Could a restaurant tax help Kentucky cities fix budget woes? Why some are opposed
A bill backed by the mayors of Kentucky’s two largest cities would give more cities and counties the option of imposing a local restaurant tax.
House Bill 470, filed by Rep. Rob Rothenburger, R-Shelbyville, would apply to Lexington and other cities that do not already have the authority to levy such a tax. The bill would allow an up to 3 percent tax on restaurant receipts. In exchange, restaurants would be exempt from net profit taxes. Other cities that can’t levy a restaurant tax include Covington, Louisville, Bowling Green, Ashland, Owensboro and Florence.
If passed, the bill would give local governments the authority to enact local ordinances. Depending on the local ordinance, that tax could be tacked on to restaurant bills on top of a sales tax.
There are 228 cities in Kentucky that can enact a restaurant tax, but only 50 have done so, according to information from the Kentucky Office of Local Government. Under current law, 100 percent of restaurant taxes go to local tourism boards to bolster tourism-related industries.
Under the bill, local governments that newly levy a restaurant tax would be required to give 25 percent of the money collected to a local tourism board. The remaining money could be used by the city or county for specific purposes, including public safety and tourism-related infrastructure. In cities that already have a restaurant tax, the share going to local tourism boards must remain the same.)
“This is not requiring an imposition of a restaurant tax,” said J.D. Chaney, president and CEO of the Kentucky League of Cities, which is backing the bill. “This does not require anything. It only gives local authorities the right to consider it.”
Lexington and Louisville have both considered such a tax. Louisville Mayor Greg Fischer and Lexington Mayor Linda Gorton have expressed support for HB 470. All cities are facing steep increases in contributions to the state’s ailing pension system in coming years, driving up expenses while revenues remain stagnant.
Large cities need new revenue
Fischer has already floated a 3 percent restaurant tax as a way of shoring up Kentucky’s largest city’s budget for the fiscal year that begins July 1. The current-year budget is based on $25 million in cuts.. Lexington had similar budget cuts this year and is expectingadditional cuts for the fiscal year that begins July 1.
A 1 percent local restaurant tax would generate $9.1 million in Lexington. Of that amount, $6.8 million would go to the city, according to a January report by a group convened by Gorton to look at city revenues.
“The group found we rely too much on the payroll tax to fund city services, like public safety, parks, and economic development,” Gorton said.
HB 470 and HB 475, a constitutional amendment that would give local governments more taxing options, are needed so cities don’t have to continue to raise taxes on wages and property taxes, Gorton said.
“Kentucky ranks in the top 5 nationally in local dependence on payroll tax revenues. It is not sustainable,” the first-term mayor said. “Cities across Kentucky are facing significant increases in operating costs and pension costs.”
Kentucky’s restaurant industry is fighting the bill.
Stacy Roof, president and CEO of the Kentucky Restaurant Association, said HB 470 unfairly singles out one industry to help local governments balance their books.
“We didn’t create this issue but we are being asked to fix it,” Roof said. Restaurants operate on slim margins, which would be eroded by the tax, Roof said.
“It will affect wages and it will affect patrons’ decisions about how often they will eat out and how much they will spend,” Roof said.
Eliminating the net profit tax on restaurants will not offset the proposed restaurant tax, she said.
“That’s laughable,” Roof said. “Even if a restaurant is hitting it out of the park, their net profits are going to be very, very low.”
Chaney said cities with restaurant taxes haven’t experienced a dramatic decline in business.
“Elizabethtown has a restaurant tax, and they have seen 7 percent growth in the restaurant business while the national average is 5 percent,” Chaney said.
The bill would also let counties assess a restaurant tax. If a restaurant is in a city with a 3 percent tax and within a county with a 3 percent tax, the restaurant’s total tax would be 3 percent. If the city tax is 2 percent and the county tax is 3 percent, only 1 percent would be owed by the restaurant to the county, Chaney said.
The bill has been assigned to the House Appropriations and Revenue Committee. It’s not clear if it will get a hearing.
This story was originally published February 28, 2020 at 1:01 PM.
