Hospitality Tax

Town Council voted 4 to 1 in favor of adopting the Hospitality Tax in the Town of James Island at last Thursday's meeting.   The second and final reading will be at our May meeting.   As always, there will be a public comment period at the May meeting where residents of the Town may share their views to Council on this or any other issue.

The Hospitality Tax is a 2% tax on sales of prepared foods and beverages. This means food and drink sold in restaurants located in the jurisdiction of the Town.  It also includes fountain drinks, coffee and prepared foods sold by the convenience stores/gas stations located in the jurisdiction of the Town.

We have about 30 restaurants (and convenience stores/gas stations) that would be subject to this tax and about 90% are on Folly Road.   Some examples are Zaxbys, Chick-Fil-A, Mondo Delite, and SIPS.

These businesses have located on Folly Road because it is so busy, especially during the spring, summer and early fall.   We call it "beach traffic."    Some of the traffic on Folly Road is people who are from "out of town," in the sense that they don't live in the Lowcountry and are heading to Folly Beach for a vacation.  I don't think that makes up much of the traffic, but the vast majority of the traffic on Folly Road is people who are from "out of town" in the sense that they don't live in our Town, the Town of James Island.   I think most "beach traffic" is people from other parts of the Lowcountry spending some time down at Folly Beach.  And, of course, residents of Folly Beach and James Islanders from unincorporated Charleston County and the City of Charleston use Folly Road too.

The City of Charleston has long imposed a 2% Hospitality Tax, and it is charged at all the restaurants and convenience stores in areas on James Island annexed to the City of Charleston.  (And everywhere else in the City of Charleston.)  It also applies to all the prepared foods sold in grocery stores on James Island.  All of them are under City jurisdiction.  Examples of restaurants under City jurisdiction on Folly Road would be the Screen Door, Kickin Chickin, Taco Bell, IHOP, and McDonalds.      

The City of Folly Beach, the Town of Mount Pleasant, the City of North Charleston, etc., etc., etc., all have a 2% Hospitality Tax.   The State of South Carolina does not allow local governments to just come up with their own unique taxes.   The Hospitality Tax is one of the few taxes that can be imposed by a municipal government.   That is why so many local governments collect it.

The funds raised by the Hospitality Tax must be used somehow in relation to tourism.    And while the promotion of tourism is a possible use, dealing with the costs and burdens created by tourism is also an allowed use.  

I do not believe that the Town of James Island needs an expensive government program to expand tourism on James Island.    However, we see the cost of tourism--congestion on Folly Road--every day.   One of the allowed uses of the Hospitality Tax is to improve and maintain transportation infrastructure used by tourists.  Folly Road obviously counts.

Last year, the James Island community was part of a "Rethink Folly Road" planning process.   It was initially spearheaded by the City of Charleston, but managed by the Berekley-Charleston-Dorchester Council of Governments.   The purpose is to improve Folly Road, including traffic flow.   The result will be very expensive and usually, there is a requirement for a local match.   Further, even if we can get outside funds for construction, there will be maintenance expenses.

I believe that the Hospitality Tax may well be the least bad way for the Town to fund our share of necessary expenses to improve Folly Road.   That is why I am open to this new tax.   The alternatives are worse.

We have had very little citizen response so far.   I was contacted by one of our restaurant owners and staff has had conversations with a few others.   We haven't heard from any of the large chains, as might be expected.   As we have heard repeated several times, they are no doubt surprised that we aren't collecting it already like all the other area municipalities.

We have had a handful of citizens contact the Town.   Some of the remarks suggest major misunderstanding of the tax.

One resident expressed regret that she did not annex to the City of Charleston.   It was a puzzling remark.   Residents of the Town will not be assessed a special  "hospitality tax."   It is rather patrons of restaurants in the Town would see a 2% tax added on to the bill.  If you live in the City of Charleston, you will still pay the tax if you go to a restaurant located in the Town.   And, of course, the City of Charleston has long applied this tax.  This resident insisted that the City of Charleston had no such tax.   They do.  And we have all been paying it every time we go to Ladles or any of the other restaurants under City jurisdiction whether on James Island, on the Peninsula or in West Ashley.

In my view, much of the traffic on Folly Road is due to apartment complexes and other development in the City of Charleston .   I think they very much should help fund Folly Road improvements.   To the degree that those James Islanders who live in areas annexed to the City of Charleston patronize restaurants or grab a coffee from a gas station in the Town end up paying part of this tax, they will be helping to fund the improvements on Folly Road.   Good.

Another resident opposed the tax on the grounds that the City of Charleston doesn't spend its Hospitality Tax money on improvements on Folly Road.   This complaint didn't make much sense, really.   That money goes to the City of Charleston and they use it to promote tourism and help with tourism related costs throughout the City.   Surely, that is mostly on the peninsula.

Councilman Milliken made a similar point when he contacted a TV station.  He implied that this tax is inappropriate for the Town because the Town isn't focused on tourism.  Right.

