As Charlottesville grapples with its proposed 2016 budget, one line item has garnered much of the attention: A proposal to increase the city’s meals tax from 4 to 5 percent. The penny-on-the-dollar hike is actually a 25 percent increase in the rate, and would generate an estimated $2.1 million in new revenue for the city’s general fund.
The tax increase was one of several short-term solutions to closing the city’s persistent school funding gap proposed by the Blue Ribbon Commission on Sustainable School Funding, a 13-member panel that presented its findings to the city in January 2014. City staff and some on Council say the increase will fund school and police budgets in a way that shifts part of the burden onto visitors, who according to a tourism analysis are responsible for 40 percent of current meals tax revenues.
“People in this community really want quality services,” said City Councilor Kristin Szakos. “And yet we’re reaching the point at which we can’t pay for these things.”
Restaurateurs last fought a proposed increase to the meals tax rate in 2012, and many are angry that it’s being revisited. Several said the market is so packed with eateries that the industry can’t afford to ask customers to pay more, and Charlottesville is risking killing a cash cow; the meals tax is expected to bring in $8.1 million this year, making it the fourth-biggest source of revenue in the city budget.
“Once we raise this tax, it will remain raised, and they will raise it again next time there’s a need,” said Peter Castiglione, co-owner of Maya. “And what happens if nobody goes out to eat? Now the schools don’t get their money, and we’re still penalized.”
As the debate heats up, we’re taking a look at the claims on both sides.
Is it a progressive tax?
No. But that’s not stopping the debate over this question.
In economic terms, a tax is progressive if the rate increases as a payer’s ability to pay goes up—as with the federal income tax. It’s regressive if those with lower income end up paying more of their income on the tax than people with higher income.
Flat-rate transactional taxes are pretty much universally understood to be regressive, said Mildred Robinson, a professor at UVA’s School of Law and a federal and state tax expert. A sales tax is a prime example, she said, “and a meals tax is another species of retail sales tax, just a special one.”
So why did the Blue Ribbon Commission call the meals tax “one of the more progressive taxes available” in its report?
“I think the sense was that eating out is a discretionary expense, and the most regressive taxes are the ones people don’t have any choice about at all,” said former Charlottesville Mayor and Commission member Bitsy Waters.
As Szakos put it, the meals tax “is not a tax on necessities, it’s a luxury tax.”
“But it’s not a luxury—that’s the thing,” said Robinson. “People eat out for recreational reasons and non-recreational reasons.” And the fact that the thing you’re taxing could be considered a discretionary expense doesn’t make a tax progressive, she said, “it simply means it may make it bite less than it would otherwise.”
How does Charlottesville’s meals tax stack up?
Supporters of the increase say the city’s meals tax rate is one of the lowest in the state, but according to UVA’s Weldon Cooper Center’s most recent summary of local taxes in the Commonwealth, the median meals tax levied by Virginia localities is 4 percent, which means Charlottesville is smack in the middle.
Narrow the focus to the state’s 39 independent cities, though, and Charlottesville is tied with five others for the lowest meals tax; the average rate in the group is 6 percent.
Will raising the tax rate discourage people from dining out?
Depends on who you ask.
Charlottesville Mayor Satyendra Huja, who has said he supports the rate increase, said he doesn’t think it will affect diners’ decisions. “How many times do you look at the meals tax?” he said.
Other municipalities have been here. Roanoke raised its meals tax rate from 5 to 7 percent in 2010 to fund schools, but brought the rate back down after two years. According to a Roanoke Times analysis, restaurants’ pre-tax revenues went up 13 percent over the two years the increased rate was in place.
But another Virginia case study draws a different conclusion. The Restaurant Association of Metropolitan Washington compared revenues at a chain with restaurants in Fairfax and Arlington counties after Arlington instituted a meals tax in 1991. They found the chain’s Arlington restaurant grew much more slowly than its Fairfax neighbor over the next 20 years, and wait staff there earned 20 percent less.
Rapture owner Mike Rodi said he believes the hike will affect customer perception. “They’re more hesitant to go out, and they tip less, so people who make their living in restaurants will start earning less,” Rodi said. And he said there’s no question his bottom line will suffer. One example: Rodi said he’ll have to shell out more to credit card companies, which charge a transaction fee that’s a percentage of the total sale. “The taxes are not exempted from that transaction fee,” he said.
Why aren’t councilors considering other measures?
They have, and they are.
The Blue Ribbon Commission recommended other measures to raise revenue, including increasing property and lodging tax rates. Several members said their role was merely to lay out those options, not recommend one over the other.
During early budget discussions, Szakos initially pushed for a real estate tax hike as well, a more diverse approach to raising revenue that she emphasized during her last campaign.
It would have been the first property tax rate increase in the city in 20 years. It didn’t happen.
At least one Councilor has said she’d like to consider dividing the burden of raising another $2.1 million between smaller hikes to the meals and lodging tax rates.
“I just want to make sure we have investigated all other remaining options to close this gap while there is still time to do so,” said Kathy Galvin. She may end up a swing vote on the issue; while Szakos and Huja support the one-penny meals tax increase, Dede Smith has been cool on the hike, and Bob Fenwick is adamantly opposed.