On November 8, voters in Fairfax County, Virginia, will be asked to approve a 4 percent add-on sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on prepared food and beverages. Together with the regular sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , which is 6 percent in Northern Virginia, the new tax would lift the total sales tax on prepared food and beverages to 10 percent.
Most members of Fairfax County’s Board of Supervisors support the add-on tax, but state law prevents them from implementing it without voter agreement. A brief description of the proposed tax appears on the county government’s website, and the county mailed a pamphlet to residents discussing why the Supervisors think the tax would be a good idea. A meals tax appeared on the ballot once before, in 1992, but the electorate voted it down then. Fairfax County is a suburb of Washington, D.C., with a population of 1.1 million in 2015.
The Fairfax Supervisors explain that because of restrictions imposed by the state, this is one of their few options for substantially increasing taxes without further raising real estate taxes. They estimate that the proposed meals tax would collect $100 million in the first year alone. The Supervisors promise that 70 percent of net revenues from the meals tax “would be dedicated to Fairfax County Public Schools.” The remaining 30 percent would go toward other types of spending and, perhaps, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. relief. The pamphlet adds that 28 percent of the tax would be collected from people who do not live in the county.
The website and pamphlet also note that many jurisdictions in the area already tax prepared meals at higher-than-normal rates, including the District of Columbia, Arlington County, and the cities of Alexandria, Fairfax, and Falls Church.
Among the places where the added tax on ready-to-eat food would be owed are restaurants, coffee shops, hot dog stands, and grocery stores’ salad bars and deli counters. The tax would not apply to groceries the county did not classify as ready to eat. There would also be numerous exceptions, such as items from vending machines, meals for students at educational institutions, meals for hospital patients, and food at cafeterias that businesses operate for their employees.
Although the proposed meals tax would apply in only one county, it is interesting to a tax analyst because of the county’s large population and because the tax illustrates many commonly seen problems with how taxes are designed and how they are explained to voters.
The meals tax would be distortionary and increase tax complexity
Unless there are good reasons to the contrary, a tax should exhibit neutrality, which means it should not favor some products or production methods over others, and it should be simple. Neutrality is desirable because it minimizes the extent to which people make inefficient production and consumption decisions for tax reasons. Simplicity is beneficial because it holds down the tax system’s paperwork costs; the billions of hours Americans spend on taxes is time they cannot spend more enjoyably or productively. Unfortunately, the principles of neutrality and simplicity often receive short shrift when governments design their tax systems. The U.S. tax system is notorious, for instance, for its ever increasing complexity.
A 10 percent sales tax on ready-to-eat food and beverages compared to a general sales tax rate of 6 percent (and a reduced rate of only 2.5 percent on most groceries) clearly violates the neutrality criterion by saddling ready-to-eat food with a tax penalty. The creation of a special tax category and tax rate for food and beverages based on how they are prepared and where they are sold plainly adds to tax complexity.
Problems with how the tax is being described
The meals tax illustrates at least three questionable arguments often used when trying to sell proposed tax increases to the public.
One method of building support for a proposed tax is to say it would help pay for a popular spending program. For example, Maine is asking voters to approve a 3 percentage point hike in its top income tax rate, which would give it the second highest top rate in the nation, and pledging the money would go towards K-12 education. Similarly, California voters are being asked to extend expiring and supposedly temporary income tax increases on top earners until 2030, with most of the proceeds dedicated to education and low-income healthcare. In Fairfax County, the association of the meals tax with education spending fits the same pattern.
There are two reasons to be skeptical about such promises. First, if the spending programs linked to the tax increase are so valuable, why aren’t they already being funded, with the financing accomplished by shifting money out of lower priority government programs? That way, the public would be assured the most worthwhile programs are undertaken rather than making them contingent on whether voters approve a tax increase. Second, elected officials may not actually spend the money as they say they will. The blatant way to accomplish this is simply to ignore pre-election assurances after a tax increase becomes law. A subtler and politically safer technique is to make a show of directing every cent collected by an extra tax into the designated programs but simultaneously to send the programs less than otherwise from other sources. For example, if $70 million from a new tax is channeled into a spending program but the amount the program would receive from other sources in the absence of the new tax is trimmed by $35 million, the actual funding increase is only half the apparent increase.
