Nearly free lunch

In the early days of the Clinton administration, the president’s economic program got through Congress on a series of razor-thin votes. Every Democratic vote was needed. One of the Democratic holdouts was U.S. Sen. Richard Bryan of Nevada.

Bryan’s problem was a tax break near and dear to the casino industry—the meals and entertainment deduction, also known by more emotionally loaded terms, like the “three-martini lunch deduction.” The money to be saved by cutting the deduction was earmarked for deficit reduction, but it was only one part of the Clinton economic plan.

The deduction had been reduced from 100 to 80 percent during the Reagan administration. Now Clinton wanted it cut from 80 to 50 percent. Clinton made an appeal to Nevadans—"There are national issues at stake here, as well. If we’re going to do something about this deficit, we’re all going to have to contribute.”

Meanwhile, the National Restaurant Association was pushing from the other direction, running television spots portraying bus boys pleading for their jobs.

To get Bryan’s vote for the whole program, Clinton offered 65 percent. Bryan wouldn’t budge. Finally, Clinton offered to drop the whole idea in order to get Bryan’s support for the rest of the program.

Even then Bryan didn’t yield, which turned out to be a monumental blunder—Clinton found the votes he needed elsewhere and the full measure—with the 50 percent cut in the lunch deduction—was passed by the Senate on a 51-50 vote ("Nevada Pork,” March 19, 1997). Bryan had overplayed his hand.

The industry waits
The job losses the restaurant industry warned about never appeared. But business never gave up trying to get it raised again, and there were intermittent efforts to do so in Congress. In 2004, the Small Business Administration cranked out a study claiming, “Small incorporated firms benefit more than larger firms from the meals and entertainment deduction.”

The industry jumped on the claim. “Restoring the business meal deduction creates an environment where entrepreneurs can flourish, and America’s small businesses can create more jobs and help strengthen the economy,” said Boston restaurateur Tom Kershaw, a National Restaurant Association board member.

But the Washington lobby group Citizens for Tax Justice calls the deduction essentially a government subsidy—and says that business itself regards it as such. In a position paper, CTJ argued, “A perusal of testimony before the House Ways and Means Committee shows … defenders of write-offs for business meals and entertainment generally do not focus on tax policy issues. Instead, they attempt to defend the $6 billion annual cost of these deductions as government subsidies to the restaurant, resort and entertainment industries.”

Nevada columnist Andrew Barbano is scornfully sarcastic about the lunch deduction.

“Our federal, state and local governments pass out humongous corporate welfare subsidies to every type of business from the Oakland Raiders to Cabela’s sporting goods and local casinos. So why not include the hotel-restaurant industry where such deals get made over $15 hamburgers and $20 martinis?”

The deduction has a reputation for being poorly policed by federal officials, of huge giveaways slipping through official scrutiny.

It is also inequitably applied. Businesspeople deduct meals at expensive restaurants and entertainment such as skyboxes. Workers can’t deduct their brown bag sandwiches or visits to ball games where they engage in shop talk.

Following a decade of a 50 percent deduction that was regarded as too high by many critics, and after the Sept. 11 tragedies, business struck back.

As author Mark Zepezauer describes it in his book Take the Rich Off Welfare, “After the 9/11 attacks, the ‘three martini lunch deduction’ was deemed a matter of urgent national security; Congress voted to gradually raise the deduction to 65 percent in 2002, then 70 percent by 2004, 75 percent by 2006, and back to good old 80 percent in 2008. The mind-set seems to be, as always, that what’s good for business is good for the country. So whatever new tax breaks you can come up with that’s all to the public good. Since the economy was slumping after 9/11, the only thing they could come up with was more tax cuts and handouts. But the economy was slumping before 9/11.” (The business downturn in the early Bush administration is generally regarded by economists as having begun in March 2000, the last year of the Clinton administration.)

This change was made quietly and even many businesses do not realize that the deductibility of meals and entertainment has changed. Meanwhile, some conflicts between small and large businesses have appeared.

The National Small Business Association has called for changes in the law to address those conflicts: “It is interesting to note … that the penalties for small firms are quite easily juxtaposed against the benefits for large firms. If a large firm has a company cafeteria or a chef in the executive suites, that firm will not only be able to fully deduct the costs of providing those meals, but the employee will be allowed to exclude the value of those meals from income. … Congress should seek to provide balance between the treatment of on-site meals and entertainment functions of larger corporations and the necessarily different realities of smaller businesses. Also, Congress should give additional weight to the necessity of these marketing costs in small firms.”

The casino industry’s stake in the business lunch deduction makes it a matter of interest to Nevadans attending the presidential caucuses this month, so we surveyed candidates for their positions. Several of the candidates did not respond. Here are the other candidates’ responses:

Democrats
Bill Richardson: Does not propose any change in the deduction.

Barack Obama: “I support reviewing tax deductions, including the current deduction for business meals, to ensure that they serve their intended purpose. Any deduction that is widely exploited and misused should be reformed.”

John Edwards: “I am concerned that excessive corporate tax loopholes have unfairly shifted the tax burden onto regular workers. I am examining the issue of tax deductions for business lunches.”

Republicans
John McCain: “Pork is pork regardless of whether it is earmarked in spending bills or written into the tax code. Business deductions should be restricted to those expenses that are a necessary cost of generating business revenues — something that the IRS is equipped to monitor and enforce under current law.”