The last five months have been a trying time for Dunkin’ franchise owners and quick-service restaurants across the country. Now operators face a new threat to their bottom lines: cash-hungry city and state governments. Facing huge budget deficits in the wake of the coronavirus pandemic – and the harsh blow it has delivered to the national economy – cities and states are looking to businesses large and small to help make up the shortfall.
As we shall see below, local and state officials are both exploring new ways of squeezing tax revenue out of the business community – such as through a tax on advertising – as well as eyeing increases to tried and true methods, such as the age-old property tax. But make no mistake, the taxman is coming.
Ad Tax Poses Latest Threat to Small Biz Finances
The Washington, D.C., City Council may have nixed a proposal that would have slapped a three percent tax on advertising services and the sale of “personal information,” but as city and state governments struggle to plug massive budget deficits in the wake of the coronavirus downturn, we have likely not seen the last of this idea.
The D.C. Council retreated from the tax plan, which would have raised more than $18 million, after a heavy lobbying campaign by the 4A’s, or the American Association of Advertising Agencies, and other business and industry groups. At a time when businesses, including quick-service restaurants, are struggling to get back on their feet, the proposed tax on advertising and information gathered through market research would put a further damper on economic activity, opponents argued.
And it would also deal a harsh blow to the advertising, media and publishing sectors, which are major employers in their own right and are also struggling to stay afloat amid the worst economic crisis since the Great Depression. No niche industry, advertising accounts for $30.4 billion in economic activity and sales in D.C. Companies with products and other services that depend on advertising – like Dunkin’ and other quick-service chains – account for roughly 20 percent of Washington’s 751,369 jobs, noted Cary Hatch, CEO of MDB Communications and chairman of the Mid-Atlantic American Association of Advertising Agency, in an op-ed in the Washington Business Journal.
“No state or city is going to be able to tax their way to prosperity in the midst of our current pandemic and economic crisis, and attempting to do so will be counterproductive at best,” warned Alison Pepper, executive VP of government relations for the 4A’s, in a statement to Ad Age. “Advertising grows business, and concurrently, grows the sales tax base for states and cities.”
Advertising industry trade groups also pushed back hard against the arguably nebulous idea of taxing personal information. Not all information gathered on behalf of companies and advertising firms is used simply to target customers, and can be part of a broader attempt to understand their customers and the markets they are operating in, Pepper told Ad Age. Yet despite the influential trade group’s success in derailing the D.C. plan to tax advertising, Piper and the 4A’s are gearing up to battle a looming wave of similar proposals across the country.
In fact, D.C. supporters of the ad tax noted that Phoenix as well as seven states across the country have considered similar taxes. Maryland’s governor this spring vetoed a bill that would have hit every digital ad sold by Facebook and Google in the state with a 10 percent tax, with a lower rate for smaller companies. A similar proposal has also been filed in New York, according to Ad Age. “I absolutely expect other states to follow suit,” Pepper told the trade publication.
Property Tax Hikes Loom as Cities, States Scramble for Cash
State and city governments are in a bind, with the coronavirus-driven downturn having overnight wiped out hundreds of billions in taxes. By next year, states across the country will face a combined budget hole approaching $300 billion—and that’s not even counting the major cities, some of which have budgets larger than individual states. As they face deep cuts to services and programs, from schools and parks to police, state and municipal leaders are suddenly looking for ways to squeeze more tax revenue out of businesses.
However, state and local officials aren’t just looking to get creative and come up with new levies, such as the tax on advertising and personal info detailed above. Some are doubling down on existing taxes, among them Nashville, which just hiked property taxes on local businesses by 34 percent, according to the Nashville Scene. In particular, the Metro Council voted to boost the levy on commercial properties to $4.221 per $100 in assessed value. The increases have raised the hackles of downtown property owners, as well as the local restaurants and businesses to whom they lease out space.
