Philly’s tax on soda made prices bubble up

An expert in risky health behaviors linked to obesity, Cawley read a newspaper article about how an upcoming city 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.

Philadelphia's tax of 1.5 cents per ounce on sugar-sweetened beverages is one of several passed by cities throughout the United States. The goal is to increase prices and dissuade people from drinking soda to benefit their health. These taxes have been controversial; Cook County, Illinois, recently repealed its tax, which had only been in place for a few months.

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. 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 of 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.