Philly soda, wage taxes draw scrutiny in Harrisburg

Two Philadelphia-specific taxes got the legislative spotlight Tuesday as the Senate Local Government Committee held a hearing on the city’s beverage tax and the House Finance Committee held a hearing examining legislation to alter the city’s wage tax.

Starting with the beverage tax, the Senate Local Government Committee, chaired by Sen. Scott Wagner (R-York), held a hearing that featured in-person testimony from several anti-beverage tax proponents, including outgoing Philadelphia City Controller Alan Butkovitz, representatives from Coca-Cola and Pepsi, and convenience store owners, all of whom testified about the negative impact the 1.5 cent-per-ounce levy on sugary beverages is having on the Philadelphia economy.

Butkovitz began by explaining that while the tax was implemented with the laudable goal of providing funding for pre-K programs and citywide improvement projects – all the while encouraging healthy eating habits – it has resulted in “an unnecessary bait-and-switch” with the city’s wage tax.

“We cannot allow a single tax like the beverage tax to eliminate the progress these businesses have made in our communities,” Butkovitz emphasized. “Over the last few years, Philadelphia has had a habit of singling out businesses through tax hikes and not realizing the ultimate impact to the hard-working families that support our communities,” he said.

“Unfortunately, the initial goal of the beverage tax has fallen short. We signaled a few months ago that beverage tax revenues are not going to meet projections this year. I expressed my concern that if revenues continued on the same path, the city could fall behind its projections by $15 million or more a year. Over a five-year period, that’s $75 million – real money.”

The committee heard in person from some of those affected. Jeff Brown, CEO of Brown’s Super Stores, Inc., which owns several supermarkets in the Philadelphia area, testified that he has 210 fewer associate positions in his stores as a result of the beverage tax.

“The beverage tax has cut beverage sales by half at our 13 ShopRite stores in the city and created storewide sales drops that vary from 10 to a whopping 25 percent,” he said.

“In my six ShopRite stores alone, sales are down an average of 15 percent storewide. And my beverage sales are down nearly 60 percent since the tax took effect in January. We know that shoppers are going outside the city to buy their beverages – and they are taking all their grocery dollars with them.”

The committee also heard from early-education advocates and health associations about the benefits of the beverage tax, including written testimony from Philadelphia Mayor Jim Kenney and Philadelphia City Council president Darrell Clarke that provided a firm defense for the city’s implementation of the beverage tax.

“While several funding alternatives were proposed and considered, an overwhelming majority of City Council determined that the 1.5-cent-per-ounce tax on sugar-sweetened and artificially sweetened soft drinks was the broadest, fairest funding option,” they stated in joint testimony. “This tax – and its associated programs – represents an innovative, cost-efficient local funding solution to solve universal challenges. The City of Philadelphia, which has continued to pass balanced budgets and increase investments in our children while actually lowering taxes in the next fiscal year and significantly improving our credit rating over the last five years, has continued to focus on local solutions.”

Many of the committee members speaking out on the tax did so not in opposition to the goals of the revenue, but to its source and effect on the business community and lower-income consumers.

“This conversation that we have today will not be about preemption, but will be about the policy: how it works, how it doesn’t work and, then, maybe suggestions about what we do going forward – how we find alternative means and alternative revenues to support those programs where it is most needed,” said Sen. Anthony Williams (D-Philadelphia). “It may not happen tomorrow, but it will happen – and it should happen. In the meantime, though, there are many families that are suffering. Suffering, because they can’t afford the products they used to afford or suffering because they are losing hours on the job. Those are realities and those are truths that we have to face and be honest about, regardless of where you stand on the fact that we have to support pre-K or repairing recreation centers.”

Others viewed the tax as a breach of the social contract entered into with some grocery store owners that were incentivized by the state and city to locate in non-ideal areas to provide more grocery options to Philadelphians.

“I think this appears to be what is happening all over Pennsylvania,” Wagner stated, equating the beverage tax to a proposed severance tax on natural gas. “What we do is, we find government changing the rules on businesses. Well, it’s no wonder that businesses are leaving Pennsylvania or don’t want to come to Pennsylvania – the city of Philadelphia is being affected dramatically.”

Philadelphia’s beverage tax is the subject of ongoing litigation currently before the Pennsylvania Supreme Court. Previously, the Philadelphia Court of Common Pleas and Commonwealth Court have dismissed constitutional challenges to the tax.

Though just a footnote in the beverage tax hearing, Philadelphia’s wage tax and its effect on suburban municipalities was the focus of a hearing before the House Finance Committee Tuesday morning.

Primarily discussed was House Bill 1312, legislation sponsored by Rep. Scott Petri (R-Bucks) that would remove Philadelphia’s preemption of local taxes by allowing those working in Philadelphia that commute from outside of the city to pay their local tax first and receive a credit against the Philadelphia non-resident wage tax.

Currently, as a result of the Sterling Act, a Depression-era law giving Philadelphia broad authority to enact resident and non-resident wage tax (also known as a commuter tax), none of the wage tax paid in Philadelphia by non-residents is returned to a worker’s home community – a difference from other local wage taxes across the state.

According to Petri, this difference has led to funding crises in some communities.

“Over the years, a lot of my municipalities have enacted an (earned income tax) to supplement their revenue to pay for police, fire, etc.,” said Petri. “So, what the bill is aimed to do is, when you pay our local EIT…you are going to get a credit against a Philly wage tax. We don’t want to take away all of the Philly revenue because we realize there is a cost to the city of Philadelphia for providing safe places to work, trash, police and etc.”

Additionally, Frank O’Donnell, a supervisor in Bucks County’s Northampton Township, said the current commuter tax makes it difficult for municipalities to budget and raise revenue.

“The impact of this tax on Northampton is, if we looked at the earned income tax dollars that Northampton would get if there wasn’t a Sterling Act, we’d be roughly at $8.5 million. We lose 15 percent of that to the city and the super credit. That is such a substantial piece of our budget that it just makes it extremely difficult as we are going through what we are right now with what are our needs for roads expansion, what are our needs for new police stations…and look at all of those other issues,” he said.

Meanwhile, Minority Chairman Jake Wheatley (D-Allegheny) argued that the discussion related to the Sterling Act changes should not occur in a vacuum but, rather, as part of a holistic review of the tax structure of the entire commonwealth and its subsidiary local governments.

“I think it is important we do it in a rational way – in a way that grows our regions and the commonwealth so we get away from this harming someone to benefit someone else – as best we can,” he said. “I learned a long time ago that with tax policy, someone is going to end up on the wrong side of it, but we should try to make sure that whatever we do is something we can sustain.”

Jason Gottesman is the Harrisburg Bureau Chief of The PLS Reporter, a news website dedicated to covering Pennsylvania’s government.