rates for married taxpayers, with no children, filing a joint return and assuming standard deduction.

Chairman STARK. The Chair would also-were you here for the Treasury's testimony?

Mr. BENNETT. Yes, I was.

Chairman STARK. If you would speak to that and their objections, that would be informative, I think.

Mr. BENNETT. I will be happy to.

I have been asked to advise the subcommittee of two endorsements. The National Restaurant Association, which, of course, is the organization whose membership includes virtually all major food service establishments throughout the United States, endorses this legislation and intends to file a statement to that effect with the subcommittee. Likewise, I have also been asked by the Hotel Employees and Restaurant Employees International Union of the AFL-CIO to advise the subcommittee that they also endorse the legislation and likewise will be filing a statement with the subcommittee prior to the cutoff date.

I think the reasons for this joint labor and management support will become clear. Briefly, this bill would amend section 119 of the code by eliminating the requirements of present law that employerprovided meals must be furnished on the business premises in order for the value of the meals to be excluded from the employee's compensation for tax purposes. In an effort to provide parity between employers who are economically unable to or don't have the space available within their workplace to establish a company cafeteria, this concept is being advanced in this country. It parallels almost precisely the concept which has existed in Western Europe for well over 20 years; in Great Britain, it is closer to 40 years.

What the legislation would do is simply remove the requirement in code section 119 that the meal must be provided on the business premises. All other requirements of the law and all requirements within the current regulations relating to section 119, would remain the same-to include the requirement, as Treasury indicated in their written statement, that the meals must be provided for a substantial noncompensatory business reason. We are simply seeking parity between employers who cannot provide company cafeterias and those who can.

This is not, as was also suggested by Treasury, a new fringe benefit. This is a balancing of the availability of an existing fringe benefit. The tests for business purposes would remain the same as I mentioned.

The legislation would impose additional restrictions on the furnishing of off-premises meals. They would have to be applied nondiscriminatorily and be made available to all employees within the employer's workplace. A maximum of one meal per day could be provided, it must be provided during the workday, and only during the normal employee meal periods.

The exclusion would be limited only to meals provided in kind. By that I mean, of course, that no cash could be used. It would not be used for purchase of alcohol or tobacco, and the benefit would not be transferrable to anyone else. We think this would end the discrimination in present law against those employers who cannot physically or economically provide on-premise eating facilities.

I would like to refer to two pieces of testimony which were delivered before your subcommittee, Mr. Chairman, when it and Mr.

Pickle's subcommittee held hearings on fringe benefits just a couple of weeks ago. Mr. Frank Swain, Chief Counsel for Advocacy of the Small Business Administration, said and I quote:

"A small business' ability to offer a worker a package of compensation, including wages and benefits, enables it to compete with larger firms for the most qualified employees. Given two firms offering a prospective employee an equal wage but unequal benefit plans, it is difficult to imagine a worker selecting the job with the less attractive benefit option. The ability of a small business to attract and maintain a quality work force enables it to effectively compete in the marketplace with larger enterprises in the production of goods and services."

Likewise, during the course of those same hearings, Mr. Pearlman, Acting Assistant Secretary of Treasury for Tax Policy, mentioned the concern of the Treasury-and I believe of the Congress-that "tax benefits derived from existing statutory fringe benefits are not fairly distributed among taxpayers.' This is an effort to provide that fair and equitable distribution.

The way this system could work-and I will be brief; I know the red light is on here-is that an employer▬▬

Chairman STARK. You should have taken it out of Mr. Taylor's

time.

Mr. BENNETT. OK, Mr. Chairman. You won't mind if I take an extra minute.

A group of small employers could approach this concept by getting together and providing a cafeteria near their premises in which a number of them could share. It would be technically off the business premises of the small employers, but this would allow them to provide this benefit to their employees, again for all the reasons that are in the current law.

