«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»
Given the multiple methodologies used by the JCT and Treasury to identify tax expenditures (and given that the JCT and Treasury have reached inconsistent conclusions even when using almost identical methods), it is unsurprising that scholars have also weighed in on how to best separate tax expenditure provisions from other provisions of the Code. But while it is unclear which methodology is best suited to identify tax expenditures provisions, a look at each of these methodologies reveals that it is quite clear that
239. See supra notes 13–16 and accompanying text.
240. E. Tammy Kim, Why Do the People Raising Our Children Earn Poverty Wages?, Nation (July 31, 2013), http://www.thenation.com/article/why-do-people-raising-our-childrenearn-poverty-wages/ [http://perma.cc/ZD3D-5BB2]; Claire Zillman, Child Care Workers Join Fast Food Workers’ Fight for $15 an Hour, Fortune (Mar. 30, 2015, 9:44 PM), http://fortune.com/2015/03/30/child-care-workers-pay/ [http://perma.cc/B5X4-PL89].
241. See infra Sections IV.D.1–3.
Uncle Sam and the Childcare Squeeze 607 February 2016] the working childcare provisions should not be included on this list. By applying each of the methodologies for identifying tax expenditures developed by the JCT and the Treasury Department, as well as several developed by scholars and economists, this Section shows that the far stronger argument is that neither § 21 nor 129 should be characterized as a tax expenditure provision. In order to prevent future misunderstandings that leave working families vulnerable to overtaxation, provisions providing tax relief for working childcare costs should be excluded from all future tax expenditure lists.
1. The Joint Committee on Taxation’s Predominant Model
The predominant model the Joint Committee on Taxation (on behalf of the Congressional Budget Office) used to define tax expenditures seizes on the legislative history of the Congressional Budget and Impoundment Control Act of 1974 (CBICA), which created the requirement that the CBO and the Treasury Department each publish an annual list of tax expenditure estimates.242 This legislative history simply states that tax expenditures are deviations from the “normal tax structure”243 without further explanation. Thus, the JCT generally considers all tax provisions that deviate from this hypothetically normal income tax as tax expenditures to be referenced and estimated in its annual reports.244 To perhaps state the obvious, this puts enormous pressure on the definition of a “normal” tax structure and, as a result, this standard is highly (and rightly) criticized as overly ambiguous if not completely devoid of substance.
As Professor Bittker puts it: “[E]very man can create his own set of tax expenditures, but it will be no more than his collection of disparities between the income tax law as it is, and as he thinks it ought to be.”245 Nonetheless, for nearly four decades, the JCT has clung to the idea of using the normal tax structure as a reference point.246 According to it, the
242. Pub. L. No. 93-344, §§ 3, 301(d)(6), 601, 88 Stat. 297, 299, 308, 323–24 (1974) (codified as amended at 2 U.S.C. §§ 622, 632, 31 U.S.C. § 1105(a)(16) (2012)).
243. The JCT’s reports specifically reference legislative history for the first time in 1982, seeming to then adopt the idea of normal tax. The 1982 report states as follows: “The legislative history of the Act indicates that tax expenditures are to be defined with reference to a ‘normal’ tax structure.” 1982–1987 Estimates, supra note 198, at 2. Before that time, mention was sometimes made to the normal tax structure but it is not entirely clear that the concept had been formally adopted.
244. In 2008, an alternative methodology was used. Staff of Joint Comm. on Taxation, 110th Cong., Estimate of Federal Tax Expenditures for Fiscal Years 2008–2012, at 3–10 (Comm. Print 2008) [hereinafter 2008–2012 Estimates]. In 2009, however, the JCT returned to the previous method. Staff of Joint Comm. on Taxation, 111th Cong., Estimates of Federal Tax Expenditures for Fiscal Years 2009–2013, at 4–5 (Comm. Print 2010) [hereinafter 2009–2013 Estimates]. The alternative methodology is discussed infra in Section IV.C.
