Two weeks ago, we pointed out that when Philadelphia became the first US city to pass a soda tax last summer, city officials were eagerly looking forward to the surplus-tax funded windfall to plug gaping budget deficits (and, since this is Philadelphia, the occasional embezzlement scheme). Then, one month ago, after the tax went into effect on January 1st we showed the tax applied in practice: a receipt for a 10 pack of flavored water carried a 51% beverage tax. And since PA has a sales tax of 6% and Philly already charges another 2%, the total sales tax was 8%. In other words, a purchase which until last year came to $6.47 had overnight become $9.75.
What happened next? Precisely what most expected would happen: full blown sticker shock, and a collapse in purchases. Just two months into the city’s sweetened-beverage tax, supermarkets and distributors are reporting a 30% to 50% drop in beverage sales and - adding insult to injury - had started planning for layoffs.
Fast forward just a few days later, when these warnings are becoming reality. According to the Philadelphia Inquirer, with sales slumping as much as 40% because of the new Philadelphia sweetened beverage tax, Pepsi said last week that it will lay off 80 to 100 workers at three distribution plants that serve the city. And since Pepsi employs 423 people in the city, it means that as much as 20% of its employees will be out of job due to a disastrous ordnance that was meant to provide additional municipal funding and instead will now lead to an increase in unemployment, coupled with a general decline in consumption, not to mention tax revenues for the city of Philadelphia.
The bottling giant sent out notices last Wednesday and said the layoffs would be spread over the next few months. "The layoffs come in response to the beverage tax, which has cut sales by 40 percent in the city, PepsiCo Inc." spokesman Dave DeCecco said. “Unfortunately, after careful consideration of the economic realities created by the recently enacted beverage tax, we have been forced to give notice that we intend to eliminate 80 to 100 positions, including frontline and supervisory roles,” DeCecco said.
The layoffs will occur at plants in North Philadelphia, South Philadelphia, and Wilmington. The plants are run as independent businesses required to report profits and losses to the company.
City hall was, predictably, livid: mayor Jim Kenney's administration lambasted the news, pointing to Pepsi's overall profits and the benefits of the expanded pre-K program that the 1.5-cent-per-ounce tax funds. Kenney said the tax, which was aimed at paying for nearly 2,000 pre-kindergarten slots and other programs, raised $5.7 million in January, more than double what city officials had projected. As of this week, the program also has created 251 jobs in the city, mostly full-time pre-K teaching positions, the city said. There is just one problem with that math: the offset to the newly created jobs is 100 jobs lost at just one company, which means that the job losses from the soda tax will eclipse any pre-K job creation by the time the full impact of the soda tax ripples through the city's retailers.
So with math clearly not the city's strong suit, it promptly reverted to what it is far stronger at: pandering.
“The soda industry sunk to a new low today,” city spokeswoman Lauren Hitt said. “They are literally holding hostage the jobs of hard-working people in their battle to overturn the tax. Pepsi reported nearly $35 billion in gross income and $6 billion in profit last year.... The idea that they can afford to do that but ‘must lay off workers’ should make every Philadelphian very skeptical of whether these layoffs are actually due to the tax.”
Hitt also said the company and the rest of the beverage industry had spent hundreds of thousands of dollars lobbying against the tax. "The idea that they can afford to do that but 'must lay off workers' should make every Philadelphian very skeptical of whether these layoffs are actually due to the tax," she said.
Actually, yes they are, but what has become apparent is that was the city's hope that Pepsi would ignore losses at the regional level, and use profits from other geographic operations to subsidize Philadelphia's losses. Alas, that's not how capitalism works, and Philadelphia is starting to realize this and it is not happy.
Neither, for that matter, are Pepsi's employees. Outside of the North Philadelphia plant Wednesday, Ed Langdon, a 40-year employee who shuttles products between warehouses, said the cuts are the most drastic he's seen in his time at Pepsi according to Philly.com. Langdon, whose job is safe, said workers have been told the plant will decrease production of jugs of iced tea and canned soda.
"It's managers, it's drivers, it's people who go out and put the soda on the shelf. It's all across the board. It's everybody. I was sick last night when I heard," Langdon said. He also noted that the layoffs were seen coming from afar: some colleagues who are paid on commission were seeing drastic cuts in weekly pay. "The trucks are going out and they're coming back with the soda on it," he said. "No one's buying it. It's just not happening."
Desperate to save face with an increasingly angry population which has seen its soda prices soar due to mandatory local government intervention, just minutes after news of layoffs broke the city sent out a release announcing that its pre-K program has created 191 teaching positions and 60 support-staff jobs. The average pay for the positions, more than half of which are full time, is $14.72 an hour.
However, as we reported in late February, the Pepsi layoffs are just the tip of the iceberg. Recall that there were already numerous reports from bottlers and supermarkets of steep beverage sale declines since the tax went into effect in January. Last month, Canada Dry Delaware Valley said it would lay off 35 people due to declining sales. Jeff Brown, who owns six ShopRite stores in the city, said he’s had to slash employee hours and believes as many as 300 jobs could be cut. In other words, 250 jobs created and roughly double that already on the chopping block.
Meanwhile, Pepsi has explained to city hall what it can do to stem, and even reverse, the job losses: undo the tax.
DeCecco said the Pepsi jobs would be restored if the tax — currently under appeal and awaiting an April hearing — is struck down in court.
The city has pointed to higher-than-expected revenue numbers in the first month of collection, and restaurants who report being largely unaffected by the tax, to argue the industry could be exaggerating sales declines in an attempt to prevent the enactment of similar taxes in other cities or to gain a favorable outcome in court.
The Pepsi spokesman said there was nothing political about the layoff announcement, and in this particular case he is right: it is all about the bottom line.
“This isn't something we take lightly or want to do, and we are committed to working with our employees and the union to treat impacted individuals with the care and dignity they deserve,” he said.
Pepsi may end up winning as the tide of public opinion is starting to turn against the mayor. Anthony Campisi, a spokesman for a coalition of retailers, bottlers, and unions opposed to the tax, said it was unfair for the city to blame the companies for the job loss.
“It’s the mayor who’s to blame for the economic and human impact of the tax,” Campisi said. “And its offensive to blame the impact on Philadelphia businesses that are no longer sustainable because of it."
But the straw that just might break the municipal camel's back in the deeply democratic city would be if the Teamsters - the backbone of any democratic administration - cry bloody murder, which they are starting to do.
Danny Grace, secretary-treasurer for Teamsters Local 830, which represents many of the employees affected, said in a statement: “Our worst fears have been realized today. ... This terrible news, although not surprising, is particularly disastrous for the members of Teamsters Local 830, who rely on a strong soda industry for their livelihoods.”
Will Philly's soda tax be the latest attempt by an intrusive local government, demanding an ever greater share of the pie, seeing its efforts blow up in its face, and will City hall have no choice but to reverse course handing the local retailers a quick victory? For now the stalemate remains, but a few thousands more layoffs, and Philly's soda tax experiment will promptly end up on the garbage pile of "brilliant" bureaucrat ideas gone badly wrong.