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How the city's meals-tax hike six years ago became a heavy burden on struggling restaurants.



In politics, promises are made to be broken. Rhoda Richardson-Elliott, owner of Bill's Barbecue, knew full well that City Council's pledge six years ago to eventually rescind an increase in the city meals tax, from 5 percent to 6 percent, was a lie.

"They did it because we couldn't stop it. If they had put it to a referendum, it wouldn't have happened," says Richardson-Elliott, who oversees eight Bill's Barbecues in Richmond and the surrounding counties. "They are not going to rescind it."

It may not seem like a lot, she says, but the 1 percentage point meals-tax increase added insult to injury. Including state and local sales taxes, she pays 11 percent in taxes on each barbecue platter she serves in the city. In Chesterfield and Henrico counties, which don't have meals taxes, it's 5 percent.

"Supplies are going up, customers are going down and you can't raise your prices because nobody is willing to take that hit," she says. "It seems like we're working harder than we've ever worked, but we're just barely hanging on."

Local restaurants, among the hardest hit by the recession, and City Hall's dependence on them to feed the public kitty offers a lesson in tax policy, fairness and the city's growing reputation as unfriendly to business.

Unlike the counties, Richmond leans on local eateries for revenue more heavily than any other business sector. During the last five fiscal years city restaurants, caterers and other food establishments coughed up $109 million in meals taxes.

The issue isn't if you tax, but how, says Natasha Altamirano, a spokeswoman for the Tax Foundation in Washington. "We think that tax systems should be as neutral and as simple as possible," she says. "One of our main principles of sound tax policy -- part of that is having a broad basis and low rates. The narrower you make your tax base, the higher the rate has to go."

How the restaurants in Richmond got stuck with a disproportionate tax burden has much to do with political expediency. Or simply put, taxing restaurants and food establishments is easier than, say, raising the real estate tax rate a penny, which would generate much more revenue and spread the burden more equitably.

Flash back to 2003, when supporters of the fledgling downtown performing arts center desperately sought city money to help foot the project's $100 million price tag. They were acutely aware of the hurdles: A state-imposed sales tax increase was out of the question, and extracting existing capital funds could stir sticky political confrontations --Richmond can't build new schools but finds money for a new symphony hall? So backers of the performing arts project turned to an easier target: restaurants.

The same group also approached hotel operators about raising the lodging tax, reasoning that because they were already being taxed to pay for the downtown convention center, they wouldn't mind skipping across East Broad Street to chip in for the proposed arts complex. The hoteliers balked.

Restaurants, however, were an easier sell. There was a more direct cost-benefit correlation; you could argue that performing arts patrons in town for a show would stay for dinner, thus increasing food sales at local eateries. In July 2003, City Council agreed, passing a 1 percentage point increase to the city's meals tax rate. Some in the restaurant business protested, but others bought the proposal with an important caveat: Once the city had paid its portion of the performing arts center project (ultimately $7.6 million), the tax increase would end, reverting to the original 5 percent.

The city's last disbursement to the arts center came in October 2004 -- and the tax increase remained. The money collected continues to flow into the city's general fund.

Local restaurateur Rick Lyons was against the tax increase in 2003 but figured if it helped get the performing arts center built, it wasn't all bad. Now that the performing arts center is finished, he wonders where the money's going.

"I'd probably be fine with it as a business owner if I knew it was going toward something," says Lyons, owner of the Republic on West Broad Street. "Now the money has been lost in the abyss."

During the debate over the meals tax six years ago, supporters argued that an extra 1 percent wasn't borne by restaurants but customers, who don't make decisions about where to dine based on such a small figure. But that's circular logic, says Kail Padgitt, an economist at the Tax Foundation.

"We know that is not true in economics," Padgitt says. "We know that both the restaurant customer and the proprietor are bearing some portion of the tax. The government can't legislate who is going to bear the true incidences of the taxes."

It's an even heavier price in a sagging economy, Padgitt says, because restaurants must keep prices low and can't blindly pass along taxes to consumers. Restaurant owners concur. Consumers are increasingly watching their checks and, more than ever, are making decisions about where they eat out based on prices.

"I think people, especially in the last year, have been especially savvy about looking at their check and not just throwing a credit card on the table," Lyons says. "It all adds up."

Taken together, the 6 percent in taxes can be the difference between making money and going out of business. Mike Byrne, who last month closed his restaurant in Shockoe Slip, Richbrau Brewing Co., after 15 years in business, says if he didn't have to pay the 6 percent meals tax he likely would have been able to break even instead of falling into the red. In good times, Byrne says, he might post a 10-percent profit, but during downturns he'd be lucky to clear 5 percent.

"You can only charge so much for a hamburger," Byrne says. "I'm only making a dime on that hamburger. Toward the end I was making negative 2 percent and a positive 1 percent." While Byrne doesn't blame the meals tax for the loss of his business, it certainly didn't help. "The reality of it is in the last four and five years, we've lost 50 percent of our lunch trade," he says. "You take that 50 percent in lunch and you add that 6 percent tax, that's a big swing."

It all adds up to putting Richmond restaurants at a competitive disadvantage to their suburban neighbors, Padgitt says. "Even small changes in prices are going to change people's preferences for eating out."

Charlie Diradour, who manages a real estate company that owns several restaurant properties in Richmond, including Fan District staples such as Buddy's and Kuba Kuba, says the meals tax is a competitive disincentive.

"If I lived in Henrico County I wouldn't venture into Richmond to dine twice a week if I knew I had to pay a 6 percent higher tax," says Diradour, also a political consultant who launched a brief campaign for the House of Representatives in the fall. "We need to do everything we can in this city to draw people here. And this is an example of where we failed."

Correction: In earlier print and online versions of this story, Style incorrectly reported that Charlie Diradour's real estate company owns Joe's Inn in the Fan. Diradour no longer has an ownership stake in the restaurant.

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