We at the Town are not going to spend the money to promote tourism in downtown Charleston.  Of course, all of it will be spent to benefit James Island.   And there is no plan to use this money to promote James Island as a special tourist destination.  Improving Folly Road is both a permitted expense and a major priority for the Town.  At least for me, that is why I am even considering it.

Interestingly, we have had discussions at the staff level with the City of Charleston proposing that they earmark their Hospitality Tax money from Folly Road businesses in the City of Charleston to help fund the improvements on Folly Road.   Whether that will occur, I am not sure.   But part of the "deal" would be that the Town would do the same.   That possibility is only on the table if the Town adopts the Hospitality Tax.

Another resident didn't think it was right that when he went to Kickin Chickin he would have to pay this extra 2% in order to improve Folly Road.   He explained that James Islanders only go to "Charleston" for special occasions.

Of course, he already does pay that 2% tax at Kickin Chickin because it is located in the City of Charleston.   If you are thinking that when you go to LaTabella you will pay 2% more---no, you already pay it, because it is in the City of Charleston.

And if you didn't know that you were paying that tax when you go to the IHOP but you do not if you go to Sweetwater Cafe, doesn't that say something about significance of this tax?   Maybe I am cheap, but when I go out to one of our nicer restaurants, I usually spend $40 to $50.  So, it is about 80 cents or a dollar more for the hospitality tax.   Of course, I  don't go out too much.  Maybe other people go out most nights and spend a lot more.  I suppose every little bit counts.

It was also suggested that the Town cut back government waste and use that to improve Folly Road.  The resident then went into a long series of complaints that appeared to be focused on Federal government spending and taxes.   The cost of improving Folly Road outstrips our entire Town budget.   Of course, we can never pay for all of it.   This proposal is to obtain funding to pay a share.   And the kind of money the Town has available from other other sources is very small.   The $450,000 this tax will raise each year is small compared to the cost of doing much of anything on Folly Road, but it is large compared to our current budget.  (The Camp and Folly project is $14 million.  The Town budget is more like $3 million in total.)

However, I can't stop here.   I am an economist.

The basic economics of a sales tax is that the burden is shared by both buyer and seller.   The practice of tacking on the tax at the end only creates the illusion that the tax is entirely paid by the buyer.   The result of a "sales tax" is to slightly reduce the sellers' prices (menu prices charged and received by the restaurant) while also increasing the total amount paid by the patrons including the tax.   Because of our unusual situation where restaurants in the Town do not pay the tax and nearby competitors do pay the tax, most of the burden of the tax would be on the restaurant rather than on the patron.   Basically, Mondos has to compete with the Screen Door, and since the Screen Door has to charge 2% extra, Mondo can charge 2% more on the menu price and the patrons will go home having paid similar amounts at either restaurant.  If Mondo pays the tax too, it will no longer be true.  They will need to come closer to matching menu prices at restaurants in the City.

Now, restaurants are very competitive, but because they are all slightly different, they are "imperfectly" competitive.   And I am sure that few businessmen and women are able to get their pricing and production perfect.   But the baseline presumption should be that this tax will make operating restaurants in the Town slightly less profitable rather than significantly increase the amount paid by those patronizing the restaurants.

Further, given that there are limited parcels in the Town for businesses of any sort, including restaurants, a long run effect of the tax will be to slightly reduce the rents earned by commercial property owners in the Town.   In other words, because a restaurant can currently operate without the tax if they are located on a Town parcel, this slightly raises the rents that the commercial landowners can get for their property.   Since this benefit only applies to restaurants (and convenience stores/gas stations to a slight degree,) this should result in there being more restaurants than other businesses.   There will be a tendency for restaurants to locate on Town parcels and other businesses to locate on City parcels.  This effect would no longer exist if the Town also has the Hospitality tax.

Now, if we spend this money to improve Folly Road, this will be desirable for all of the businesses on Folly Road.   All of the businesses, including the restaurants, will be made more profitable if the Folly Road corridor becomes a better place to stop rather than just pass through. But, in the long run, making Folly Road a better place to have a business will increase the rents that can be charged by the owners of commercial property on Folly Road.

So, the fundamental effect of the expenditure is to benefit the commercial property owners on the Folly Road and the burden of the tax will mostly be on them too.    Think about it.  They benefit greatly by having all of this "beach traffic."  If there were no beach traffic, most of the property on Folly Road wouldn't be commercial at all!   Most of us who live in the Town just see this as so much headache.

I know, it is complicated.  It is a lot easier to say that the "tourists" will pay part of the cost of fixing up Folly Road.   And I think it is likely that some residents of the Town will sometimes end up paying at least a little more when they go out to eat at restaurants on James Island.  As will the tourists and the residents of the City of  Charleston on James Island.   But I am sure that it will end up being much less than the small amount that will be tacked on at the end of the bill.

But even if we do pay some more, we will also benefit from an improved Folly Road.   We have to live with beach traffic.  The only route to Folly Beach cuts through our Town.   In my view, improving Folly Road is an important priority.   As I said above, the Hospitality tax looks like it might be the least bad way to fund it.

Still, I want to know what you think.  Be sure to let me or other members of Council know before our May meeting.  That is when we have our second and final reading.