245. Boris I. Bittker, Accounting for “Tax Subsidies” in the National Budget, 22 Nat’l Tax J.
244, 260 (1969); see also Thuronyi, supra note 190, at 1158.
246. This is not necessarily to criticize the JCT, which is trying to fulfill the CBO’s statutory responsibilities to the best of its ability. In fact, the JCT often recognizes the imperfect
nature of its model. In its 1984 report, for instance, the JCT states:
608 Michigan Law Review [Vol. 114:559 normal tax structure includes, among other things, the personal exemptions provided to each taxpayer and her dependents (discussed at Section I.A), the standard deduction (to be discussed more below) and “deductions for costs incurred in producing net income, e.g., investment expenses or the cost of the tool that a mechanic purchases for use on his job.”247 In other words, these items, as part of the normal tax structure are not, by definition, deviations from that structure and, therefore, not tax expenditures.
The JCT has always characterized tax relief for working childcare expenses, whether it took the form of the older phased-out deduction, the current percentage credit, or the exclusion for employer-provided childcare, as tax expenditures.248 But even under the JCT’s own definition of a normal income tax, this seems incorrect for at least two reasons.
First, the JCT states that a “normal” income tax does not include various costs of earning income.249 This is an uncontroversial premise, and while it is likely that each person’s definition of what constitutes a normal income tax will differ in some respects, no well-reasoned articulation of a normal The staff acknowledges that its concept of a normal tax structure may err on the side of being too narrow and that its definition of tax expenditures may err on the side of being too broad. The staff’s approach traditionally has been to list any item as a tax expenditure for which there is a reasonable basis for such classification and a revenue loss above a de minimis amount. The staff emphasizes, however, that in the process of listing tax expenditure items no judgment is made, nor any inference intended, about the desirability of any special provision as public policy, or about the effectiveness of the tax approach relative to other methods available to the Federal Government for achieving the particular public policy goals intended.
Staff of Joint Comm. on Taxation, 98th Cong., Estimates of Federal Tax Expenditures 1984–1989, at 4 (Comm. Print 1984) [hereinafter 1984–1989 Estimates].
247. Id. at 4. The concept of normal income tax was not expressed exactly the same in all JCT annual reports, but in all reports a normal income tax was seen to include the personal exemption amounts and included some expression that costs of earning income should be
included as well. The 1984 report also stated as follows:
Under the individual income tax, this normal tax structure includes a single personal exemption for each taxpayer and one for each dependent; the zero bracket amount, which serves as a general minimum standard deduction for all taxpayers; the progressive tax rate structure; the exclusions for various types of imputed income, such as the rental value of owner-occupied homes; and deductions for costs incurred in producing net income, e.g., investment expenses or the cost of the tool that a mechanic purchases for use on his job.
Id. at 3–4. The JCT’s 2001 Report stated as follows:
Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses. Most other tax benefits to individual taxpayers can be classified as exceptions to normal income tax law.
Staff of Joint Comm. on Taxation, 107th Cong., Estimates of Federal Tax Expenditures for Fiscal Years 2001–2005, at 3 (Comm. Print 2001).
248. See, e.g., 1984–1989 Estimates, supra note 246, at 14 tbl.1.
249. Id. at 4 (“Deductions for costs incurred in producing income are considered part of the normal tax structure and, therefore, are not listed as tax expenditures.”).
Uncle Sam and the Childcare Squeeze 609 February 2016] income tax could possibly exclude adjustments for the costs of earning income.250 The JCT does not provide further guidance on how to make the determination of what costs are sufficiently associated with the cost of earning income that they become part of the normal tax structure and fall entirely outside of the tax expenditure categorization. Nonetheless, one gains some information about the JCT’s thought process by looking at the types of expenses it puts in the “cost of earning income” basket. For instance, the JCT does not include on its list of tax expenditures “deductions for businessrelated travel expenses,” entertainment expenses, and “moving expenses.”251 But, as discussed in Part III, these expenses are more consumptive than working childcare costs. If these deductions are not characterized as tax expenditures, than the tax relief provided by §§ 21 and 129 (or by a reformed childcare deduction) should not be either.
