Meals Tax: Good or Bad?

In my dream, Glinda the Good Witch approaches me, asking “Are you a good tax or a bad tax?”

“I’m not a tax at all,” I protest. “Taxes are old and ugly.” I ignore the sound of giggling coming from the flower beds. “My name is…my name is…” I am drawing a blank.

Thankfully, I wake up at that moment. This is what happens, I realize, when I fall asleep while mulling over the fact that the Loudoun County is again discussing a tax on prepared foods, commonly known as a meals tax.

Is the meals tax a good tax or a bad tax?

I realize that, to supporters of Grover Norquist and his tax pledge, there is no such thing as a good tax. Like Dorothy in my Wizard of Oz dream, they think all taxes are ugly. But even those folks might concede that some taxes are uglier than others.

Let me offer a few thoughts to consider.

If we accept the fact that we need some local government services, then we need to have some taxes to pay for those services.

It’s not good to be overly reliant on one tax. This is akin to putting all our eggs in one basket, and is bound to be unfair to some people.

For example, the county government is heavily reliant on the real property tax. When property values plummet, as has happened twice in the past two decades, county officials have to contend with painful cuts in services and personnel, coupled with increases in the tax rate during lean times.

The real property tax is also especially painful for some people, such those who might be characterized as property rich but cash poor. This would include many older homeowners who purchased their property when it was much less expensive, who are on a fixed income, and who may have paid off their mortgages.

The property tax is less painful for people whose property is worth about what they paid for it, and whose taxes are included in their mortgage payments. While they might feel that their taxes are high, they don’t have to write monthly or semiannual checks directly to the county for thousands of dollars.

Likewise, renters aren’t even directly aware of paying property taxes, because they pay only indirectly, through their rental payments.

Consider, on the other hand, the unpopular personal property tax, also known as the “car tax.” These taxes are usually low compared with real property taxes. But in Leesburg, we have to make three personal property tax payments every year, two to the county and one to the town. I think this is one reason the taxes are so unpopular that promising to eliminate them arguably became the deciding factor in James Gilmore’s 1997 gubernatorial campaign.

Some argue that the meals tax is regressive – that it places a greater burden on those who have less ability to pay. But the argument can also be made that eating out is discretionary. Those with more ability to pay are more likely to eat out, and to spend more money while doing so, so they will be better able to afford the tax.

For those of us who live and dine in Leesburg, we don’t have to wonder what a meals tax would be like. The Town of Leesburg and three other towns in Loudoun County already have a meals tax. Leesburg collects a tax of 4% on restaurant meals and prepared foods that are carried out. A county meals tax would not apply in Leesburg or the towns that already have such a tax.

The meals tax generates about $3.5 million a year in revenues for the Town of Leesburg, compared with $11.4 million in real estate taxes. If Leesburg’s meals tax were eliminated, one way to compensate for the lost revenues would be to increase the real estate tax rate from 19.5 cents to about 25.5 cents per $100 in assessed value. Real estate taxes on a $400,000 property would increase by about $240 per year, from $780 to $1,020. That’s a lot of hamburgers.

Would that be more or less painful than the meals tax? And what is the effect of the meals tax on businesses, especially restaurants? Do people eat out less often, order less expensive meals, or tip less because of the meals tax?

These are questions for county officials to consider as they discuss whether to ask the General Assembly for the same authority to impose a meals tax that cities and towns in Virginia already have.

As for me, I’ll try to think about happier things as I’m falling asleep.