Earlier this month, the cities of Shelbyville and Madisonville, Ky., passed ordinances that require restaurant customers to pay an extra 3 percent tax on food and drinks in addition to a 6 percent sales tax.
The laws resulted in split opinions.
Meanwhile, some government leaders and proponents have touted it as a positive move that will generate more money for the cities. The revenues will be spent on beautification efforts, events and tourism.
Shelbyville and Madisonville were able to pass these ordinances because of a Kentucky law that permits fourth- and fifth-class cities — towns with populations between 999 and 8,000 — to impose a restaurant tax of up to 3 percent. (Changes to city classifications went into effect in 2015, and those formerly classified as fourth- and fifth-class cities, like Shelbyville and Madisonville, were grandfathered in.)
The Kentucky League of Cities would like to broaden the state law to allow all municipalities to impose a restaurant tax if they so chose.
Along with the local option sales tax, KLC has made the restaurant tax expansion one of its priorities for the 2016 Kentucky General Assembly session. However, there currently is no pre-filed bill related to the restaurant tax.
The larger cities, which have bigger tax bases and more tourism, would like the option to diversify their tax revenue streams, said J.D. Chaney, the KLC’s deputy executive director.
“Otherwise, you are consistently going after property taxes, which are already too high, or occupational taxes that make us non-competitive,” Chaney said.
Louisville Mayor Greg Fischer applauded KLC but said he is more focused on the local option sales tax bill, which he has championed for years.
“While (local option sales tax) is my primary focus, and we are not pursuing a restaurant tax in Louisville, I appreciate KLC’s efforts to allow for more revenue tools at the local level so we can pursue the visions that our citizens share with us in a fiscally responsible manner,” he said.
A restaurant tax, or what is sometimes referred to as a meal tax, is not new. Major U.S. cities, including Indianapolis, Chicago, Minneapolis and Washington, D.C., all impose such taxes. However, there are many more cities such as Los Angeles, New York City, Nashville and Dallas that don’t.
Stacy Roof, president and CEO of the Kentucky Restaurant Association, is closely monitoring KLC’s push for the expansion of a restaurant tax. KRA is a membership organization that lobbies on behalf of restaurant owners in the state.
“That is always something we are opposed to,” she said. “I feel like it takes discretionary income away from people, and it makes people more wary of going out to eat.”
While proponents generally have argued that it is a tourism tax, Roof said the people who end up paying are local residents.
Anecdotal evidence from cities with a restaurant tax shows that a 3 percent tax isn’t “overly burdensome for the restaurant patrons,” Chaney challenged.
And the new tax would not harm restaurant operations, he said. As proposed by KLC, any city that imposes a restaurant tax would be prohibited from levying a gross receipts or net profit tax, an annual tax that business owners must pay. It would allow restaurant owners to pass the tax onto patrons.
“If the money is properly invested in the infrastructure and the promotion of tourism,” he said, “then you actually see an overall increase in demand at your restaurants.”