Travel Roundtable Seeks Biz Meal Deductibility
<FONT SIZE="+3"><B>Travel Roundtable Seeks Biz Meal Deductibility</B>
<I>The Travel Business Roundtable, an ad hoc group of more than 70 senior executives from travel supplier companies, recently issued the following white paper designed to support its position that tax deductions for legitimate business meals should be fully restored. </I>
<B>Objective</B>
The Travel Business Roundtable urges lawmakers to reinstate full tax deductibility for business meals, and calls for travel industry suppliers, employees and customers to support candidates for elective office who will enact the restoration of that deduction. We advocate restoring the business meal tax deduction for the same reason the deduction was originally created-to stimulate economic activity.
<B>Background</B>
Prior to 1986, expenses for food and beverages were fully deductible as long as the meals and drinks were consumed in an atmosphere conducive to business. Congress reduced the deductibility of business meals to 80 percent when it overhauled the income tax in the Tax Reform Act of 1986. The legislative history of the 1986 Act shows that Congress was primarily concerned that 100 percent deductibility did not take into account the personal consumption element of business meal expenses. The stated rationale for reducing the deduction by 20 percent was to reflect "the fact that meals... inherently involve an element of personal living expenses." The Congressional Joint Committee on Taxation estimated the revenue impact of the change in business meal deductibility in conjunction with similar reductions for the deductibility of business travel and entertainment expenses. Together, these reductions were estimated to raise about $11.5 billion over 5 years.
In 1993, the deduction for business meals was reduced to 50 percent. This time, Congress merely reiterated the 1986 rationale that the deduction effectively subsidized an element of personal consumption. Its only additional justification for another 37.5 percent in reduction in business meal deductibility was that "increasing the portion of such expenses for which a deduction is denied is appropriate in the context of deficit-reduction legislation." In other words, Congress' only reason for making this change was to raise revenue.
<B>Effects Of The Change</B>
The impact of the most recent reduction in deductibility to 50 percent from 80 percent, which took effect in 1994, has been clear and lasting. Restaurateurs have reported lower business lunch sales, with many executives canceling restaurant accounts and cutting back on their use of restaurants to conduct their business. Fine dining establishments, as well as more moderately priced restaurants, are feeling the effects.
The reduction in deductibility increases the cost of doing business, a particular burden for smaller businesses. As a result, less business is being conducted in restaurants, which has caused many restaurants to close their doors, particularly during luncheon hours. This, in turn, has led to reductions in hours for employees and, in some cases, layoffs.
The reduction in tax deductibility has hurt many middle-income Americans whose jobs involve travel. Truck drivers, for example, average 200 days or more on the road each year. The reduction in deductibility means that truckers, who can earn an average of $27,000 annually, have suffered an effective tax increase of $700. Those who feel the sharpest impact of the reduction in the business meal deduction are not the "fat cats" that members of Congress castigated for deducting three-martini lunches, but primarily small business owners and restaurateurs.
<B>White House Conference On Small Business</B>
At the 1995 White House Conference on Small Business, restoration of business meal tax deductibility was deemed one of the highest priorities by 1,700 delegates from small businesses, 85 percent of whom voted to call on Congress and the President to "enact legislation that will allow a tax deduction for 100 percent of the expenditures for meals and entertainment."
As the delegates reasoned in their recommendation, small businesses typically rely on close personal relationships and customer service to compete for sales rather than on expensive advertising campaigns or widespread product sampling, both of which are 100 percent deductible. The travel industry delegates said they "oppose reductions in the deductibility of travel and entertainment expenses that are incurred as legitimate costs of doing business." This recommendation was an important component of a comprehensive strategy for correcting tax policies that have a negative long-term impact on the industry's growth potential.
<B>Study Results</B>
American Express studied the impact of the reduction in tax deductibility on corporate travel and entertainment expenditures at the end of last year among 150 small, 150 midsize and 75 large companies. Amex found that about 40 percent of T&E policy makers have made or plan changes to policy guidelines in response to the January 1994 tax change.
Amex also found that corporate buyers for most large and midsize companies and more than half of small companies are looking to reduce restaurant spending, and about half of large and midsize companies have begun educating employees about existing T&E guidelines or more aggressively enforcing those company policies. The Amex study also found a pronounced shift away from fine dining toward inexpensive or fast-food restaurants.
Reports from restaurants around the country support these findings. Many individual restaurant owners have seen a significant loss of business, as many corporate accounts have been terminated or severely cut back, resulting in the reduction of employee hours and the elimination of many jobs.
The National Restaurant Association says the impact on its members shows that business meals are not limited to the privileged few. They have found that 70 percent of business meal users have annual incomes below $50,000.
"Despite the widely held belief that the business meal deduction is a 'fat-cat' perk for lawyers and lobbyists," said NRA president Ralph Brennan, "our members have always known that the primary users are salesmen, entrepreneurs, truck drivers and other small business people who are more likely to patronize a coffee shop than a fine dining restaurant."
Meanwhile, fine dining establishments, which are far more labor intensive than less-expensive restaurants, play an important role in generating jobs and competing for global tourism dollars as well as in providing a neutral setting for business transactions.
<B>Restoring the Full Deduction</B>
The Internal Revenue Code generally adheres to the principle that ordinary and necessary expenses incurred in carrying on a trade or business for the production or collection of income ought to be deductible. Business meals are a legitimate business expense and ought to be treated as such. Therefore, the Travel Business Roundtable urges the repeal of the reduction in business meal tax deductibility to put an end to its counterproductive effects.
Achieving this goal will not be easy. The travel industry must commit itself to a two-year campaign to educate lawmakers and policy makers so they can understand why they should overturn the reduction of a tax deduction which once was an effective means of promoting economic activity.
As the third-largest retail industry and second-largest employer in the United States, the $400 billion travel industry should shoulder responsibility in promoting the U.S. travel industry so that it can be strong in competing globally for inbound business travel and tourism. There is far more to be gained from cooperation between U.S. travel suppliers and the government in developing public policies that improve the tax revenue base than from blunting proven incentives which can increase travel and entertainment spending.
The Travel Business Roundtable firmly believes that the restoration of the business meal tax deduction will promote economic growth and employment opportunities.