Three-martini lunches may be a relic of the 1970s, but they didn’t disappear immediately when Jimmy Carter complained that the working class was subsidizing them during his 1976 presidential campaign. The midday business ritual continued unmolested until a two-step congressional reduction in the allowable corporate deduction for meals and entertainment. Ronald Reagan’s Tax Reform Act of 1986 reduced the deduction to 80 percent, and Bill Clinton’s Omnibus Budget Reconciliation Act of 1993 took it down to fifty.
At the time, comedian George Carlin joked, “while the three-martini lunch is being cracked down on, it shouldn’t affect the working man’s two-joint coffee break.”
Of course, Carter’s quip about martinis was shorthand for a more extensive critique of the tax code’s fairness. Why should the government pay for a businessman’s lunch when wage earners enjoy no comparable tax breaks? When President Trump signed the Tax Cuts and Jobs Act of 2017, he retained the long-term trend of limiting deductions for business expenses on meals and entertainment. Now, as the Washington Post reports, he’s about to reverse the trend and take us back to the 100-percent deductible of the Carter years.
The draft language of the emergency coronavirus relief package includes a tax break for corporate meal expenses pushed by the White House and strongly denounced by some congressional Democrats, according to a summary of the deal circulating among congressional officials and officials who are familiar with the provision.
The full deduction was championed during negotiations with Congressional Democrats by Republican Sen. Tim Scott of South Carolina and heavily promoted by Treasury Secretary Steven Mnuchin and the White House National Economic Council director, Larry Kudlow.
House Speaker Nancy Pelosi and other Democratic negotiators reluctantly agreed to the change as part of a swap wherein Republicans begrudgingly allowed an expansion of “tax credits for low-income families and the working poor.”
Sen. Scott boasted in a statement that his provision is “pro-worker, pro-restaurant, and pro-small business [and] will lead to increased spending in restaurants and more income for staff.” It’s a suspect assertion.
The Washington Post notes, the Democrats believe the change will “do little to help struggling restaurants and would largely benefit business executives who do not urgently need help at this time.” The Post also cites Kyle Pomerleau, a tax analyst at the right-leaning American Enterprise Institute, saying it’s “bad policy” and “not good economic relief for the current situation.”
Restaurants and bars have certainly been hit hard by the COVID-19 pandemic, but this isn’t because businesses aren’t getting a big enough write-off on their business lunches.
First, even before corporate America moved their meetings to Zoom, the business lunch’s importance was in decline. Coinciding with the 1980’s war of drugs and increasing awareness of the social and liability costs of drunk driving and sexual harassment, companies long ago adopted a low tolerance approach to alcohol consumption on the job. Contracts are no longer built on a handshake but locked-down by highly-trained company attorneys. This social change combined with the reduced entertainment tax advantages to put an end to the three-martini meal.
By the early 1990s, restaurants were already noticing the change. At first, bartenders were often asked to create separate bills for business lunches, one for food (that would be billed to the company) and the other for drinks (which would not). This undoubtedly impacted the hospitality industry’s revenue, but it was driven as much by changing mores around drinking and contracts as the new tax code. In our current crisis, the reduction in revenue is driven by employees working from home and avoiding gathering in public, especially indoors where the virus spreads more readily. Few business diners will start piling into restaurants and even if they wanted to, most restaurants are operating under strict caps on how many patrons they can accommodate.
Unsurprisingly, the restoration of the 100 percent entertainment deduction is welcomed by some of the big tourism lobbies such as the American Hotel and Lodging Association and US Travel. The National Restaurant Association is for it but it has not been the main focus of the Independent Restaurant Coalition, a new advocacy group, which represents smaller dining operations. These tax subsidies certainly won’t hurt restaurants but neither are they the best or most efficient or fairest way of assisting the restaurant industry.
Forbes reports that the COVID relief package provides an additional $284 billion for the Paycheck Protection Program for small businesses. It would make more sense to boost this number to help struggling bars and restaurants than to waste the money pretending that subsidizing business lunches during a pandemic will save the industry.
The corporate world has moved on since the 1970s and the tax code can’t force them to go back, nor should it try.