Another approach would be to utilize nearby eating establishments, perhaps two or three of them that might be in the immediate vicinity, either by direct arrangement between the employer and the restauranteur or through the use of a coupon system such as exists very widely in Western Europe. Let me stress again that this is not a new benefit created for small businesses. It simply removes the present bias and balances the law to allow small businesses to provide employee meals on an equal footing with large businesses that can do so right now.

Turning for a moment, I would like to enter into the record the economic analysis we have done predicated on 1982 revenue estimates which Mr. Duncan requested at that time, and received from the Joint Tax Committee. We have paralleled the methodology used by the Joint Committee Revenue Estimators in an effort to demonstrate feedback revenue and feedback employment effects which we feel confident are inseparable from and proportionate to any static revenue loss from this legislation. Rather than a revenue loss, there would actually be neutrality of revenue; and there would be a revenue gain associated with it when State taxes are also considered.

Rather than go through those calculations and describe them in detail, I prefer to enter that analysis into the record. Again, I indicate that it is predicated on the revenue estimates provided Mr. Duncan in 1982, which are different from those which Treasury ad

vised us only yesterday afternoon they would be providing to you this morning.

In the interest of time, I will stop my testimony here. I will answer any questions you may have, and allow Mr. Taylor to proceed.

[The prepared statement follows:]

STATEMENT OF DOUGLAS P. BENNETT, POWELL, GOLDSTEIN, FRAZER & MURPHY

SUMMARY

1. H.R. 907 would correct a current inequity in the income tax code by providing a means whereby small and medium sized employers could offer meals to their employees during the work day as they are unable to make the investment of capital and provide the space necessary for a company cafeteria.

2. When feedback revenue effects are considered, the $72 million static revenue loss after five years computed to result from enactment of H.R. 907 by the Treasury Department and Joint Tax Committee revenue estimators becomes an $11 million revenue gain.

3. In addition, the employee meal system will enhance employment in the restaurant industry which is a significant employer of the hardcore unemployed, including teenagers, minorities and women.

4. Using the typical restaurant industry work week of 27 hours, approximately 12,000 jobs would be created in the restaurant industry after five years from enactment of H.R. 907, each job costing approximately $6,000 using static revenue estimates, and earning approximately $1,000 in additional revenue using feedback revenue estimates.

5. H.R. 907 is endorsed by both the National Restaurant Association and the Hotel and Restaurant Employees and Bartenders International Union, AFL-CIO, giving it an unusual labor/management backing which reflects the unique benefits to both the restaurant industry and its workforce.

STATEMENT

Mr. Chairman and members of the Subcommittee, my name is Douglas P. Bennett and I am a member of the law firm of Powell, Goldstein, Frazer & Murphy in Washington, D.C. I have been involved in developing and advocating the legislation before you now as H.R. 907 since its inception several years ago. In this connection, I have calculated the economic effects of this legislation within the restaurant and food service industries and on national revenues and employment.

I have been asked to advise the Subcommittee that the National Restaurant Association, which represents all facets of the food service industry, endorses this legislation and intends to file a statement to this effect with the Subcommittee. I have also been asked to advise the Subcommittee that the Hotel and Restaurant Employees and Bartenders International Union, AFL-CIO also endorses this legislation and also intends to file a statement to that effect. The reasons for this unusual labor/ management support will become clear from my discussion of the economic effects which demonstrate unique benefits to both the restaurant industry and the restaurant workers from the employee meal concept.

Briefly, as you know, H.R. 907 would eliminate the requirement of present law that employer-provided meals must be furnished on the business premises in order for the value of those meals to be excluded from the employee's compensation for tax purposes. Employers who now have, or who could economically provide, onpremises facilities could not take advantage of this legislation. All other requirements for the exclusion of the value of employee meals under present law would be retained.

