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«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»

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Tax expenditure analysis no longer provides policymakers with credible insights into the equity, efficiency, and ease of administration issues raised by a new proposal or by present law, because the premise of the analysis (the validity of the “normal” tax base) is not universally accepted. Driven off track by seemingly endless debates about what should and should not be 254. 2008–2012 Estimates, supra note 244, at 3–10.

255. 2009–2013 Estimates, supra note 244, at 4–5.

Uncle Sam and the Childcare Squeeze 611 February 2016] included in the “normal” tax base, tax expenditure analysis today does not advance... the... goals that inspired its original proponents....256 The JCT’s alternative approach separated tax expenditures into two categories: “Tax Subsidies,” which consist mainly of those provisions that were generally categorized under the predominant approach as tax expenditures, and a new category called “Tax-Induced Structural Distortions.”257 Under this alternative model, provisions granting relief for working childcare costs could only feasibly fall within the “Tax Subsidies” category.258 A “Tax Subsidy” was defined “as a specific tax provision that is deliberately inconsistent with an identifiable general rule of the present tax law (not a hypothetical ‘normal’ tax), and that collects less revenue than does the general rule.”259 “Tax-Induced Structural Distortions” were defined as follows: “structural elements of the Internal Revenue Code (not deviations from any clearly identifiable general tax rule and thus not Tax Subsidies in our classification) that materially affect economic decisions in a manner that imposes substantial efficiency costs.”260 In this way, while the new approach “cover[ed] much the same ground”261 as the predominant approach, it defined tax expenditures without “relying on a hypothetical ‘normal’ tax.”262 In theory, this alternative methodology would solidify the concept of tax expenditures by requiring the JCT to identify the general rule from which any given provision identified as a tax subsidy (and hence a tax expenditure) departs. In reality, however, “[c]ountless sets of rules can be characterized as the general rules of the current income tax, with other rules constituting the exceptions.”263 This problem emerges when one tries to determine whether tax relief for working childcare costs should be characterized as a tax subsidy.

256. Staff of Joint Comm. on Taxation, 110th Cong., A Reconsideration of Tax Expenditure Analysis 1 (2008).

257. Id. (“The two categories together cover much the same ground as does the current definition of tax expenditures, and in some cases extend the application of the concept further.

The revised approach does so, however, without relying on a hypothetical ‘normal’ tax to determine what constitutes a tax expenditure, and without holding up that ‘normal’ tax as an implicit criticism of present law. The result should be a more principled and neutral approach to the issues.”).

258. See id. at 12 (classifying the distinction between debt and equity as a Tax-Induced Structural Distortion but “not a tax expenditure (Tax Subsidy) in the narrow sense, because there is no clear consensus as to what general rule of tax law, if any, the debt-equity distinction might violate”). Other examples provided were the deferral of foreign earnings earned through foreign corporations and the capital gains preference. Id. at 10, 22.

259. Id. at 9.

260. Id. at 41.

261. Id. at 39.

262. Id.

263. Thuronyi, supra note 190, at 1185 (“These problems with developing a set of objective general rules, as well as the absence of criteria for distinguishing ‘special’ from ‘general’ rules, show that the general/special dichotomy is as arbitrary and subjective as an ideal income tax.”).

612 Michigan Law Review [Vol. 114:559 Section 61 of the Code provides the general rule that “gross income means all income from whatever source derived.”264 Thus, one might argue that all exclusions from gross income constitute deviations from that allimportant section.265 The Joint Committee on Taxation took this approach during the couple of years in which it utilized its alternative formulation of tax expenditures.266 Specifically, in 2008 and 2009, the JCT characterized a variety of exclusions as “Tax Subsidies,” including the exclusion for “employer-provided health care,”267 and “miscellaneous fringe benefits,”268 along

with § 129’s FSA exclusion and § 21’s credit.269 It explained as follows:

