A pair of bills seeking to equalize taxing authority between Virginia cities and counties has some restaurant and lodging owners concerned about potential tax rate increases.
HB 785 and SB 588 seek to give counties the same authority as cities to impose taxes on meals, cigarettes, admissions, hotel rooms and travel campgrounds.
As it currently stands, cities have more leeway to alter tax rates than counties do due in large part to the Dillon Rule.
Under current law, only certain counties (mainly the Williamsburg area) may impose an admissions tax, typically capped at 10%. Similarly, counties are generally limited to a maximum rate of 2% for a transient occupancy tax and 4% for a meals tax, with approval from a voter referendum. Furthermore, only Arlington and Fairfax counties may impose a cigarette tax, which is limited to 30 cents per pack. None of these limits applies to cities.
Though the state Senate and House of Delegates versions differ in their language, the bills could permit counties to raise meals tax rates to as much as 6% without a local referendum. Similar raises with limits would apply to the other taxes, though none exceeds 5%.
While the Senate version of the bill has been amended to set some caps, the House version contains far fewer amendments and restrictions.
A report by the Joint Legislative Audit and Review Commission estimates that counties could collect up to $528 million total in additional revenue annually beginning in fiscal 2022 if SB 588 is adopted.
This additional revenue equates to approximately 4% of current total tax revenue collected by counties, with about 86% of the additional revenue coming from meals tax collections, according to the report.
However, some restaurant owners are concerned that a 2-percentage point increase to the meals tax could hurt business.
Terry Vassalos, owner of Tip Top restaurant in Albemarle County, said that while a meals tax rate of 6% may not seem large at first glance, his customers would certainly notice the ensuing change in menu prices.
The county currently has a meals tax rate of 4%, which was approved by a voter referendum in 1997. The City Council voted last year to increase Charlottesville’s meals tax to 6%.
“When the city raised its meals tax, I noticed more customers coming from the city, since my restaurant is so near,” Vassalos said.
Vassalos said he believes that if the county wants to increase its meals tax rate, it should hold a vote and allow residents to decide.
“It’s about the principle of the decision; this is something that affects everyone in the county, and so they should be able to decide if they want it or not,” he said.
Equal taxing authority was part of the Albemarle County Board of Supervisors’ legislative wish list this year.
Supervisor Ann H. Mallek said one of the biggest issues facing the county is an over-reliance on residential property taxes, which she said disproportionately affects older residents and those on fixed incomes.
“Enlarging the scope of the taxes we can levy — particularly amusement taxes — would make it possible for visitors to the area to help pay for services and reduce the impact on residents,” she said.
The last time the county held a referendum to approve a meals tax rate increase, Mallek said she saw an understanding among voters about the value of the increase.
However, Eric Terry, president of the Virginia Restaurant, Lodging & Travel Association, argues that voters are fed up with tax rate increases.
“Basically, what it seems like the General Assembly is doing is approving a half-billion-dollar tax increase on Virginia residents without allowing them to vote on it,” he said. “They’re just sliding through this tax increase without any public votes or any meetings to gather public opinion.”
Terry said his organization is not opposed to tax equalization but said it feels like a handful of industries are being singled out as opposed to a broader tax that would affect everyone more equally.
According to the travel association, of the past 60 attempts to pass a meals tax in counties in Virginia, 47 have failed. Language within the House bill seems to address this concern, preventing a county that held a failed referendum prior to July 1, 2020, from imposing a certain tax until six years after the referendum.
The House version of the bill passed with some substitutions Friday. The Senate version was read a second time on the House floor Friday.