KO Coca Cola Company

By Mike Esterl 

The U.S. soda industry faces its biggest threat yet in Philadelphia, which is weighing a tax that could raise the price of a can of Coke or Pepsi by more than half and sharply curb consumption of sugary drinks.

Jim Kenney, who is mayor of Philadelphia, the country's fifth-largest city, is pitching the budget measure to pay for prekindergarten and other popular services.

That is a shift in strategy from other municipalities like El Monte, Calif., and Telluride, Colo., that have lost taxation bids after playing up the health benefits of scaling back on sweetened beverages.

Philadelphia's proposed levy of 3 cents an ounce is three times higher than in Berkeley, Calif., the first U.S. city to pass such a measure. Philadelphia's city council plans to vote in June on the tax, which would cover regular soda and other sugar-added beverages including sports and energy drinks and ice tea.

The American Beverage Association, funded by Coca-Cola Co., PepsiCo Inc. and Dr Pepper Snapple Group Inc., has spent more than $3 million on television and radio ads opposing the measure. A large coalition including local retailers, restaurants and the International Brotherhood of Teamsters oppose the tax, warning grocery bills would soar, jeopardizing thousands of jobs and hitting the poor the hardest.

Even without the taxes, soda drinkers are peeling off amid concerns over rising obesity and diabetes rates. U.S. soda volumes dropped 1.2% in 2015, the 11th straight yearly decline, and per-capita consumption is at a three-decade low, according to industry tracker Beverage Digest.

"The answer is not regressive taxes. The answer is, for sure, collaborative innovation," said Coke Chief Executive Muhtar Kent at the company's shareholder meeting last month, referring to soda taxes in general. He cited industry efforts to introduce smaller package sizes and lower-calorie drinks.

Yet elsewhere in the country, Oakland's city council voted this month to put a penny-per-ounce tax on the November ballot. In San Francisco and Boulder, Colo., residents have been collecting signatures for a similar measure. Baltimore's city council is considering store signs warning that sugary drinks fuel obesity, diabetes and tooth decay. San Francisco will start enforcing a law requiring a similar warning on billboards and other public advertisements in July.

Mr. Kenney, Philadelphia's mayor since January, has steered clear of health arguments for sugary-drink taxes, instead selling his measure as an efficient way to generate nearly $100 million in annual revenue to fund thousands of pre-K slots, new schools, libraries, parks and recreation centers.

"I sense Americans generally and I know Philadelphians don't like the government telling them what they should and should not do," he said in an interview.

About 59% of Philadelphians backed the sugary drink tax in a poll by Temple University's Institute for Survey Research published earlier this month. The city's largest newspaper, the Philadelphia Inquirer, also has endorsed the proposal. Residents voted overwhelmingly last year to create a commission to pursue universal pre-K.

In his March budget speech, Mr. Kenney said he proposed the tax after a young inmate told him the education program at a local jail was "the best school" he had ever attended. "There is simply nowhere else to find this revenue," added Mr. Kenney, noting Philadelphia already has raised property taxes four times in the past five years.

But everyone agrees the hefty tax would alter behavior. The beverage industry estimates Philadelphia's consumption would fall by 79% in the first year and the mayor's office estimates a 55% drop. The average Philadelphian consumes about 14 ounces of sugar-added drinks a day, similar to national estimates. In Mexico, which introduced a sugary drink tax in 2014, soda sales volumes are rising again after initially falling. But the more modest levy only increased prices by about 10%.

A 3-cent-per-ounce tax would raise prices by 55% to 60% on average if fully passed to consumers, according to city and industry estimates. Popular discounted packages of soda at supermarkets such as 2-liter bottles and 12-packs of 12-ounce cans, which often retail for about $2 and $4, respectively, could double in price. Free refills at restaurants and movie theaters also could disappear.

Passage of the tax is far from certain. Three of 17 city council members have publicly opposed the measure and several have voiced concerns, including President Darrell Clarke, who has said the tax likely would have to be lowered to win enough support. Councilwoman Blondell Reynolds Brown proposed Thursday an alternative flat tax of 15 cents on most beverage containers. The beverage industry also hasn't ruled out suing to try to stop the levy.

Opponents, including concerned retailers, predict consumers will drive to neighboring counties for soda. A hefty tax would "turn Philadelphia into probably one of the biggest black market cities in the U.S.," predicted Harold Honickman, chairman of Honickman Group, which distributes Canada Dry and Snapple in the city.

The soda industry has spent more than $100 million since 2009 to defeat taxes in more than two dozen cities and states, partly by arguing they smack of a "nanny state." Philadelphia abandoned a proposal in 2011 after the industry contributed $10 million to a local children's hospital.

Meanwhile, money is pouring in from the outside. Michael Bloomberg, who tried unsuccessfully to cap portion sizes as New York mayor, has contributed hundreds of thousands of dollars to the local "yes" coalition. The coalition, Philadelphians For A Fair Future, is airing TV ads arguing the tax would "help lift our children" out of poverty.

Philadelphians Against the Grocery Tax Coalition, funded by the beverage industry, is airing an ad showing paper dolls falling to the ground and a voice-over warning there won't be enough money for pre-K if sales plunge. The group said it delivered more than 25,000 letters and petitions opposing the tax to city council members Thursday, and a protest rally earlier this month drew hundreds, many wearing "no soda tax" T-shirts, as Teamster drivers circled in Coca-Cola and Canada Dry trucks and honked.

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

(END) Dow Jones Newswires

May 19, 2016 15:21 ET (19:21 GMT)

Coca Cola (NYSE:KO)
Historical Stock Chart
From Mar 2024 to Apr 2024

Coca Cola (NYSE:KO)
Historical Stock Chart
From Apr 2023 to Apr 2024