Rethinking the Restaurant Tax
In the heady days of late 2010, Mayor Suttle’s new tax was the talk of the town. To deal with shortcomings in police and fire pension funds, and to provide another source of revenue for the city, Suttle’s city government introduced a 2.5% restaurant tax, which would apply in addition to the 7% sales tax to purchases of meals at a restaurant or similar business.
Outcry was immediate and heated. It was the heyday of the Tea Party movement, and Suttle’s tax increases, which included a 15% property tax increase and a 40% car tax increase, were seen as intolerable. In the wake of the October 1st implementation of the restaurant tax, some restaurateurs even sued the city, claiming that the 2.5% tax was “unconstitutional, illegal and unenforceable” (the Nebraska Supreme Court would ultimately disagree in 2012).
Suttle’s public image deteriorated as a result of this and other tax increases, and he was subject to a recall election in early 2011, one crest of a nationwide wave of recall efforts against incumbents. While Suttle would narrowly survive the effort, he was unable to replicate that success in his re-election bid against current mayor Jean Stothert.
Stothert campaigned specifically against the restaurant tax in her 2013 bid, later promising to end it by 2015. Even after maintaining the tax in four consecutive city budgets, Stothert still claimed to be against it earlier this year.
However, in recent weeks, Stothert has actually extended the restaurant tax. Last Tuesday, the City Council voted to expand the tax to apply towards food truck vendors, and Stothert voiced her support of their decision, calling the decision a “matter of fairness.”
What’s wrong with the restaurant tax?
Initial complaints against the tax, while short-lived, focused on a sense of unfairness, of an unnecessary addition to the tax burden of businesses who were already charging customers a sales tax. Restaurateurs and city residents darkly predicted drastic changes in restaurant customer behavior, and a reduction in the flow of visitors from outside the city.
In the half-decade since the tax’s installment, none of these outcomes have materialized. Revenue from the tax has steadily increased in the years following, which not only makes it hard for the city government to cut the tax, it makes it hard for its opponents to claim it isn’t working.
Since restaurant owners can’t argue that the tax has killed their business, the only point legitimate point of critique against the tax is that it poses an added financial burden on the restaurant customers, regardless of whether it drives them away or not. This is the problem with the restaurant tax acting as an additional sales tax: it’s applied to the customer, rather than the business.
If the restaurant tax were applied to the business after the fact rather than to the customer for each sale, a higher-volume business could absorb some of the cost of the tax without affecting the customer.
Even with the tax’s function as an additional sales tax, it doesn’t seem wholly unreasonable. A trip to a full-service, dine-in restaurant in Omaha’s Old Market, or a fashionable steakhouse further west, is a luxury. Those who can afford that luxury can surely be expected to afford a few extra dollars in tax.
The problem here is that the restaurant tax is a blanket that covers the whole city, regardless of restaurant type or area. Omaha is home to food deserts, where eating fast food can be a more viable option than finding transportation to the nearest grocery store. People in these situations are still affected by the restaurant tax, but they’re being taxed on a necessity, not a luxury option.
What’s wrong with the restaurant tax expansion?
The City Council has voted 5–2 to extend the restaurant tax to food truck vendors. Supporters of the measure cited “fairness”. “Either you eliminate the tax for everybody, all at once, or you apply it fairly,” said Council member Aimee Melton.
Mayor Stothert, who, as we noted earlier, ran on opposition to the tax, supported the vote:
The City Council’s vote to apply the restaurant tax to food trucks is a matter of fairness. The Food Truck Association agrees this segment of the restaurant business should be added to the ordinance as the industry grows in Omaha. As Mayor, it is my responsibility to make sure city ordinances are enforced and applied uniformly and fairly.
How does the principle of “fairness” actually apply in this context? The extension of the restaurant tax to food trucks, as well as fast-food restaurants, is certainly “uniform,” as in applying to every member of a broad category without room for nuance. “Fairness,” however, implies some level of justice: the notion that a situation has been dealt with appropriately, not that it has been dealt with in the exact same manner as every other situation.
Looking at just a couple of different restaurant situations reveals that there can be significant differences between who and how the restaurants are being used. Besides the previously mentioned effect of food deserts, different demographics of people patronize different sorts of restaurants in different ways.
In the figures above, New Strategist Publications has calculated the national average spending of Americans on dinner at full-service restaurants, and snacks at mobile vendors respectively. From the diagrams, we can see that the base of customers who buy snacks from mobile vendors, such as food carts, is significantly younger than the base of customers who buy dinner at full-service restaurants.
Customers of one type of establishment for one type of meal are often totally different people, in totally different places in life, from those who buy from another place for another kind of food. However, the City Council has voted to treat significantly different situations exactly the same under the restaurant tax, under the banner of “fairness.”
This vote comes under the shadow of a pending lawsuit against the city by restaurant owner Michael Henery, who wants a $100,000 refund on the tax he claims is “unconstitutional.”
Why did the City Council vote on the issue before the court ruling? If they are concerned about “fairness,” the pending ruling by the Douglas County District Court on the Henery case should’ve satisfied them. It doesn’t seem that they have much to fear on that count. Henery and his sons come across more like spoiled children than dangerous litigators.
In response to the city’s request for the lawsuit to be thrown out, based on the fact that the state Supreme Court had already ruled the tax to be constitutional, Michael’s son Brandon said that the city was “in dreamland.” “They are just pulling every lawyer trick they know,” he told the Omaha World-Herald.
Lawyer tricks or not, the City Council has chosen to preempt whatever court ruling the District Court comes up with by capitulating to the Henerys and other complaining restaurant owners. It appears they’re less concerned with “fairness” after all, and more concerned with ingratiating themselves with the brick-and-mortar restaurant owners interest group.
It seems unlikely now that the restaurant tax will ever be repealed. Its revenue is too tasty a morsel even for the politicians who promised to destroy it. There are ways we could make it more “fair,” more just, and more equitable. Some of the revenue from the tax could be used to help solve the food desert problem, for example. Extending the tax to apply in the exact same way to significantly different situations isn’t “fairness”: it’s just a cop-out.
