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Wednesday, February 26, 2020

Seattle’s Troubled Soda Tax: Watch That Siphon

Earlier this month, the Seattle City Council met in committee to discuss the Sweetened Beverage Tax passed two years ago. At issue is how the revenues generated from the tax should be spent.

To their credit, city officials are at least being honest about the mess they’ve created.

The impetus for the meeting was to discuss a proposal from Council member Mike O’Brien to set up separate funds for the Sweetened Beverage Tax and the Short-term Rental Tax (i.e. the “AirBnB tax”) and codify spending policies in order to enforce some discipline over how the money is spent. Last fall as part of the 2019-2020 budget process, O’Brien requested that the City Budget Office plan to do that, and report back to the Council by the end of March. They did so, but recommended waiting until this coming fall’s 2020 budget-writing process to actually pull the trigger on making the changes and writing the spending policies. To understand why, we need to rewind two years.

In the late spring of 2017, then-Council member Tim Burgess proposed instituting a sweetened beverage tax, modeled after similar ones in other cities such as Philadelphia and Berkeley. The policy objective was simple: improve public health by reducing consumption of artificially sweetened beverages. The reasoning behind it goes that if you want people to buy less of something, you tax it. Even before the tax passed there were arguments: about whether the city should be passing another highly regressive tax, about how effective it was likely to be, and most of all about how to spend the revenues generated. Since it is such a regressive tax, the Council members were generally of the belief that it could be justified if the revenues were plowed back into the communities that disproportionately paid the tax (soda is marketed toward poorer demographics, and consumption is higher in those groups) through food, health, and health education programs. And yet, some of the funds were diverted away to the Seattle Preschool Program (Burgess’s pet program), the 13th Year Promise program (Bruce Harrell’s favorite), and a few others more indirectly through the Community Advisory Board which has experts in a variety of fields who can lobby for funds to go to their field’s programs.

In the fall of 2017, with Burgess moving upstairs to the Mayor’s Office after Ed Murray resigned, Council member Lisa Herbold took over as budget chair. In a move designed to attract five votes for a new $25 million head tax, she structured the proposed budget so that several necessary increases to programs related to homelessness were tied to the revenues from the proposed head tax. When the head tax failed to garner the necessary votes at the 11th hour, Herbold and the rest of the Council were left scrambling to reassemble a new balanced budget.  They cut a few things, but mostly they cobbled together one-time sources of funding for 2018 while promising a “progressive revenue task force” that would work over the winter and recommend a new tax scheme (most likely a head tax again) that could cover the ongoing cost of the additional programs into the future.

We all know how that ended up: the task force recommended a $75 million head tax, Mayor Durkan negotiated it down to just under $50 million, it passed, the business community (led by Amazon) revolted and started a referendum campaign, polls showed the referendum was going to succeed, and the Council flipped and repealed the head tax.  What they didn’t do was answer the question as to how those new homeless programs would be funded long-term.

Then Mayor Durkan made the situation worse by adding more new homelessness programs in the summer of 2018, again using one-time funds and promising that her 2019-2020 proposed budget would work out the long-term funding.

Durkan’s proposed budget did address the issue — in part by dipping into the Sweetened Beverage Tax and performing some budgetary sleight-of-hand. The ordinance creating the soda tax limits the uses of the funds to particular programs, but some of those food access and health-education programs already existed and were being funded with the city’s General Fund dollars. So in a move that City Budget Director Ben Noble described as looking for “creative uses of the city’s available revenues,” the Durkan Administration replaced the General Fund dollars with soda tax dollars (without growing the programs) and then repurposed the General Fund dollars to cover the homelessness programs. The Council didn’t like that — especially O’Brien — but the short timeframe for writing the budget and the lack of other available revenue sources meant that they couldn’t correct it in the 2019 approved and 2020 “endorsed” budgets. Instead they passed the aforementioned request for the budget office to come back with a plan for ringfencing the soda tax revenues and tightening up the spending policies.

The Budget Office’s response was, to say the least, not what the Council wanted to hear. While not disagreeing with the principle of establishing a separate fund and codifying spending rules, City Budget Director Ben Noble argued that since no new revenue sources have been proposed by the Mayor or the Council, all of the issues that caused the Mayor to tap into the soda tax revenues last fall still remain and it would be unwise to legislate away the city’s flexibility with those dollars until it had options for other revenue sources to replace the sweetened beverage tax revenues. So to-date the Budget Office has not created the separate fund or proposed updated spending rules, and it plans to wait until the fall budget process to do so.

This puts the Council in a bind. As this staff memo points out, it increases the likelihood that the Mayor’s budget will continue to tap the soda tax revenues for other purposes, contravening the Council’s stated intent, and once again structure the budget so that it’s difficult to unwind during the budget process.

There are, of course, other problems with the sweetened beverage tax, not the least of which is it doesn’t appear to be meeting its policy goal of decreasing consumption. City officials want to reserve judgment until more time has passed; UW researchers are being paid by the city to study the effects on consumption and are due to deliver their next report in September. But in the meantime, the tax is exceeding expectations for revenues, an early sign that consumption is not, in fact, being driven down. Again, city officials claim that it’s too early to tell and that the revenues keep going up because soda distributors are still coming into compliance — admitting that their original revenue estimates were essentially wild guesses since they couldn’t accurately project soda sales, let alone how they would change. Nevertheless, the city has given up on their original expectation that soda tax revenues would decline up to 20% as consumption declines, and no longer budgets for such a decline.

That leaves Seattle in the worst possible situation: a new, highly regressive tax on low-income people that is not meeting its chief policy goal, but has been siphoned off in part for other uses and the city is now dependent on that revenue stream to fund things unrelated to the tax’s original purpose.

At Wednesday’s meeting O’Brien expressed his consternation over the regressive nature of the tax, which he justified because of the expectation that it would drive down soda consumption and the revenues would be invested back in the communities. But he said that he can’t support it if the revenues are used for other purposes. He and Noble disagree on whether there are alternative progressive sources of revenues; Noble said that he had looked and there were “limited” options, but O’Brien was more optimistic, saying, “If we wanted to tax something that disproportionately affected wealthy people, we could do that and find sources,” and “a yoga tax or a latte tax is certainly better than a Pepsi tax.”

O’Brien lobbied his colleagues to pass his draft legislation that would immediately set up the ringfenced fund and codify spending policies, then ask the Mayor to present a budget that presents some options for filling the funding gap. Noble, however, pushed back, saying that “the budget is not a competitive sport,” and that the Durkan administration wants the Council to provide recommendations on what other revenue sources to pursue or alternatively what funding to cut. That led to a snippy exchange between O’Brien and Noble, in which O’Brien claimed that the Council was clear originally when it established the soda tax, Noble replied that they were also clear that they would institute a head tax, and O’Brien retorted that Durkan had a role in the demise of the head tax.

The Council didn’t reach any conclusions, and will resume its discussion on June 26th.

Image: Pixabay

Kevin Schofield
Kevin Schofieldhttp://sccinsight.com
Kevin is a city hall reporter and the founder of SCC Insight, a web site focused on providing independent news and analysis of the Seattle City Council and Seattle City Hall in general. In a previous life, he worked for 26 years in the tech industry in a variety of positions but most notably as the COO of the research division at Microsoft. Kevin volunteers at the Woodland Park Zoo, where he is also on the Board of Directors. He is also the Vice Chair of the Board of Trustees of Harvey Mudd College.

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