Last updated on 07/27/2017

Omaha’s restaurant tax, explained

Omaha's newest tax might be one of its most controversial.
City restaurant table pavement
Published by Victor Cassone

In 2010, Mayor Jim Suttle introduced a new tax that would specifically target restaurants and bars in Omaha. The goal was to ease some of the city’s financial strain and find a new reliable revenue stream for the city. Since its introduction, the restaurant tax has been a source of controversy for Omaha.

So what exactly is a restaurant tax? A restaurant tax is a special tax that is applied to meals that are prepared for immediate consumption. This means customers of both takeout and dine-in restaurants have to pay an extra tax on their meals if they choose to dine within Omaha’s city limits. The tax does not apply to groceries or other non-prepared food.

The way it works, according to Omaha’s department of Finance, is by adding a 2.5% tax to “all gross receipts for the sale of food or beverage that is prepared on the premises for immediate consumption either on the premises or elsewhere.”

The restaurant tax was initially proposed by Mayor Suttle in 2010 among a slew of other tax increases. The goal was to help deal with shortcomings with the fire and police pension fund along with adding another source of revenue to the city. The restaurant tax was by no means the first of its kind in Nebraska. By the time Omaha proposed the restaurant tax, Lincoln and Grand Island both successfully implemented a restaurant tax of their own. These cities were used as an example for Omaha once Omaha decided to implement a restaurant tax of its own.

Omaha ended up adopting a higher restaurant tax compared to the other cities in Nebraska. The initial proposal for Omaha’s restaurant tax was 4%. The rate was later brought down to 2.5%. In comparison, Lincoln’s adopted a restaurant tax of 2% and Grand Island has a rate of 1.5%.

According to the Tax Foundation, out of the 50 most populous cities in the US, Omaha has 5th largest meal specific tax at 2.5% and the 6th largest combined dining tax rate at 9.5% (sales tax + restaurant tax). Only 15 out of the 50 states had a specific meal tax. In comparison, Omaha’s neighbor Kansas City has a restaurant tax rate of 1.23% and Minneapolis has a rate of 4%.

Most the time with restaurant taxes, the goal is to try and export some of the tax burden to people visiting from outside the city. When non-residents visit Omaha, they end up relying on governmental services provided by the city such as public streets and the police force. These services cost money to maintain. Finding ways to tax non-residents helps the city recoup some of these costs and bring in some extra revenue. When someone visits a city, they tend to eat at restaurants more frequently and stay in hotels. Because of this, restaurant and hotel taxes are used to place a heavier tax burden on non-residents.

Cities with a lot of national/regional events tend to benefit the most from a restaurant tax. Omaha is by no means a tourist destination but it does host to a decent amount prominent events. The major events that come through Omaha include the College World Series, Berkshire Hathaway Shareholders Meeting and the Olympic swim trials, among others. The Omaha Zoo also attracts people from across the region.

So how much money does the restaurant tax actually bring in? During 2016, the restaurant tax brought in approximately $31 million in revenue to the city government. The restaurant tax yearly revenue has been steadily increasing by approximately $1 million each year since its adoption in 2010. The revenue from the tax is projected to continue to grow due to Omaha’s and The United State’s economic growth and stability.

According to City Finance Director Steve Curtis, $13.5 million of the revenue from the restaurant tax goes into the police and fire department pension fund. The remaining revenue goes into the city's general fund. The general fund is the city's chief operating fund. The general fund is used to finance the city’s normal governmental operations.

The restaurant tax actually brings in revenue to the city and state in two different ways. First is through the direct tax of 2.5%. The second way is through the sales tax generated from the restaurant tax.

According to the Revenue Manual provided by Omaha’s Department of Finance, “The Nebraska Sales and Use Tax is calculated on the gross receipts plus the restaurant tax”. This means the sales tax is applied only after the restaurant tax is added to the total cost. This subtle quirk has small implications for you but large ones for the city and state.

The way the restaurant tax works is by applying the tax rate directly to the raw receipt value. So if you have a $100 receipt you will pay an extra $2.50 in restaurant tax (2.5% tax rate). After the restaurant tax is applied, the sales tax is then applied to this new total ($102.5 * sales tax). Because of this order of operations, you are paying sales tax on the restaurant tax itself. You end up paying an extra 18 cents for every $100 spent eating at a restaurant in Omaha.

This doesn’t seem like a lot but it adds up for both city and state. The City of Omaha brought in around $31.5 million from the restaurant tax in 2016. Since the restaurant tax is subject to sales tax, this also means the city brought in an additional $450,000 through its 1.5% sales tax. Likewise, the sales tax from the restaurant tax brought in approximately $1.7 million to the State of Nebraska (5.5% state sales tax).

It's safe to say the restaurant tax has become a massive source of revenue for Omaha’s city government. Achieving these gains hasn’t been easy. There has been some major complaints and controversies surrounding the tax. In the early days of the restaurant tax, some restaurant owners sued the city claiming it was unconstitutional. The complaint was focused on a sense of unfairness, of an unnecessary addition to the tax burden of businesses who were already charging customers a sales tax. The Nebraska Supreme Court eventually disagreed and ruled that it was in fact constitutional.

The restaurant tax has also been used as political fodder. During the 2012 mayoral campaign, Jean Stothert made abolishing the restaurant tax a key part of her campaign platform. The 2012 election was less than 2 years after the tax was adopted and many people were still indifferent about it. Her stance on the tax played an important part in getting her elected. Since her inauguration, she appears to have changed her stance on abolishing the tax. As of 2017, she has made zero attempts to get rid of the tax.

The most recent development related to the tax involves food trucks. In late 2016, the Omaha City Council voted 5-2 on applying the restaurant tax to all food trucks in Omaha. This tax expansion seems to contradict Mayor Stothert's previous pledges to curb of the tax. Stothert’s justification for this expansion was on the basis of fairness. She didn’t think it was fair that food trucks were exempt from the tax while everyone else had to pay. Some saw the mayor's logic as contradictory to her campaign promises. They argued if the tax is something you want to abolish then why would you expand its usage?

There has been no major indications that the restaurant tax has done significant harm to local restaurants. The initial worry was that people would be discouraged from eating out due to the tax. That does not appear to be the case. The revenue from the tax continue to grow which means more, not less, people are spending money at restaurants. To be fair, it is possible that restaurant revenue could be higher if the tax didn’t exist. These increases could be a product of the country’s continued economic recovery after the Great Recession.

All in all, the restaurant tax has established itself as a major source of revenue for the City of Omaha. Many government programs now indirectly depend on it through the general fund. According to Stothert, the fire and police pension fund is now nearly 50 percent funded, up from 44 percent in 2011. There is still a long way to get that fund to where it needs to be.

Moving forward, it’s hard to imagine the city removing the tax without some sort of alternative revenue stream. As of mid 2017, the mayor and city council seem more concerned with lowering property taxes than they do getting rid of the restaurant tax. It appears the tax is here to stay.