Under the standard triple-net lease agreement, restaurants and other businesses that lease space are still on the hook for taxes and other expenses. Taking it on the chin has been Kurt Rutkowski, owner of two restaurants in Music City. In an interview with the Nashville Scene, Rutkowski noted he can’t cut labor costs because he’s already relying on family and friends to keep his restaurants running. “Triple-net hits me three times. I’ll see it in my rent, in my utilities and in any improvements I might want to make to my businesses,” he said.
The Chicago Public Schools, which relies on property taxes paid by both homeowners and commercial landlords, is counting on $1.9 billion in additional state funding plus a half-billion in federal money that has yet to be approved to make up its proposed $8.4 billion budget for this school year, the Chicago Tribune reports. While some might question the decision to rely on a still nonexistent federal aid package, CPS CEO Janice Jackson told the paper, “I think it would be irresponsible to put out a budget assuming that the federal government is going to do nothing.” Of course, if Jackson is wrong, Chicago school officials will have to make up the funding shortfall one way or another. It’s hard to imagine commercial property owners – and the franchise and restaurant owners who rent space from them – will be spared.
Restaurants Would Keep Sales Tax Money under Penn. Proposal
What with tax hikes being proposed left and right, here’s one bill that Dunkin’ franchise owners would surely love to see passed. A pair of Pennsylvania lawmakers wants to suspend the collection of the sales tax on food and beverages in a bid to boost struggling restaurants and bars.
The Republican lawmakers from Lehigh County, state Rep. Gary Day and state Rep. Ryan E. Mackenzie, want the state to hold off on collecting these taxes until restaurants and bars are allowed to reopen at full capacity, according to the Pittsburgh Business News. But there’s a twist. Restaurants and bars would still collect the six percent tax, but the cash would be available to restaurant operators in the form of a grant from the Pennsylvania Department of Revenue, according to the proposal from the two state representatives.
The money, the lawmakers argue, could go to help pay for safety measures and renovations restaurant and franchise owners were forced to undertake in order to deal with a spate of new Covid-19 regulations and rules. Democratic Gov. Tom Wolf recently reduced bars and restaurants to 25 percent capacity amid a resurgence in cases in Allegheny County.
It was a pattern seen across the country by governors in states where coronavirus infection rates rebounded after the reopening of a range of businesses and industries in the early summer. The second round of Covid-19 closures wound up shuttering 100,000 restaurants across the country, according to the National Restaurant Association. Without a financial boost, many restaurants will simply have to close, the pair contends, “Additional restrictions on capacity have forced numerous restaurants to close and we are hearing from many restaurateurs that additional restaurants will close if they do not receive some sort of assistance,” Day and Mackenzie wrote in a memorandum on their proposal, the Pittsburgh Business News reported.
If that happens, the state will wind up being the bigger loser, with an even larger drop in sales tax revenues. “If these restaurants close, the Commonwealth stands to lose far more revenue than the sales tax on 25 percent capacity operations of these businesses,” the lawmakers wrote. Gov. Wolf was non-committal on the proposal when asked about it at a news conference, the paper reported. “I don’t know if I would consider that particular one [measure] but financial support is absolutely essential,” the governor told reporters.
Even as Dunkin’ and other drive-thru focused QSRs have managed to stay afloat amid the greatest challenge the national economy has seen in decades, there is concern tax increases and other rising costs will eat away at store-level profits. While, at first glance, some tax proposals may not seem to be an immediate threat, the devil, as always, is in the details. The advertising tax that failed to move forward in the D.C. Council would hurt not just ad agencies and media organizations, it would also increase the cost of marketing for franchisees and other small business owners. And while property tax increases are often couched in all sorts of bureaucratic jargon, at the end of the day, franchise owners could face higher costs, one way or another.
It always pays to pay close attention to the various state, city and federal proposals that could impact your bottom line, and especially at a time of crisis. With Ed Shanahan’s weekly Small Regular newsletter and Independent Joe magazine, we’ll keep an eye on what’s brewing in the halls of state and city governments so you can do what you do best, running your business and taking care of your customers and employees.