(The Center Square) – An idea to implement a 20% service charge on Denver restaurant bills, floated last week by Mayor Mike Johnston, could cost the city’s economy $718 million over the next five years, according to a policy think tank.
Johnston made the suggestion during an interview on the “City Cast Denver” podcast Wednesday while discussing struggling restaurants in the city.
“One idea we’ve been floating to restaurants is the idea of a service charge,” he said. “If you do a service charge of 20%, you can gather that, and you can spread it equally across all the employees.
“You could pool those service charges, you could share it with all the staff, and interestingly for us, if you add a service charge, that comes above the line in the bill, which means it’s also taxed,” Johnston explained. “So if you had a $100 tab, and now you put a 20% service charge, you pay $120, and we tax $120 … So our proposal would be, if we did that, you could take the marginal new tax, and we could share that revenue back with the restaurants …”
Johnston added a service fee would be a way to “support the institution of the restaurant, at the same time you’re supporting dollars back to the individuals.”
Following online backlash, the mayor told the Denverite news website Thursday that a service fee would be voluntary and “is merely one potential option that could help Denver restaurants and employees succeed, and I will keep working hard to find a commonsense solution that ensures wages stay high and businesses remain open.”
The Independent Restaurants For A Better Colorado, an advocacy coalition made up of industry groups such as the Colorado Restaurant Association, says the city has lost 22% of its restaurants over the last three years, with 220 closures last year.
A surcharge like the one floated by the mayor could lead to more closures, according to an analysis by the Common Sense Institute, a free-enterprise think tank.
“Denver’s restaurant industry is already struggling, and adding a 20% surcharge could force more businesses to cut jobs or close,” CSI Executive Director Kelly Caufield said in a statement. “Our research shows even small cost increases have ripple effects, reducing economic activity and hurting workers and consumers alike.”
In one scenario, a surcharge of 20% results in a 20% increase, leading to a $718 million hit to gross domestic product in the city by 2030 and an employment decline of 4,575, CSI said.
In another scenario, CSI said if tips go down 15% due to the surcharge and costs for diners goes up 5%, GDP would decrease by $176 million, and employment would be reduced by 1,122 people.
The Colorado Restaurant Association said most restaurant workers don’t support moving to surcharges, which is why it’s supporting a bill making its way through the legislature that would change the state tip offset for employees in municipalities where their local minimum wage exceeds the state minimum wage.
“[We have] been saying for years that we want restaurants to have options and flexibility in how they run their businesses – options to use traditional tipping or move to service charges, as operators see fit,” Colorado Restaurant Association President and CEO Sonia Riggs told The Center Square. “While we appreciate all creative ideas for how to provide our industry with relief, we also know that most tipped workers in Colorado, and across the country, want to keep their tips. Most don’t want to move to service charges.
“That’s why the Restaurant Relief Act (HB25-1208) is so important, because it protects the traditional tipping model for local, full-service restaurants and lets operators do what’s right by their teams and their communities,” she said.