All employee compensation is subject to tax unless the Code contains a specific exclusion for the income. Specific exclusions for employer-provided benefits include the following: coverage under accident and health plans, accident and disability insurance, group term life insurance, educational assistance, tuition reduction benefits, transportation benefits (parking, van pools, bicycles, and transit passes), dependent care assistance, adoption assistance, meals and lodging furnished for the convenience of the employer, employee awards, and other miscellaneous fringe benefits (e.g., employee discounts, services provided to employees at no additional cost to employers, and de minimis fringe benefits).270 Thus, it seems that the JCT simply lumped § 129’s FSA exclusion with a variety of exclusions properly characterized as “Tax Subsidies” because those provisions carve out exceptions to § 61’s general rule that gross income is income derived from all sources, that is, by exempting various otherwise includible items from being taxable;271 and with § 129 so-pegged, § 21’s





264. I.R.C. § 61 (2012).

265. Thuronyi, supra note 190, at 1158.

266. For instance, in its 2008 Report the JCT explains as follows:

The exclusion from gross income for employer-provided health care benefits is an exception to the Code’s general rule that all compensation for services constitutes gross income. The value of health care benefits that an employer provides to its employees constitutes gross income to each employee in this general sense. Fringe benefits are included in an employee’s gross income unless specifically excluded under a provision in the Code. For this reason, the provisions that exclude employer-provided health care benefits from income are exceptions to the general rule and are Tax Subsidies under our revised classification.

2008–2012 Estimates, supra note 244, at 15 (footnotes omitted).

267. The JCT cited exclusions for employer-provided healthcare as an example of a Social Spending Tax Subsidies, explaining that this exclusion “can be traced back to the 1940’s, when employers offered fringe benefits in order to attract labor in a period of tight wage controls.” Id.

268. Id. at 38.

269. Id.

270. Id. (footnote omitted).

271. A closer look at the JCT’s 2008 and 2009 reports further suggests that the working childcare tax relief provisions may have been improperly characterized as “Tax Subsidies.” The JCT listed these provisions under “Social Spending,” one of three sub-categories of “Tax Subsidies.” Id. at 55; see also 2009–2013 Estimates, supra note 244, at 41. The JCT defined its newly created sub-category of “Social Spending” provisions as those “Tax Subsidies related to the Uncle Sam and the Childcare Squeeze 613 February 2016] mirror credit provision became inevitably attached.272 But as the analysis in Part III reveals, there are far better ways to view the tax relief provided by §§ 21 and 129. Specifically, §§ 21 and 129, like many other sections of the Code, provide necessary tax relief (however inadequate) for the costs of earning income. In other words, these sections are not exceptions to any general rule at all but instead create their own firstorder rules. This view is consistent with the legislative history of § 21 discussed in Part I. Furthermore, it has been embraced by the Treasury Department in its Tax Expenditure Estimate Reports discussed in the next Section, which fulfill the department’s own responsibilities under CBICA.

3. Treasury’s Tax Expenditure Model

Initially, the Treasury Department identified tax expenditures by employing a model very similar to the JCT’s predominant model. Specifically, Treasury identified tax expenditures as tax provisions that departed from a “normal tax” and defined normal tax in the same way as the JCT. Thus, at first, there was little disparity between the tax expenditure lists of the JCT and Treasury.273 In 1983, however, Treasury began to use a different model that is quite similar to the alternative model used by the JCT. Treasury exclusively used this methodology in both 1983 and 1984.274 Starting in 1985, apparently concerned that having its estimates differ substantially from those of the JCT supply of labor” and those “intended to subsidize or induce behavior unrelated to the production of business income.” 2008–2012 Estimates, supra note 244, at 6. It is not clear for which of these two reasons the JCT placed working childcare tax relief provisions in the “Social Spending” bucket, but it does not appear to belong in either. As explained in Part II, the legislative history of § 21 is quite different, emphasizing the percentage credit as a mechanism for providing a deduction equivalent for the cost of earning income. It is also possible that the JCT just made an error and characterized tax relief for working child care as a cost “unrelated to the production of business income”—the other way to earn a place in the “Social Spending category.” Id. at 6. This characterization is blatantly incorrect given the plain language of the Tax Code. Section 21 states that the percentage credit allowed only applies to “employmentrelated expenses” defined as “amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed.” I.R.C. § 21 (2012). Section 129 limits the amounts that may be excluded from income by being diverted into an FSA to these same expenses. Id. § 129.

