Bohanon: Let Locals Set Their Own Food Tax

October 11, 2015

by Cecil Bohanon, Ph.D.

The Indiana State Legislature is contemplating letting local counties and municipalities impose a local tax on restaurant meals. Current rules require a locality that wants to impose such a tax to petition the Legislature for permission to do so. I have never understood why a state legislature should be in charge of what local government units can tax.

Well, to be honest, I do understand. Local governments, in Indiana as elsewhere, are constitutional creatures of the state government. Their taxing authority is, therefore, limited by the state. Nevertheless, as an advocate of the doctrine that political affairs ought to be handled by the least centralized competent authority, a doctrine called subsidiarity, I see no reasons why local governments ought to be prohibited from taxing whatever they want at whatever rate they desire.

A state legislature should mandate the procedure that local government is to follow. I like the idea that any local tax must be passed by a local referendum. The principle of local people determining local issues of public finance is a sound principle of political economy. Local control breeds local responsibility and develops habits of self-government. Good habits of citizen-run government are, in my humble opinion, the essence of the American system of government. We don’t have dukes or barons; we rule ourselves.

That said, why would local jurisdictions want to tax restaurant meals? One answer: they want the money. This is a common cry from local governments since property tax caps went into place. A second answer is that they perceive much of the tax will be paid by non-residents who patronize restaurants in the jurisdiction. The most popular local tax around is one paid by non-locals. Don’t tax me, don’t tax thee, tax that guy from Ohio at the McDonald’s.

However, such mercenary and predatory motives may be self-limiting. While it may be true that visitors to the shores of Lake Gichigoomi have little alternative but to eat at restaurants by the lake, they have many alternatives to a visit to Gichigoomi. Simple economic analysis suggests that taxes tend to fall more heavily on the side of the market that is least able to avoid the tax. A simple example illustrates the point.

Picture a lakes district with a number of similar and competing resort towns. Tourists enjoy rest and relaxation in charming cabins on the various lakes’ shores. Typical cabins rent for $100 a day in the region. Now the locals in Gichigoomi decide to impose a $20 per night tax on rental cabins. At first blush, you’d think the tourists would just suck up the $20 fee. However, because there are many untaxed alternatives to Gichigoomi lake cabins, owners of Gichigoomi cabins will feel pressure to absorb most if not all of the tax. The cabin bills may record — $80 rent, $20 tax —but it is the owner of the cabin who actually bears the tax.

If on the other hand the proceeds of the $20 tax are channeled to financing something that makes the environment of Gichigoomi more attractive to the tourists, landlords may be able to pass on the tax to tourists. In any case, the prospects for simply fleecing unwitting tourists to the benefit of the locals are quite limited.

So I say make sure that local taxes are decided by local referenda and then let communities compete with one another to find the best mix of taxes and spending that suits their purposes and ends. It’s called self-government.

Cecil Bohanon, Ph.D., is a professor of economics at Ball State University.



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