Another argument made on behalf of the meals tax is that 28 percent of it would be collected from non-county residents. The argument is based on what is known as tax exporting, which roughly means, in a saying popularized by Senator Russell Long, “Don’t tax you, don’t tax me, tax that fellow behind the tree.” Tax exporting is arguably why many localities place extraordinarily high taxes on hotel rooms and rental cars. The practice raises obvious fairness concerns. For instance, if much of the Fairfax meals tax would go toward county school spending (although perhaps not the promised 70 percent), why should non-county residents be forced to pay more than a quarter of that? Tax exporting also represents taxation without representation, which is troubling in a democracy. Moreover, the tax-exporting argument forgets that tax increases inflict collateral damage on those within the taxing jurisdiction. In Fairfax County, two varieties of collateral damage from the meals tax are that county eating establishments would suffer some loss of business and county residents would pay about three-fourths of the tax.
The county government also seeks to justify the proposed meals tax by noting that some nearby jurisdictions impose similar taxes. This is a valid argument to a limited degree. It means that imposing the tax in Fairfax County would not put county businesses at a tax disadvantage compared to those in other jurisdictions; it would only eliminate a tax advantage the county now enjoys. Further, when the tax systems in many jurisdictions all include a particular tax or tax feature, there is sometimes a good reason why it is so prevalent. On the other hand, some products or activities are taxed at unusually high rates simply because the taxes have not proven politically costly. For example, a recent study found that cell phone taxes have climbed to an average of 18.6 percent nationally, although “[w]ireless service is increasingly the sole means of communication and connectivity for many Americans, particularly those with lower incomes.” This leads to the question of whether there is any reason besides political expediency for imposing a special tax on prepared meals.
Prepared food and beverages do not have special characteristics calling for a special tax
Several factors not mentioned in the Fairfax County literature are often cited to try to justify special taxes. Do one or more of them apply to the proposed meals tax?
Special taxes on certain products or activities are sometimes defended because of the external harm they supposedly cause. For example, liquor license fees are a holdover from the days when saloons were considered a public nuisance requiring additional policing. Proposals to impose carbon taxes to prevent global warming are another example. The externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. rationale does not justify a meals tax, however. It is difficult to believe that a person who grabs a coffee at a shop on the way to work imposes external damage on society compared to a person who carries a coffee from home. (The meals tax would apply to the former but not the latter.)
Special taxes are sometimes imposed to punish and discourage behavior regarded as sinful or otherwise socially objectionable, such as liquor consumption and smoking. But there is no justification for placing a “sin tax” on a person who, for example, buys a carry-out meal to take back to the office while on lunch break; the person’s behavior is in no way sinful. Along with sin taxes, governments have often imposed special taxes on luxuries. It is not clear that the majority of ready-to-eat meals were ever a luxury, but as people’s disposable incomes rise and with so many family members working outside the home, most ready-to-eat meals today should certainly not be considered luxuries. When a middle-class couple enjoys a Friday night dinner out, that is no more a luxury than, say, a flat-screen TV, an extra pair of shoes, a computer game, a comfortable couch, or a frozen dinner that can simply be popped in the microwave.
An entirely different reason for taxing a product at an especially high rate is if the quantity demanded of the product hardly changes when its price changes (very inelastic demand). Taxes on such products have only a slight impact on their production and consumption. Hence, by heavily taxing goods and services with extremely inelastic demands and lightly taxing products with price-sensitive demands, a government can reduce the degree to which taxes distort economic behavior. The demand for ready-to-eat food, though, is much too price-sensitive for a special tax to be justified on this basis. The description of the proposed prepared meals tax mailed to voters neglects to mention any of these concerns.