Virginia Beach City Council approved the budget Tuesday and one unpopular hike: the meals tax increase.
Councilmember Barbara Henley introduced a motion to delay the meals tax increase until January so restaurants wouldn’t be hit with the tax in the middle of tourist season. The new budget goes into effect July 1.
The motion failed and the budget passed 10-1, with Henley’s lone vote against it.
Amber Kostka, co-owner of The Stockpot, an Oceanfront staple, wants cities to stop viewing restaurants as untapped revenue sources.
“We are looked to very often when the city is looking for extra funding,” she said in an interview. She sits on the board of the Virginia Restaurant Association and it’s a trend she sees statewide.
The 0.5% increase will bring the total city tax on restaurant bills to 6%.
Kostka joined others who objected to the tax at a city council hearing last month. She said profit margins for The Stockpot are between 3 to 5% — meaning the city makes more off her business each year than she and her co-owner.
Total taxes going up
Adding the proposed meals tax to the state sales tax will be a 12% surcharge overall. That’s about the cost of a small appetizer on a dinner out for two.
“Customers will get their final bill, and they’ll see the tax, and they’re like, ‘Oh my gosh, did you double tax us?’” Kostka said. “Well, no, that’s the city’s tax, and then that’s the state’s tax.”
Cities in Virginia collect some of the highest meals taxes in the country.
Virginia Beach touts its rate as the lowest in the region, but it’s the third highest on a list compiled by the Tax Foundation of the 50 largest cities nationwide. Minneapolis, which tops the list, charged 12% in combined city and state taxes last year, the same as Virginia Beach’s proposal this year.
Meals at The Stockpot’s locations in Norfolk and Chesapeake are taxed at 12.5% and 12% respectively.
Richmond charges 7.5% for a combined rate of 13.5%. Williamsburg will consider a proposal next January to raise its taxes to the same rate.
The added revenue in Virginia Beach will go into the city’s Capital Improvement Plan and a fund dedicated to improving law enforcement and court buildings. After 24 years of using a converted elementary school, the city wants to build a new law enforcement training academy.
Virginia Beach last raised its meals tax in 2002.
Henley had some concerns about the tax at a budget meeting last week, saying public safety shouldn’t get the city’s “last dollars.”
“I’m not sure why we want to dedicate the meal tax money to public safety,” she said, “except to make it more acceptable to the people and say, ‘Well, you’re getting public safety if you pay this additional tax.’”
Kostka said “feel-good stuff” is typically used to justify meals taxes, but doesn’t think the restaurant industry should be targeted to fund essential services.
General sales taxes apply to a wide range of products, but meals taxes are unlike almost any other excise tax. They are usually added to disincentivize behavior, such as tobacco use, or to create a pay-for-use system, such as the boat tax proposed in this year’s budget, which would go toward maintaining waterways boaters sail through.
City council agreed to remove the boat tax after residents spoke out against it. Instead, they’ll introduce a licensing fee, ranging from $20 for the smallest vessels to $500 for the largest.
Restaurants and diners take a hit
“We call ourselves the canary in the coal mine for how the economy is doing,” Kostka said.
Restaurants feel the impact first when markets go south. The pandemic rocked the industry, and more recently, inflation and rising food and labor costs have pinched businesses' budgets.
Restaurant patrons often respond to a difficult economy by eating out less and ordering less when they do go. An added tax could speed up those spending behaviors.
In 2015, the original Stockpot moved into a space next to a family-owned gym in Virginia Beach with a menu focused on wellness, with home-cooked broths and wholesome breakfast and lunch items. Almost everything is made from scratch.
To sustain the cost of quality ingredients in meals at similar price points to other restaurants, diners receive a filling portion, but probably not enough for leftovers, Kostka said.
The Stockpot also provides health insurance, 401(k)s and paid time off for employees.
Kostka wants to raise wages and help employees with childcare as well, but it’s hard to add those benefits with less money to go around.
Credit card fees for businesses have also increased, taking a 3 to 5% bite out of all card transactions. Restaurants pay a fee to credit card companies to collect the city’s taxes. Some restaurants, including The Stockpot, have passed that fee onto customers who use a credit card. .
“It’s just a lot of challenges hitting us at once,” Kostka said. “I think the expectation is that we can just weather the storm, weather the storm, weather the storm.”
