The Rhode Island Hospitality Association (RIHA) believes the proposed increase in the meals and beverage tax contained in Governor Lincoln Chafee’s budget proposal is a shortsighted attempt to generate additional revenue for the state, and that the proposal will ultimately end up costing more than is worth as it will persuade tourists, conventions and even residents to conduct their business elsewhere while simultaneously failing to address the root causes of Rhode Island’s perennial budget deficit.
The purpose of the legislation is to increase the meals and beverages tax from 8 percent to 10 percent in hopes of collecting $39.5 million in new revenue to help close a $215 million budget deficit for 2012-2013. However, an undue burden would immediately be placed on local residents and the small business owners who run these establishments.
Rhode Islanders have a rich tradition of dining out, with local restaurant sales anchored by strong support from the local community. A $50 restaurant bill is taxed $4 under the present 8 percent tax. The same bill is taxed $5 under the proposed increase. A family that dines out once a week will be forced to pay an extra $52 a year in tax, which will cause many to reduce the frequency of their meals out.
Restaurants that wish to lower their prices to offset the tax increase will be hard pressed, as they are already struggling to cope with the meteoric rise of the price of commodities. For example, over the last two years, the average cost of flour is up 22 percent; coffee is up 18 percent; beef is up 15 percent; pork is up 12 percent; and sugar is up 11 percent. Many other commodities have seen equally dramatic price increases. However, menu prices have increased only 1.5 percent on average.
The earnings of tipped employees will also be reduced. Presently, some guests tip on the pre-tax total while most tip on the post-tax total. Increasing this tax will result in more guests tipping on the pre-tax total. Workers will have less expendable income, and in turn will be forced to reduce the amount of money they put back into the Rhode Island economy through local spending.
This increased tax will also place Rhode Island at a competitive disadvantage in the fight to attract visitors. We would instantly bare a black mark for surpassing the meals and beverage tax rate in neighboring Massachusetts and Connecticut.
The Rhode Island Convention Center competes with more than 300 convention centers nationwide to attract key events, tens of thousands of visitors and millions in revenue to Providence. Increasing the meals and beverage tax by 2 percent will raise the cost of hosting an event in Providence to an unacceptable level.
The tourism industry in Newport will also face setbacks. Cruise ships, which we have fought for three decades to add our beautiful coastal cities to their touring schedules, may decide Rhode Island is now too expensive for its passengers.
South County, where summers are anchored by a vibrant rental market, may also be passed over in favor of more affordable locations if the expanded lodging base tax also proposed in the governor’s budget is passed.
International tourism will decline. The U.S. Department of Commerce predicts an estimated 1.5 million visitors from outside the U.S. will visit the region, setting a new record. International visitors are an important demographic because of their free-spending habits, but a higher meals and beverage tax rate will discourage them from selecting Rhode Island as their destination.
As the fourth largest industry in Rhode Island, hospitality must remain as competitive as possible. Each decision must be weighed through the filter of how it will affect our competitiveness to attract visitors, who will in turn spend hundreds of millions of dollars in our state.
Consider this: research has shown that every 187 visitors drawn to Rhode Island results in the creation of one new job. What other industry can say that? By increasing taxes, and placing us at a competitive disadvantage, our ability to add jobs and create stability is dramatically hampered.
For these reasons, RIHA urges the governor and the General Assembly to work as partners to solve Rhode Island’s perennial budget deficit through long-term, meaningful job creation and institutional reform, and not the implementation of new taxes that place an undue burden on all of us. We hope we can work together to make Rhode Island a more competitive destination.
Dale J. Venturini is the President and CEO of the RI Hospitality Association.