sales as consumers buy beverages beyond city limits. And PepsiCo and The Coca-Cola Co. have reported layoffs of collectively more than 120 people in Philadelphia resulting from the lost business.

Just one week into Cook County's sweetened beverage tax, some retailers say they're feeling Philadelphia's pain. Rashad Shatat, owner of Richie's Mini Mart, in south suburban Lansing, said his beverage sales are down 20 percent because shoppers are simply driving a mile down the road into Indiana. Shatat said he is considering selling his business.

There's also been widespread confusion about what beverages exactly should be taxed. Since its rollout, consumers have filed lawsuits against Walgreens, McDonald's and 7-Eleven for allegedly improperly applying the tax.

"The big lesson to take away from Philadelphia is to repeal the tax before it's too late. ... They've seen significant consumer flight in Philadelphia," said David Goldenberg, spokesman for the Can the Tax coalition, the beverage industry-funded effort to repeal Cook County's sweetened beverage tax.

But the view from Philadelphia Mayor Jim Kenney's office is that the impact to local businesses has been overstated by retailers — including Klein's Supermarket — that are aligned with the American Beverage Association, the industry trade group representing companies like Pepsi and Coke.

And though the revenue didn't match projections, the almost $40 million raised in half a year still represents a "meaningful" step toward the city's five-year goal of raising $405 million, primarily to expand pre-K and community schools, and rebuild parks, said Lauren Hitt, Kenney's spokeswoman.

"Honestly, we're very happy with how it's gone. The only thing we didn't expect was how dogged and dishonest the beverage industry would be with its campaign. ... Tell Chicago to expect the same. They have a lot of resources to burn," Hitt said.

Certainly in both places, the strong opposition from the beverage industry and retailers shows no signs of fading.

In Philadelphia, the beverage industry's lawsuit is headed to the Pennsylvania Supreme Court after losing twice in lower courts. In Chicago, the Illinois Retail Merchants Association's lawsuit will be considered in an appeals court after suffering a defeat last month that allowed the tax to move forward.

Despite such similarities, there are also stark differences to consider:

• Philadelphia's sweetened beverage tax is on distributors, while Cook County's is primarily applied at the checkout counter, because of differing state laws. The upshot? Food stamp purchases are exempt from Cook County's tax, but not in Philadelphia.

• With more than 5.2 million people, Cook County's population is more than triple Philadelphia's. Geographically, Cook County is 945 square miles, not counting lakes, dwarfing Philadelphia's 135 square miles. That means it's easier for Philadelphians to drive beyond city limits to avoid the tax than many Cook County residents.

• Cook County's tax is intended to primarily sustain existing county services, including public safety and health services. Philadelphia's tax aims to expand pre-K and rebuild parks.

So far, Philadelphia's sweetened beverage tax has either been a promising start or an abject failure, depending on whom you ask. The Tax Foundation, a Washington, D.C.-based tax policy nonprofit, issued a report Aug. 3 titled "Soda Tax Experiment Failing in Philadelphia Amid Consumer Angst and Revenue Shortfalls."

The Tax Foundation has in recent years received funding from Coke and Pepsi, among various other corporations, but maintains that its research is independent.

It is poor public policy to build programs and services, such as Philadelphia's pre-K expansion, with unstable revenue from a tax that discourages consumption of the beverages being taxed, said Jared Walczak, senior policy analyst for the foundation.

Meanwhile, health policy organizations laud what certainly appears to be a trend in public policy. Over time, the argument goes, such taxes will discourage people from drinking sugary drinks linked to obesity, heart condition and diabetes, and therefore shrink medical costs.

The Center for Science in the Public Interest, a Washington, D.C.-based health advocacy group, is especially supportive of taxing sugar-sweetened beverages, but defends policies like those in Philadelphia and Cook County that also fold in diet drinks made with sweeteners such as stevia or aspartame.

"We believe the smarter public policy is to tax sugary drinks, but we also understand there are political decisions to be made at the local level depending on the needs of the community," said Jim O'Hara, director of health promotion policy for the advocacy group.

Even if local beverage tax revenues decline over time because of decreased consumption, the tax still will have a positive impact on the county's hospital system, which spends more than $200 million annually treating health conditions linked to consumption of sugar-sweetened beverages, said Rizki, Cook County's interim chief financial officer.

And combined with spending cuts and other revenue streams, the tax will help the county offset rising costs and sustain services, he said. In other words, it's just one piece of a larger, more complex puzzle.

"The sweetened beverage tax was never advanced as some type of panacea," Rizki said.

The true impact of soda taxes, popping up in cities across the country, likely won't be known for years. But at least for some people already affected, the answer isn't so cut and dried.

At My Bright Beginnings, a child care center in Philadelphia, seven more children are receiving pre-K instruction because of funding from the soda tax, said Alison Scott, director of the Graduate Hospital location.

And that's a great thing, but, on occasion, even preschool directors like a cold sweetened beverage.

"It's definitely good for our center," Scott said of the tax. "As a consumer, it hurts to pay $2.25 for a (20-ounce drink) but I'll gladly pay it for the additional students."

gtrotter@chicagotribune.com

Twitter @GregTrotterTrib

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