Taxes and Regulations Hamper the Restaurant Industry’s Road to Recovery

The restaurant industry has always been a high risk industry that operates on relatively tight margins. The impact of the Covid-19 pandemic and accompanying rules and regulations have made things infinitely more difficult for those in the business. Now the industry faces a plethora of new challenges including a 7.5% inflation rate, supply chain issues, and a national labor shortage. Most concerning of all are the onerous rules and regulations that states and localities continue to impose on restaurants and, as a consequence, consumers.

The Covid-19 pandemic has been particularly damaging to the food service industry in general. During the height of the pandemic, restaurants were forced to grapple with state ordered shutdowns as well as a multitude of other masking and sanitation requirements that continued long after the shutdowns ended. Some restaurants attempted to survive during this period of time by expanding outdoor seating and offering food service pickup and delivery. Unfortunately, many restaurants still closed their doors to the detriment of their workers and customers.

According to the National Restaurant Association, some 90,000 restaurants closed their doors as a result of the pandemic, many permanently. In addition, the number of industry employees declined by more than 1 million, with sales far below pre-pandemic levels when adjusted for inflation. To make matters worse, just as many businesses were beginning to see some small gains, a new array of problems have arisen including a 40-year high inflation rate, global supply chain slow down, and a national labor shortage.

Perhaps most depressingly, federal, state, and local governments continue to introduce numerous new rules and regulations to the food service industry, compounding what is already a harsh business environment. Restaurants must pay a range of taxes and fees including federal income taxes, payroll taxes, and they also pay a variety of state and local taxes. Restaurants frequently have little choice but to pass costs onto consumers.

The level and severity of taxation varies from place to place, but nearly all food service operations face several layers of taxation that can quickly add up. For instance, in addition to federal taxes, New York City restaurants must also pay a 4.5% service tax, 4% state sales tax, and a 0.375% metropolitan commuter district sales tax. That is a combined 8.875% sales tax on all processed and prepared foods. New rules and regulations only add to this tax burden.

Philadelphia provides one such example. City officials recently released new permit regulations governing the city’s many restaurant “streateries” (outdoor dining areas). These regulations include a litany of new fees that restaurants must pay in order to operate a streatery. Some of the new requirements include a $2,200 annual license fee, $200 application fee, $1 million general liability insurance policy, and $60,000 security bond for streatery removal during extreme weather events. Other provisions require businesses to identify a new electrical system to power their streateries and to submit a street design to the city’s Art Commission. The pure scope of these new requirements illustrate the danger of red tape and bureaucratic misadventure.

Another recent example is Seattle’s misguided “sweetened beverage tax.” In 2018, the Seattle mayor and city council enacted a tax on all sweetened beverages distributed within city limits as part of a campaign to encourage healthy eating and drinking habits. However, recent evidence suggests the tax did not result in better “health outcomes” but rather led residences to simply swap out soda and other sugary drinks for beer. What the tax did do was harm distributers like small restaurants and convenience stores who were forced to raise retail prices on sugary drinks. Similar misplaced taxes have been pushed in other cities like Denver, Philadelphia, and San Francisco.

Other regulations seem innocent enough but frequently contain hidden costs that raise prices on consumers. For instance, Montgomery County Maryland’s new law requiring restaurants to offer at least one healthy children’s meal option would likely lead some restaurants to incur additional costs by having to stock additional perishable food. Consumer choice is often driven not by health-conscious considerations but by consumer preference which is inherently subjective.

Each of these new regulations are likely well-intentioned measures written by legislators who want to make a positive impact on their communities. The problem is these measures usually cost money and require owners to make difficult decisions such as raising food prices or closing their doors.

Elected officials should hold off on punitive regulations and recognize that many restaurants are still in the process of economic recovery. Most continue to operate on slim profit margins and have taken out considerable loans to remain open. New taxes and regulations, however minor, may be all that it takes to sink their business and lead to layoffs. Therefore, legislators should be weary of enacting any new tax or regulation that is likely to have negative carryover effects. Sometimes no action is the best action. Assuming new laws are even warranted, legislators should prioritize simplicity over expediency and focus on reforming the current tax and regulatory environment to encourage commerce and growth. These steps will go a long way towards helping restaurants and other small businesses on their road to recovery.

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