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March 31st, 2010:

The Philadelphia soda tax will mean the end of Free Refills

Philadelphia is on the verge of passing a sweeping soda tax that could herald the end of restaurants offering free refills for Philadelphians.

It’s a dark day indeed for the City of Brotherly love.

So far, most of the media coverage of the proposal focuses on the two cents per-ounce tax it would impose on bottled and canned sodas and other sweet drinks. This would increase the cost of a typical can or bottle of Coke by about 60 percent.  But little noticed in the legislation is an eighteen-cents-per-ounce tax on the syrup that restaurants use to mix coke. This tax would increase the cost of serving a fountain drink by between 100 and 350 percent.

To see how, let’s take a look at the cost structure of fountain drinks and free refills.

Restaurant industry blog Foodservice Friends estimates that the total cost of serving a 20-oz soda is about 22 cents.

Here is their estimate of how that cost breaks down:

Syrup for a 20-oz cup of soda (8.75 oz with ice): $0.12

20 oz foam cup: $0.07

Lid for cup: $0.01

Straw: $0.015

Total Cost = $0.215 or rounded up $0.22 per soda

The point here is not the specific figures, but to show that syrup is the primary cost in every soda restaurants serve. And this assumes you’re paying $50 for a standard five-gallon case of syrup. That price seems right for off-brand sodas, but is rather low for Coca-Cola or Pepsi, which typically run about twice that price and are likely to cost even more.

So if the restaurant offers free refills—as it should—the syrup used in each glass is pretty much the only cost the restaurant incurs (other than labor) for each refill.

But what happens if the Philadelphia soda tax is imposed? The price of syrup is tippled. The proposal’s eighteen cent per-ounce tax on soda syrup, which seems small, causes a huge spike in the price per cup. On a typical five-gallon case of syrup, there would be $115.20 of taxes—which would double the cost of name-brand syrup and more than triple the cost of off-brand syrup.

What would happen if each refill of soda cost a restaurant 35-50 cents instead of the 10-15 cents it costs now? Well, I can’t image they’d offer free refills for too much longer. Either that or the price of a soda would have to start at $5 to maintain profit margins.

So what can you do to help stop the free refills killing Philadelphia soda tax? Head over to savephillyjobs.com and sign their petition. Then call your representatives and tell them you oppose a soda tax—it’s a good idea even if you don’t live in Philly —because a soda tax may be coming to your town next.

What does a soda tax look like?

The folks over at SavePhillyJobs.com have posted a PDF of Philadelphia’s proposed soda tax law. You can check out the official document here, but I’ve copied the important sections below.

(1) Sugar-sweetened beverage. Any non-alcoholic beverage which lists any form of sugar, including high fructose corn syrup, as a listed ingredient; or which is prepared at the point of sale by mixing water with any syrup which lists any form of sugar, including high fructose corn syrup, as a listed ingredient; except that sugar-sweetened beverages shall not include baby formula. Sugar-sweetened beverages include, but are not limited to, soda; non-100%-fruit drinks; sports drinks; flavored water; energy drinks; and pre-sweetened tea. Sugar-sweetened beverages do not include unsweetened drinks to which a purchaser can add, or can request that a seller add, sugar, at the point of sale.

The Department of Public Health is authorized to promulgate regulations to clarify the inclusion or exclusion of particular products.

§ 19-3602. Imposition and Rate of the Sugar-Sweetened Beverage Tax.

(1) There is hereby imposed a tax on the privilege of selling at retail any sugar-sweetened beverage, including but not limited to sales of pre-packaged beverages, sales of fountain beverages, sales at restaurants, and sales from vending machines.

(2) The rate of tax shall be two cents ($.02) per ounce sold of pre-packaged beverage; and 18 cents ($.18) per ounce of syrup used for sales of fountain drinks; all subject to the following adjustments:

(a) The rate for each calendar year (or such other accounting year allowed by the Department) commencing on or after January 1, 2011, shall be certified by the Department to the Chief Clerk of Council no later than the immediately preceding December 15. The Department shall calculate the rate by multiplying the then-current rate by the CPI Multiplier. The CPI Multiplier shall equal the ratio of the most recently published Consumer Price Index for All Urban Consumers (CPI-U) All Items Index, Philadelphia, Pennsylvania, United States Department of Labor, Bureau of Labor Statistics (“CPI”), on December 15 to the most-recently published CPI on the immediately preceding December 15. The rate shall be expressed in dollars per ounce, rounded to the nearest one-ten-thousandth of a dollar (four decimal places).

A couple thoughts on this:

Two cents per-ounce is a whopper of a tax. It is twice the rate that has been floated in New York and at the national level. If implemented, this tax would add nearly 60 percent to the cost of your typical twelve pack.

The eighteen cent per-ounce tax on soda syrup would almost certainly mean the end of free refills in Philadelphia, as it will increase the cost of the primary ingredient in soda by between 100 and 300 percent (depending on if a restaurant serves brand name or generic soda).

The tax is indexed to inflation. So unlike beer, the tax burden will not decrease over time.

Although it is being sold as a soda tax, it is structured in such a way that it will apply to a wide-range of beverages from juice, to chocolate milk, to energy drinks, to fancy coffee-based beverages.

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