Further, the legislation would impose additional restrictions for off-premises meals to be excludable from income. The meals would have to be made available on a non-discriminatory basis to all employees at the same business premises. A maximum of one meal per working day would be permitted. Meal consumption could occur only during normal employee meal periods. The exclusion would be limited to meals provided in kind (that is, no cash could be provided to an employee either directly or as change) and would not include the cost of any alcohol or tobacco purchased by the employee. Finally, this benefit would not be transferable to anyone other than the designated employee. Adequate safeguards would be mandated under regulations to ensure compliance with these conditions.

Present law clearly discriminates against those employers who cannot physically or economically provide on-premises eating facilities, thereby affording larger scale employers a competitive advantage in terms of employee productivity, health and safety. Just three weeks ago on September 18, 1984, Frank S. Swain, Chief Counsel for Advocacy of the United States Small Business Administration testified before this Subcommittee on the obvious importance of employee benefits to small busi

nesses:

"A small business's ability to offer a worker a package of compensation, including wages and benefits, enables it to compete with larger firms for the most qualified employees. Given two firms offering a prospective employee an equal wage but unequal benefit plans, it is difficult to imagine a worker selecting the job with the less attractive benefit option. The ability of a small business to attract and maintain a quality workforce enables it to effectively compete in the market place with larger enterprises in the production of goods and services."

H.R. 907 will correct one current inequity by permitting a small employer either to (1) share a cafeteria with other employers achieving economies of scale not available to each individual business or (2) to provide for employee dining in nearby restaurants either by direct arrangement or through the use of a coupon voucher system. It should be noted that this is not a new benefit created for small businesses. Rather, it removes present law bias and balances the law by enabling small businesses to provide employee meals in an equal footing with large businesses which are currently able to do so.

Further, any of the permissible employer meal plans would encourage employees to dine nutritiously in nearby locations frequented by their colleagues. The obvious productivity gains from such a system have been demonstrated in the countries of Western Europe and Latin America which have adopted this system. Thus, this legislation simultaneously corrects an inequity in the tax law, enhances employee health, safety and productivity and, as discussed below, substantially enhances employment and profitability within the restaurant industry.

Revenue estimates prepared by the staffs of the Treasury Department and the Joint Committee on Taxation in November, 1982, show a $72 million annual static revenue loss after five years (when it is assumed that the employee meal system will be fully implemented). This estimate is based in the assumptions that, after five years, .4 percent of the then-total United States workforce (estimated at approximately 110 million) would participate in the employee meal system and that the average cost of an employee meal would be $3.36 after application of a five percent annual inflation factor over the five year period, which cost would be shared equally by the employer and employee. The estimate also assumes 230 meals for employee year.

Using these same assumptions, and methodology consistent with that employed by your staffs, I have computed the feedback economic effects which follow inevitably from the enactment of this legislation. These include the additional revenues which will be earned by food service establishments and the consequent additional food service personnel who will be necessary to handle this new business. In addition, I have computed the revenue gains at the federal and state levels which will result from the additional income, payroll and sales taxes to be paid by food service establishments because of this new business and also from the additional personal income taxes to be paid by the new employees. Finally, I have computed the savings in unemployment benefits attributable to the additional employment. I would like to enter our complete economic analysis into the hearing record, and I request the Subcommittee's agreement to do so.

Although the Congress has shown a prudent reluctance to legislate based on hypothetical feedback effects, the effects which I have just enumerated are inseparable from the federal revenue loss estimates. The very dollars of federal revenue loss which have been attributed to the passage of this legislation are necessarily translated into dollars spent by employers for employee meals which result in revenue increases for the food service industry. The cited employment effects are the logical consequence of these revenue figures and are consistent with the experience of the countries of Western Europe and Latin America which have all used the employee meal system successfully.

Specifically, using the staff assumption that, after five years, the average value of the employee meal is $3.36, and assuming that 0.4 percent of the U.S. work force (estimated to be 109,700,000) participate, the total value of all employee meals per year would be $339 million. Of that $339 million, 65 percent is assumed to represent new business for eating establishments. This figure is conservative when compared to experience in onr European city where 77 percent of the amount spent for employee meals after enactment of similar legislation represented new business. It is