Virginia Gives Voters a Say on Meals Taxes, and They Usually Say No
November 2, 2016
Meals taxes haven’t fared well at the polls in Virginia, but 24 years after a failed referendum, the Commonwealth’s largest county is taking another bite at the apple. Fairfax County’s new meals tax referendum marks the 60th attempt by a Virginia county to levy a tax on restaurant meals and prepared foods since 2000, and the record for proponents of such taxes isn’t very good: voters have rejected the imposition of a meals tax 46 of the last 59 times a proposal has gone to a vote, with 59.6 percent of all votes on these ballot questions cast against adopting a meals tax. Fairfax County officials hope that this time will be different.
Virginia prides itself on doing things its own way. It is designated a commonwealth (one of four). It boasts 38 of the nation’s 41 independent cities. And unlike most of its peers, it lets the voters decide whether to impose a meals tax. (Sometimes. More on that later.)
Nineteen states and the District of Columbia authorize meals taxes. Of these, 17 exclusively authorize local option meals taxes, one (Vermont) imposes a state meals tax and provides for local option meals taxes, and one (New Hampshire) only collects meals taxes at the state level. The District of Columbia also has a district-wide meals tax. Whereas meals taxes in Oregon, Vermont, and Virginia must, at least in certain cases, be approved by the voters, local option taxes on food and beverages can be adopted by ordinance or are provided for statutorily in fifteen other states. And where ten states allow localities to set their own rates, typically subject to a cap, eight establish the local option rate by statute.
Let’s go back to that caveat on voter approval, because despite the Fairfax meals tax ballot question marking the 60th time such a tax has been on the ballot somewhere in Virginia since 2000, the voter approval provision comes with a big asterisk.
Counties in Virginia are authorized to levy a food and beverage tax at a rate of up to 4 percent with the approval of the voters by referendum. The referendum may be certified for the ballot by resolution of a county board of supervisors or by a petition signed by at least 10 percent of registered voters. Five counties, however, have been statutorily exempted from the referendum requirement and can adopt meals taxes by ordinance (Arlington, Frederick, Montgomery, Roanoke, and Rockbridge Counties), as can cities and towns with general taxing powers. Furthermore, cities and towns are not subject to the rate cap.
Unsurprisingly, counties occasionally seek statutory authority to levy a meals tax without having to put it to the voters. Fairfax County itself tried to go that route in 2004, but the county’s efforts were rebuffed in the House of Delegates.
To add one more wrinkle, in Virginia, county meals taxes only apply within the boundaries of towns contingent upon the approval of the town’s governing body, and are not levied within the boundaries of any town which imposes its own meals tax. Within Fairfax County, the town of Vienna imposes a 3.0 percent meals tax and the town of Herndon levies a 2.5 percent meals tax. Any county meals tax could not be collected within either of their jurisdictions, and could only be collected in Fairfax County’s third town (Clifton) with the approval of the town council.
While Virginia stands out by involving the voters in at least some meals tax determinations, it simultaneously allows localities to impose those taxes at uncommonly high rates, as the following table shows. Excluding statewide (or District-wide) taxes, only Oregon municipalities and the city of Little Rock, Arkansas, are permitted to levy a meals tax at a rate at or above the 4 percent permitted Virginia counties.
Meals Tax Authorities by State, with Rate and Method of Adoption.
|Arkansas||Select cities and counties, incorporated towns||Ordinance||Up to 3%*|
|Florida||Counties, select resort cities and town||Ordinance||1%|
|Illinois||Metropolitan Pier and Exposition Authority||State Statute||1%|
|Indiana||Select counties and municipalities||Ordinance||1%|
|Kentucky||Select cities||Ordinance||Up to 3%|
|Louisiana||Two specified taxing districts||State Statute||0.5 – 0.75%|
|Maryland||Select resort areas||Ordinance||Up to 1%|
|Massachusetts||All localities||Ordinance||Up to 0.75%|
|Michigan||Select localities||Ordinance||Up to 1%|
|New Hampshire||Statewide tax||State Statute||9%|
|New Jersey||Cape May County only||Ordinance||2%|
|Oregon||Select local governments||Referendum||No cap|
|Rhode Island||Uniform local meals tax||Statutory||1%|
|South Carolina||All counties and municipalities||Ordinance||Up to 2%|
|Utah||All counties||Ordinance||Up to 1%|
|Vermont||Statewide tax + option for all municipalities||Town Meeting||Up to 10%|
|Virginia||All counties||Referendum†||Up to 4%|
|Cities and towns with general tax authority||Ordinance||No cap|
|Wisconsin||Exposition districts and resort areas||Ordinance||Up to 0.5%|
|District of Columbia||District-wide||Ordinance||4.25%|
* Four percent in the city of Little Rock, Ark. † Five counties are statutorily authorized to adopt meals taxes by ordinance.
Meals taxes generally apply to purchases of prepared foods for immediate consumption, either in a restaurant or similar eating establishment or as a carryout meal. A typical meals tax (as in Virginia) would apply equally to a dine-in restaurant meal, an order at a fast food establishment, and the hot food bar at a grocery delicatessen. Such taxes do not, however, apply to the sale of groceries or other non-prepared foods not intended for immediate consumption. In fact, whereas prepared foods are frequently subject to both a meals tax and the general sales tax, groceries are often exempt from both.
Often rationalized as a “luxury tax”—even though prepared foods are popular with individuals across the income spectrum—or justified as a tax that will fall disproportionately on tourists and other visitors, meals taxes are popular with local governments but increase tax complexity and have the potential to place local restaurants at a competitive disadvantage.
Meals taxes do not accord well with the “benefit test” for taxation, which asks whether those paying a tax also receive the benefits which flow from the resulting governmental expenditures. Out-of-town visitors dining at local restaurants do not stand to benefit from the funding of most local projects and priorities. Similarly, there is nothing inherent in the concept of eating prepared foods that intuitively merits a higher level of taxation. And while restaurant meals are usually (though not always) straightforwardly taxable, the applicability of the tax to other prepared foods is not always so clear.
Local governments tend to favor meals taxes as a way to raise additional revenue outside of traditional sources of local tax collections, like the property tax, and one that can be exported, to some extent, to nonresidents. Accordingly, enthusiasm for meals taxes may be particularly strong in tourist destinations, college towns, and other localities where a substantial portion of the tax burden can be exported to out-of-town visitors. The enthusiasm of local government officials, however, hasn’t always been shared by the voters. The Fairfax County referendum will put the meals tax’s popularity to the test in Virginia’s most populous county, and even as the rest of the country is focused on other election results, you can bet that local officials elsewhere will be watching.
For a more detailed look at the proposed Fairfax meals tax ballot question, click here.