Here’s a simple rule for tax policy: don’t charge a flat fee to the hometown’s heroes, especially a fee for doing heroic stuff. That’s admittedly a tad hyperbolic; none of us are governing Gotham and only a few of us are living in it. But it gets to two important roots of principled taxation: reliance upon the permission of people in the jurisdiction and the need to consider rational expectations. People don’t like adverse treatment of their heroes and it seems plainly counterintuitive to deter heroism with a flat tax.
Enter Boston’s brilliant outdoor dining fee for North End restaurants. I’ve never been to Boston but a cursory search on North End will make it’s rich history clear enough to appreciate the issue. We’re talking about what was probably the US’ first “neighborhood” and is today a hub of culture and dining. When The Great Lockdown happened outdoor dining was “a savior” at a time when diners feared indoor spread of COVID-19, according to a quote from one restaurateur cited by WBUR. This is the heroic stunt conducted by one of COVID’s many heroes: the small food business owner. The fee’s very direct target.
No wonder people are unhappy with the fee.
Why would you ever levy a tax on this apparent miracle? According to (presumably) residential neighbors some of the costs – particularly noise pollution and trash spillover – were getting externalized. This is the City’s legitimate claim to revenue: more intensive trash service needs to be provided and nearby property values – and their consequent tax values – theoretically get squashed by more noise pollution. Some of the benefit from outdoor dining needs to be used to handle all of those spillovers.
A number of dining setups also occupy pavement that would have been curbside parking, which is a valuable if not controversial subsidy (at best, assuming the curbside parking was metered) from Boston to its drivers – one they intend to replace with likely more expensive agreements with garages (what a wonderful monopoly). That giveaway has to be paid for by someone!
Fine, but talk about bungled value capture.
First, banish flat fees. They virtually never make sense and either leave money on the table or give a perverse disincentive. In this case the obvious frustration is paying $7,500 to have a table and three seats outside while your neighbor pays the same to have an urban campsite. You have two ways to assess sidewalk usage: square footage and revenues associated with outdoor dining. The former presumes setup size is a determinant of pollution costs; the latter presumes collections are the determinant. Both have potential fallacies embedded in those presumptions. But both consider that externalized costs of this nature are variable, and for both public acceptance and economic efficiency the tax or fee must also be variable.
Second, after two years of public authorities obliterating their credibility explicitly, following decades of implicit destruction, is this fee really the hill Boston’s fiscal administrators want to die on? Theoretically you could tax every breath a person takes, and the city would riot. Or you could institute a consumption tax that still effectively reaches every breathing person albeit through a socially permitted mechanism. This is an important lesson because unpopular taxes are easy to kill and generally delegitimize taxation regimes. You may have jurisdiction but its through the permission of the taxed, similar to police powers. If the public would rather be taxed on food than air, it’s more or less their choice.
In either case living is still being taxed. And if Boston authorities need to capture the externalized costs of outdoor dining they too need to figure out how the public would like that done. Precision is clearly a concern: at least one local news interview featured someone suggesting the City charge only trash rules breakers the fee. That wouldn’t address noise pollution and the lost free parking subsidy though. It also doesn’t make the fee-on-eateries more palatable for a City that was undoubtedly dependent upon restaurants to keep serving take-out during the pandemic.
But no one likes tourists, which may make this an ideal opportunity for a new consumption tax. Levied upon diners’ checks in North End – because all the revenue generated would be spent within North End – it would take advantage of inelasticity and inertia common among seated diners. Additionally at least some of the tax burden would be exported to tourists and residents from outside the neighborhood, in a way meaningfully connected to productivity rather than as a flat fee left to business owners to redistribute. The tax can even be exclusively levied on checks issued at restaurants with outdoor setups, maintaining fairness.
Some may appeal: wouldn’t a consumption tax deter dining? Yes, and that’s exactly what we would want versus deterring businesses from building outdoor dining. The fee as structured deters outdoor dining spaces, which is only a problem regarding parking and partially noise. Those extra diners would still be trafficking the neighborhood, making only so much less noise and litter. This misunderstanding really undermines an opportunity to max out the Laffer Curve here.
The root problem is inefficiency: an inefficiently high number of diners at restaurants providing outdoor seating, leading to an imbalance between the fiscal benefit from it flowing to residents vs the cost of having dining outside. A consumption tax increases the cost of dining and may deter enough diners to reduce the externalized costs of outdoor dining while raising enough revenue from the “survivors” to handle the fixed (destroyed free parking spaces) and variable (trash and noise) externalized costs of outdoor dining.
Yeah the restaurants will likely lose some business. A fairly distributed sacrifice for the burden they’re passing onto their neighbors I would say. They’ll at least only lose revenue, not incur a tax on earnings, and because of the monopolistic competition inherent to this kind of neighborhood demand could be nearly inelastic for the best restaurants. People will eat a bomb dinner with this tax as a dessert and smile if the memories are worth it.
A consumption tax keeps this market functioning as normally as possible while maximizing everyone’s benefits/minimizing costs.
It’s no wonder people are fuming at this fee though, it’s a poorly designed tax levied upon a group viewed as getting the short end of all the sticks over the past two years. A little more thought, and a lot more recognition of the people’s right to inform tax design, can go a long way toward avoiding these kinds of clashes.