Furthermore, the JCT explains its reasons for including the personal exemption amounts and standard deduction in its version of a normal income tax structure—that is, not classifying the personal exemption amount
or standard deduction as tax expenditures—as follows:
The staff does not include as tax expenditures either the zero bracket amount or the personal exemption for the taxpayer and dependents because Congress believes these amounts approximate the level of income below which it would be difficult for an individual or a family to obtain minimal amounts of food, clothing and shelter.252 The “zero bracket” amount refers to the “standard deduction” provided to all taxpayers regardless of expenses actually incurred. In 2014, for instance, a married couple filing jointly may claim a standard deduction of $12,400 along with a personal exemption amount of $3,950 for each spouse and each dependent.253 Thus, a married couple with two children earning anything under $28,500 will not have any taxable income (and thus find themselves in a “zero bracket”) for 2014.
But under this reasoning, it seems that tax relief for working childcare costs might be viewed in a similar way as the standard deduction and personal exemption amount are viewed, not as a tax expenditure but as part of a normal income tax. A simple illustration drives home the point. Consider Couples A and B, each with two young children and each earning a combined salary of $29,500. Suppose that one member of Couple A earns $29,500 by herself while the other member of that couple cares for their children. Congress has determined couples need $28,500 to simply survive
250. See supra Part II.
251. See, e.g., 1984–1989 Estimates, supra note 246, at 4–5 (“Deductions for costs incurred in producing income... are not listed as tax expenditures. These include deductions for moving expenses, employee business expenses, investment expenses, and business-related travel expenses.”).
252. Id. at 4.
253. In 2014, Various Tax Benefits Increase Due to Inflation Adjustments, IRS (Oct. 31, 2013), http://www.irs.gov/uac/Newsroom/In-2014,-Various-Tax-Benefits-Increase-Due-to-Inflation-Adjustments [http://perma.cc/35PZ-ZNFC].
610 Michigan Law Review [Vol. 114:559 and, therefore, Couple A should only be taxed on the $1,000 income that exceeds that critical amount. The government should not, in other words, burden the amount needed for subsistence. The personal exemption and standard deduction amounts ensure that this is true.
Now suppose that, in contrast to Couple A, both members of Couple B work, together earning $29,500. When both members of Couple B are at work, they incur $1,000 additional cost for childcare. Couple B has only the $28,500 Congress believes it needs to provide basic necessities. But without relief for working childcare costs, Couple B would (like Couple A) be taxed on $1,000 and would (unlike Couple A) be unable to survive. In this way, the percentage credit allowed in § 21 seems to provide needed adjustments to the dual-earner and single-parent families’ tax liability that ensures that they, like single-earner couples, are not taxed on the basic amount needed for mere survival. There is, therefore, a rather compelling case that working childcare relief should not be viewed as a “tax expenditure” at all but, like the personal exemption and standard deduction, as part of the normal tax structure defining a minimum level of income below which no taxation will be levied.
As discussed, using the highly malleable concept of a normal income tax to differentiate tax expenditures from other tax provisions has received much criticism. As a result, in 2008 the JCT developed an alternative methodology for characterizing tax provisions.254 After only one year of using this alternative model, however, it returned to the predominate model just described.255 Nonetheless, the alternative model provides a different way to think about whether provisions that allow tax relief for working childcare costs should be characterized as tax expenditures. This alternative analysis also suggests that the working childcare provisions should be removed from the tax expenditure list.
2. The Joint Committee on Taxation’s Alternative Model
In 2008, under the direction of now-Professor, then-JCT Chief of Staff Edward Kleinbard, the Joint Committee on Taxation made a valiant attempt to respond to the many criticisms of its predominant model, relying on a “normal” income tax.
In its pamphlet entitled, A Reconsideration of Tax Expenditure Analysis, the JCT wrote: