LITTLE ROCK — A burger, fries, and a heap of taxes: Arkansas restaurant patrons are paying for a lot more than food with their bills. In addition to state and local sales taxes, some of the state’s larger cities tack on an advertising and promotions tax to a restaurant’s bill.
But far from lining the restaurant owners’ coffers by attracting more patrons, those taxes actually hurt the restaurant industry, some local owners say.
The advertising and promotions tax “has a direct and significant [negative] impact on the restaurant industry,” said Scott McGehee, owner of Big Orange Burger and ZaZa Fine Salad & Wood Oven Pizza Co.
The advertising and promotions tax, more commonly referred to as the hamburger tax, is a tax on prepared food at restaurants and on hotels. It does not include alcohol sales. In Little Rock, the tax is 2 percent; in North Little Rock, it’s 3 percent.
Mark Abernathy, owner of the Loca Luna and Red Door restaurants in Little Rock, said the tax puts an unfair burden on restaurants.
“It is what it is, so we make the best of it, but the truth is that the projects that the restaurants fund should be funded by general tax and not just earmarked for restaurants,” he said.
For Little Rock, the majority of the money is used to repay the bonds that built the original Statehouse Convention Center, said Gretchen Hall, the president and chief executive officer of the city’s Convention and Visitors Bureau. The remaining funds from taxes cover the operations of the bureau, including marketing for the city and upkeep of city-owned propertylike the Ottenheimer Market Hall in the River Market, the Robinson Center and other facilities, she said.
Karen Trevino, executive director of North Little Rock’s Advertising and Promotion Commission, said the city’s parks department receives most of the 3 percent tax from restaurants to keep Burns Park and its recreational fields in good condition. The commission also receives a chunk of the tax for marketing and advertising.
With all sales taxes combined, restaurants in Little Rock add a total of 10.5 percent in state and city taxes to patrons’ food bills; North Little Rock restaurants collect 11 percent.
Greg Kaza, executive director of the Arkansas Policy Foundation, said his organization views food taxes as a poor policy decision. The Arkansas Policy Foundation is a nonpartisan, nonprofit Little Rock organization that makes policy recommendations for Arkansas.
“Since 2002, we found that food taxes, whether at the state or local level, are regressive,” he said. “They fall disproportionately on poor and low income [families], because they tax a necessity of life.”
In recent years the state has reduced its sales tax on most food purchases at grocery stores from 6 percent to 1.5 percent. But with the taxes still applied in restaurants and the downturn in the economy, restaurant owners say people are going out to eat less.
“We’re competing with grocery stores,” said McGehee, who is opening up a tacos-and-margaritas restaurant, Local Lime, in October. He added that restaurants away from downtown benefit even less from the tax, because it funds mainly downtown projects.
And he questioned taxing restaurants at a steeper rate than other industries.
“There’s a lot of services where you’re not taxed,” McGehee said. “How is that fair? Why should my goods and services be taxed and not someone else’s?”
Abernathy, the founder of Consolidated Arkansas Restaurant Industries group, said there is no independent restaurant association in Arkansas to protect restaurants. His group is no longer active because of the difficulties he faced gathering support, he said.
Little Rock Advertising and Promotion Commissioner Gene Fortson said the tax receipts show that the restaurant business has grown recently.
“The tax collections are a reflection of their business,” he said. “As a matter of observation, a lot of the value restaurants - more food for less money - have increased [in business].”
Fortson said a change in the Little Rock tax has been debated for some time, but it cannot be considered until 2015, when the bonds for the Statehouse Convention Center are fully repaid.
“The question is what do you do at that point in time, because a decision will have to be made,” he said. “But we haven’t gotten there yet.”
The commission has discussed a $65 million renovation to the Robinson Center, Fortson said.
Hall said those renovations, which she said are“desperately needed,” will likely be paid for with the advertising and promotions tax revenue.
“More than likely, that will have to be a bond project, because thus far, we don’t think we’ll be able to raise enough money or write a check,” she said.
In North Little Rock, a percent of the tax, used to pay off construction costs for Burns Park, could expire in 2015, said Bob Sisson, the finance director for North Little Rock. The City Council can choose whether to renew that provision, but the other 2 percent will remain intact regardless of the decision, he said.
Abernathy said he doubts the advertising and promotions tax will ever be lowered.
“Once the city gets hold of money, they never let it go, whether it makes sense or not,” he said. “It would be a perfect time for them to come back to the restaurant industry and say you know, you’ve really paid more than your share for 40 years now, we can knock a half a percent off instead of rolling this tax over. That would be the proper thing to do.”
Hall said the Little Rock advertising and promotions tax was created from a law in the 1970s. She said she doesn’t foresee a change in the law anytime soon.
But Kaza points to the reduction in the state grocery sales tax, which occurred in three stages over the past five years.
“There were many skeptics who insisted the state grocery tax would never change,” he said. “Sure, it’s possible that the hamburger tax could be phased out.”
Kaza said other Southern cities, such as Lebanon, Ky., have debated cutting the prepared food tax.
From the advertising and promotions tax, North Little Rock has collected $2.25 million from January to May. Little Rock collected $3.81 million in the same time period.
“I want to see the city do great, and I think our industry has proved that it is over the-top generous,” Abernathy said. “I just think you need to look at what’s fair.”
Business, Pages 65 on 07/15/2012