KDP Keurig Dr Pepper Inc

By Mike Esterl 

The Philadelphia City Council approved Thursday a special tax of 1.5 cents per ounce on sweetened beverages, the first large U.S. city to pass such a measure.

The wide-ranging tax will include regular sodas, diet sodas, sports drinks, energy drinks and other nonalcoholic beverages with added sweeteners. It will be levied on distributors and could raise prices by 25% to 30% if passed along fully to consumers.

It represents a major blow to soft-drink giants Coca-Cola Co., PepsiCo Inc. and Dr Pepper Snapple Group Inc. The beverage industry argues such taxes are discriminatory and has spent more than $100 million since 2009 to defeat similar initiatives in more than two dozen cities and states.

The planned tax is slated to go into effect in January and is higher than the penny-per-ounce levy on sugary drinks in Berkeley, Calif., which in 2014 became the first U.S. city to pass such a measure. It's also broader than the Berkeley ordinance, which exempted drinks with noncaloric sweeteners.

The American Beverage Association, which represents major beverage companies, hasn't ruled out challenging the Philadelphia tax in court. It argues the country's fifth-largest city is overstepping its taxation authority.

A large coalition in Philadelphia including retailers, restaurants and the International Brotherhood of Teamsters also has opposed the tax, warning grocery bills would soar, jeopardizing thousands of jobs and hitting the poor the hardest.

Other parts of the country are eyeing similar measures, including Oakland, whose city council voted last month to put a penny-per-ounce tax for sugar-added beverages on the November ballot. Residents in San Francisco and Boulder, Colo., also could vote on a tax this fall.

The initiatives coincide with efforts by public-health officials to curb rising obesity and diabetes rates. The Food and Drug Administration recommends that Americans limit their daily intake of added sugars to about 12 teaspoons or 200 calories -- less than in a 20-ounce bottle of Coke or Pepsi.

Economists have estimated beverages have a price elasticity of about 1, meaning a 25% to 30% increase in prices could cut consumption by a similar percentage. In Mexico, though, soda sales have been rebounding after initially falling in 2014, when a roughly 10% sugary-drink tax was introduced.

U.S. soda consumption has been declining even without special taxes. Volumes fell 1.2% in 2015, the 11th straight yearly decline, according to industry tracker Beverage Digest. Diet soda sales are falling more sharply as Americans avoid zero-calorie, artificial sweeteners such as aspartame.

Philadelphia Mayor Jim Kenney steered clear of health arguments in proposing a sweetened-drink tax. Instead, he pushed the tax as an easy way to fund prekindergarten and other city services.

Mr. Kenney, who took office in January, initially proposed a tax of 3 cents per ounce. The city council amended the proposal last week, cutting the tax rate in half but expanding it to include drinks with diet sweeteners.

The American Beverage Association says the tax on distributors is effectively a sales tax requiring the state legislature's approval. It also says the tax violates the "uniformity clause" in Pennsylvania's constitution requiring uniform taxes across the state.

Mr. Kenney's administration has said it expects the tax to be upheld if challenged in court.

The city estimates the sweetened-beverage tax will generate $91 million in annual revenue after being fully implemented and that it will collect $409.5 million over the next five fiscal years.

A spokeswoman for Mr. Kenney said $210 million will be earmarked for 6,500 pre-K seats and $39 million will be spent on 25 community schools over five years. Another $49 million will go toward servicing the debt to improve parks, recreation centers and libraries.

In addition, $24 million of tax revenue is earmarked for the city's general fund and $65.6 million for other expenditures, including retrials for juveniles, added during final negotiations with council members.

About 59% of Philadelphians backed the initial 3-cent-per-ounce sugary-drink proposal in a poll published last month by Temple University and co-sponsored by the city's health department.

A poll earlier this month by David Binder Research funded by the American Beverage Association found only 38% of Philadelphia residents supported a 3-cent-per-ounce tax.

Write to Mike Esterl at mike.esterl@wsj.com

(END) Dow Jones Newswires

June 16, 2016 15:46 ET (19:46 GMT)

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