Eat. Drink. Pay.
Restaurants oppose it. The county says we need it. The fight over a meals tax is heating up.
Henrico County is getting ready for a gigantic food fight.
Restaurant owner Joe Trak hopes he doesn’t get caught in the crossfire.
The proprietor of Trak’s Greek and Italian Restaurant staunchly opposes plans to impose an additional 4 percent tax on Henrico businesses that sell prepared food and drinks.
“The county should get the money from someplace else and leave the food business alone,” Trak says, just hours before the dinner rush at his upscale eatery on Quioccasin Road.
County leaders estimate the permanent new tax would generate $18 million annually for Henrico public schools. Trak says taxing restaurants is the wrong idea, especially with some eateries struggling to survive.
“We can’t keep just asking people to pay more and more and stay in business,” says Trak, whose father opened the Henrico restaurant in 1982.
Proponents counter that a discretionary meals tax is more palatable than hiking Henrico’s historically low residential-tax rate or cutting government services.
“We view it as an essential investment in Henrico’s quality of life, which we know has a direct bearing on people’s decision to buy a home. Anyone who cares about maintaining Henrico’s property values has a stake in this referendum,” says Laura Lafayette, chief executive officer of the Richmond Association of Realtors.
The two sides will argue about the topic all summer. They are headed for a showdown Nov. 5, when Henrico voters go to the polls to decide the outcome.
The Henrico County Board of Supervisors in April voted unanimously to seek court permission to place a meals-tax referendum on the ballot. Henrico Circuit Court must approve the request, although county officials say that is mostly a formality.
If the plan is approved by the court, Henrico supervisors need to draft an ordinance that sets the exact percentage of the tax to be collected; it would apply to restaurants, burger joints, caterers, convenience stores, supermarkets – any business that prepares and sells food items for direct consumption.
Like all Virginia counties, Henrico is restrained by state statute from imposing a meals tax higher than 4 percent. (Cities in Virginia generally may charge a higher rate; Richmond levies a 6 percent tax on meals eaten in food establishments).
The Henrico meals tax is a case of déjà vu all over again, as Yogi Berra might say. A similar meals-tax initiative in 2005 was defeated by 151 votes following months of contentious debate. The 2005 proposal was tied to Henrico County’s decision to float bonds for school construction and new parks-and-recreation facilities. Those bond issues passed, but the defeat of the meals tax forced the county to lengthen the timeline of construction projects.
County officials say this time is different. “In 2005, we asked citizens (to approve) new facilities. This time we’re asking them to help us preserve our existing services,” says Brandon Hinton, Henrico County’s budget director.
Henrico leaders want to avoid a repeat of 2005, which explains why they sought state legislative approval to impose the levy earlier this year. A request to grant Henrico supervisors direct authority to impose and collect the tax died in the finance committee of the Virginia House of Delegates.
So once again voters get to weigh in.
Budget director Hinton says new money is urgently needed to address a looming budget crisis in the years ahead, mostly fueled by state-mandated increases in funding for several programs. Henrico’s budget for the 2014 fiscal year is $1.1 billion, a 9 percent reduction from 2013. More than $115 million has been winnowed from the budget since 2009. Before approving the current fiscal-year budget, Henrico had to make a one-time-only allocation of interest earnings from revenue bonds, due to depleting reserve balances and concerns that its AAA bond rating could be at risk.
“One of the things the bond-rating agencies look at is your use of fund balances,” Hinton observes.
|Adding a new tax to his customers' bills will hurt business, says restaurateur Joe Trak.|
The gap between anticipated revenues and increased “fixed costs” will widen by $110 million during the next five years, Hinton says. Fixed costs include items such as fuel, electricity, health insurance, employee salaries and infrastructure. In 2015 alone, fixed costs are expected to grow by at least $33 million, with $21 million annually for schools alone. The largest expenditure: $14 million in increased payments to the Virginia Retirement System, a pension plan for state workers. Nearly $10 million of the VRS payment is related to employees of the Henrico County Public Schools.
