Congress’s latest Covid relief and omnibus spending bills are a mash-up of special favors for teachers unions, the booze industry, wind power, race horses, and so much more. There’s even a bailout for Broadway; take a bow, Chuck Schumer. But for a sign of the political times, and how far Congress has strayed from basic economic logic, you can’t beat the return of the full business meal deduction.
President Trump has been pushing this for months, and Treasury Secretary Steven Mnuchin made it a priority in negotiations. Perhaps Mr. Trump recalls fondly the days when real-estate and other executives could write off lunch or dinner at the 21 Club. Go ahead and order that Clos de Tart 2005. You can write it off. In the 1970s this became known as the “three-martini lunch” deduction when Jimmy Carter campaigned against it. The full deduction finally went away during the Reagan tax reform in the 1980s.
Now the deduction will return “for food or beverages provided by a restaurant” for the next two years through the end of 2022. The claim is that this will help struggling restaurants revive after the pandemic ends by giving businesses an extra incentive to leave the office for lunch. The estimated cost is $6 billion in forgone tax revenue, which is spare change for Congress this year.
This is bad tax policy now or any time. Restaurants have suffered during the pandemic, especially in states like New York with overly strict lockdowns. But they won’t be revived by a tax deduction for lunch. They’ll revive as the pandemic fades and the public feels safe enough to return. No business people we know make a lunch decision for tax reasons, and corporations don’t need another tax code carve-out.
This isn’t Covid relief. It’s a political favor for a specific industry. But why restaurants, and not hardware stores or flower shops? They’ve also suffered during the pandemic. Will a night out to see the Miami Heat qualify for the deduction if you take your clients to a game and eat at the stadium sushi bar? Why not other forms of entertainment? The unfairness is obvious, which is what happens when politicians use the tax code as a vote-buying exercise.
The deduction is also bad politics. Democrats are already attacking it even as they gave the deduction to Republicans in exchange for progressive tax priorities. Democrats won more tax credits for their special interests and now they can beat up the GOP for favoring executives who entertain their clients at fancy steak joints. Republicans fall into this trap every time.
The larger problem is how this and other tax loopholes erode the guiding principles of tax reform: low rates with few loopholes or special credits. The 21% corporate tax rate in the 2017 tax reform was justified in part by the removal of special tax provisions.
The lower tax rate helps all companies by reducing the double taxation of capital in the form of the taxes on corporate income and dividends. It produced a more efficient allocation of capital and faster growth and wage gains. But the more the tax code becomes a piece of Swiss cheese, the easier it is for the political left to argue for higher tax rates. The economy and workers suffer.
Advocates claim the meal deduction is only for two years, and that it will expire once restaurants are full of customers. Sure. The wind production tax credit was passed in 1992 to help with an “infant industry.” It will be extended again this year, though the industry is middle-aged and making money.
Once a tax favor is granted, a lobbying industry forms around it, specific politicians become its champions, and killing it typically becomes too politically difficult. See the annual “tax extenders” legislation that will be whooped through again this week.
The GOP tax reform of 2017 wasn’t perfect, but it did reduce many distortions in the corporate tax code and made U.S. companies more competitive. You’d think Republicans would want to protect it. Instead they’re returning to the days of tax code special favors. You might callit the tax swamp.
WSJ Opinion: The New Covid Resistance
WSJ Opinion: The New Covid Resistance
Wonder Land: Business owners are pushing back against extreme Covid-19 restrictions, largely in liberal states such as New York and California. Images: Shutterstock/Reuters Composite: Mark Kelly