272. See supra note 67 and accompanying text.

273. Prior to 1983, Treasury’s listing of “tax expenditures”—labeled Special Analysis G— generally matched those published by the CBO and the JCT. This close correspondence of tax expenditure lists resulted because the concept of a “normal” tax used by both executive branch and congressional staffs was a variant of a comprehensive income tax, albeit with several major exceptions, that had not deviated significantly from the concept used in the first tax expenditure listings. Office of Mgmt. & Budget, Special Analyses, Budget of the United States Government, FY 1985, at G-1, http://fraser.stlouisfed.org/docs/publications/usspa/ Specanalyses_1985.pdf [http://perma.cc/5GC2-M983] [hereinafter 1985 Budget].

274. See id.; Office of Mgmt. & Budget, Special Analyses, Budget of the United States Government, Fiscal Year 1984, at G-11, http://fraser.stlouisfed.org/docs/publications/usspa/Specanalyses_1984.pdf [http://perma.cc/FRY4-GJQF] [hereinafter 1984 Budget].

614 Michigan Law Review [Vol. 114:559 might cause confusion,275 it began to publish two lists of tax expenditures in its required reports—one using this methodology and one using the JCT’s predominant methodology, which focused on deviations from the “normal” tax.”276

Under the Treasury’s alternative model, for a tax provision to be characterized as a tax expenditure two conditions must be satisfied:

—The provision must be “special” in that it applies to a narrow class of transactions or taxpayers; and —There must be a “general” provision to which the “special” provision is a clear exception.277 General provisions were defined as those provisions that were part of the Treasury’s so-called reference tax.278 According to Treasury, these reference tax provisions provide “structural features [that] must be dealt with in some manner in order to have an operational income tax.... [By contrast,] it would be possible to have a fully operational income tax that did not contain any of the special provisions that give rise to tax subsidies.”279 Using

these concepts, Treasury defines its reference tax to include the following:

the definition of income subject to tax and allowable deductions, including cost recovery for depreciable assets; taxable units and their threshold levels of taxability;... the schedule of tax rates; the basic tax accounting rules, including the accounting period for taxation and whether income is taxed as it is realized or as it accrues.280 As discussed above, the JCT used a similar methodology to conclude that §§ 21 and 129 were tax expenditure provisions, apparently believing that these provisions, like the exclusion for fringe benefits and employerprovided healthcare, represent a deviation from the general rule in § 61 that gross income is income from whatever source derived. Treasury, however, reached an opposite conclusion, using a virtually identical test.

Treasury agreed with the JCT that many exclusions, like the exclusion for fringe benefits, constitute deviations from the general rule that all wages must be taxed.281 It, however, did not believe that the working childcare 275. 1985 Budget, supra note 273, at G-5 (“Neither the Congressional Budget Office nor the Joint Committee on Taxation adopted these revisions. Those offices continued to use a modified income tax ‘norm,’ as described above, as the basis for identifying tax expenditures.

As a consequence, Special Analysis G in the 1983 and 1984 budgets did not fully correspond to other ‘tax expenditure budgets,’ a condition some have found confusing.”).

276. Id.

277. Id.

278. Id. at G-1.

279. 1984 Budget, supra note 274, at G-1.

280. Office of Mgmt. & Budget, Budget of the United States Government, 1983:

Special Analysis G, at 4, http://fraser.stlouisfed.org/docs/publications/usspa/Specanalyses_1983.pdf [http://perma.cc/RHT5-7QCQ].



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