A 4 percent tax on prepared meals would supply $18 million annually, or the lion’s share of new funding needed for school-related expenditures. Hinton says “every penny” will be dedicated to operations and capital needs at Henrico’s 70 public schools, some of which are approaching the end of their useful life.
County supervisors could decide in the future to divert the funds for other uses, although no such plans have been discussed, Hinton says.
It’s estimated that nearly 40 percent of the proceeds, or about $7.2 million annually, will come from non-Henrico residents who patronize eateries here. Enacting a meals tax “takes increased real-estate taxes off the table for now,” Hinton says, holding the rate at 87 cents per $100 of assessed value.
Henrico has cut the real-estate tax rate six times since 1978, the last time in 2007 when it dropped from 90 cents per $100 of assessed value.
“Our goal is to keep the real-estate tax rate as is and lower it when we can,” Hinton says.
Good news for county homeowners. Not so good for food retailers, who say the meals tax unfairly singles them out. They claim a surcharge on prepared foods will have a devastating impact, particularly on restaurants with razor-thin profit margins.
“It’s difficult enough for restaurant owners to run their business, take care of their employees and invest in their communities. The meals tax is an industry-specific tax that will make it even tougher for them to stay in business,” says Mary-Huffard Kegley, government-relations director at the Retail Merchants Association in Richmond.
Restaurants aren’t the only businesses to find a meals tax unappetizing. Donnie Caffery, the owner of Good Foods Grocery, says he’s bracing for increased swipe fees on food-related credit-card transactions.
“Every time the taxes go up, it costs us more to swipe a credit card. That’s actual physical money that it costs us to collect the tax,” says Caffery, who runs a store at Henrico’s Gayton Crossing Shopping Center and another at Stony Point Shopping Center off Huguenot Road.
Coupled with an increase in Virginia’s sales tax from 5 percent to 5.3 percent, which took effect July 1, a 4 percent county meals tax would raise the total sales tax for diners in Henrico to 9.3 percent – on par with some large U.S. metropolitan areas, says Jodi Roth, the director of government affairs for the Virginia Retail Merchants Association, a statewide lobbying group.
“This is a direct hit on the working middle class. It’s going to be quite a tax on dinner for busy parents that stop and pick up prepared meals on their way home from work,” Roth says.
Henrico officials say they are aware of the implications and have appointed a blue-ribbon panel of business owners to help craft the county’s needed ordinance. Committee member John Zeheb, vice president of finance for Ukrop’s Homestyle Foods LLC, says the goal is to provide companies with clear guidelines.
“Business owners are looking for clarity and consistency, [asking] ‘What do I need to do so I can apply it to my systems?’” Zeheb says.
Questions of what constitutes prepared food and what doesn’t also need to be answered, Zeheb says. For example, a four-pack of Ukrop’s famous “rainbow cookies” would be considered ready-to-eat and thus fall under the meals tax, whereas a container of the same cookies would not.
“Every sale is based on UPC codes, so we might have to reclassify some of our inventory” to make things easier for Ukrop’s customers, which include grocery chain Martin’s Food Markets and select retailers, Zeheb says.
Henrico proposes to allow food retailers to keep 3 cents of every meals-tax dollar they collect. The goal is to ease some of the administrative burden of tax collection, Hinton says. “That’s about $1,200 they can put in their pocket for every $1 million they sell.”
That gesture may not go far enough to satisfy opponents. “I tell everybody that comes to my restaurant to please vote no on the meals tax,” restaurateur Trak says.
Lafayette, of the Richmond Association of Realtors, hopes people see the big picture. “We’re not saying, ‘Protect the real-estate tax and go gore the ox of the restaurant industry.’ The fact is that people who buy a home want to know they are able to sell it 10 years down the road,” Lafayette says.
November isn’t far away. Henrico voters have the summer to decide if they have the stomach for a meals tax, or if it’s time to stick a fork in the idea. ■