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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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Given that the tax relief Code §§ 21 and 129 provide is inadequate, lawmakers seeking to change these laws must be careful when choosing an avenue of reform. It might, for instance, seem sufficient to raise the current dollar limitations, percentage limits, and phaseouts in these sections, which together ensure that parents receive tax relief for only a fraction of the working childcare costs they incur. But while this would certainly be a step in the right direction, it would leave these reformed laws vulnerable to the same legislative dysfunction that allowed the tax relief provided to working families to become so inadequate in the first place.

As discussed in Section I.B, Congress originally enabled working parents to deduct working childcare expenses, properly characterizing these expenses as nonconsumptive costs of earning income.179 Congress, however,

175. See id. § 183(b).

176. See id. § 67 (establishing a 2 percent floor for miscellaneous itemized deductions like the one in this example).

177. If J&J had been in a higher tax bracket, they might have been subject to limitations in § 68. See id. § 68(a)–(b). Further, J&J might lose the benefit of deducting hobby expenses if the Alternative Minimum Tax were to apply. See id. § 55. As discussed supra note 173, I mean only to show how § 183 treats hobby expenses as a default matter.

178. See supra Section I.B. Alternatively, had S&P funded the day care through an FSA, they could have received the equivalent of a $5,000 deduction. See supra Section I.B.

179. See supra Section I.B.

594 Michigan Law Review [Vol. 114:559 later changed the mechanism for providing tax relief for working childcare expenses from a deduction to a percentage credit in order to eliminate the upside-down-subsidy effect of the deduction.180 While doing so, it expressly rejected the idea of phasing down the credit because it is inappropriate to phase down costs of earning income.181 Section 21’s current phaseouts are, therefore, directly inconsistent with Congress’s express intent. Furthermore, Congress’s failure to index the dollar limitations in both §§ 21 and 129 for inflation and rising costs is inconsistent with Congress’s general intent to treat working childcare costs as costs of earning income. Although it is theoretically possible that subsequent Congresses rejected the original intent of these sections, there is no indication whatsoever that this is the case. Instead, it is exceedingly likely that lawmakers became confused by the fact that working childcare costs are creditable, as opposed to deductible, under § 21.182 In general, the average individual taxpayer is allowed to deduct his costs of earning income. By contrast, when Congress grants individuals tax relief for nonconsumptive expenditures, which it need not do to accurately calculate net income, it often does so by providing a tax credit.183 Thus, as time left the historical purposes of § 21 forgotten, lawmakers likely assumed that § 21’s credit served a nontax purpose (since that is the function that many other individual tax credits serve) and that working childcare costs were nonconsumptive costs (like the expenses for which many other individual tax credits are granted).

Other factors likely contributed to this misunderstanding. Frankly, some confusion might be attributable to the skeptical eye with which many lawmakers view the Internal Revenue Code. Unfortunately, many lawmakers lack respect for the tax law and more generally fail to make any effort to understand the Code as even a semicoherent body of law. While the intensity of the problem seems to have increased as of late, this is certainly not a

new issue. As Professor Surrey laments:

[Some lawmakers]... see the income tax as only the composite or jumble of statutory provisions resulting from numerous ad hoc legislative decisions. Such an anarchistic view of the tax structure has the consequence of making tax policy formulation a task to be performed without criteria,

180. See supra Section I.B.

181. See supra Section I.B.

182. Consider even two sections located right before and after Code § 24. Code § 23 allows taxpayers a $10,000 tax credit for adopting a special-needs child, regardless of whether those expenses are even incurred. See I.R.C. § 23(a)(3). Section 25C provides a tax credit to encourage taxpayers to invest in energy-efficient improvements. Id. § 25C. These sections are congressional “giveaways” and serve entirely nontax purposes. Specifically, § 23’s credit is a subsidy meant to encourage citizens to adopt special-needs children and § 25C’s credit subsidizes and encourages taxpayer to invest in energy-efficient improvements. Despite how laudable these goals are, Congress could repeal the tax relief in these sections at any time without compromising the accurate calculation of tax.

183. See supra note 182 and accompanying text.

Uncle Sam and the Childcare Squeeze 595 February 2016] guidelines, or standards, and any policy official who has tried to approach the tax conscientiously would reject that view.184 But while congressional attitudes may play some part in misunderstanding the role of §§ 21 and 129, there are also more understandable reasons why lawmakers might have become confused. In addition to the fact that most credits serve nontax purposes and are not the method by which tax relief for costs of earning income are granted, lawmakers were probably misled by the Joint Committee on Taxation’s questionable decision to include §§ 21 and 129 on its list of so-called tax expenditures. For the nontax expert, some background on this list is in order.

In the 1960s, Stanley Surrey, in his capacity as Assistant Secretary of Treasury for Tax Policy,185 first expressed concern over the number of tax provisions that provided tax reductions for expenditures that were not associated with the cost of earning income (which he called “tax expenditures”) and, therefore, not necessary adjustments to accurately calculate tax liability.186 Thus, while Surrey recognized that some tax provisions—such as the deduction for ordinary and necessary business expenses—should be considered “structural provisions necessary to the application of a normal income tax,”187 he also recognized that many other provisions were best viewed as “special preferences.”188 Surrey explained:

These special preferences, often called tax incentives or tax subsidies, are departures from the normal tax structure and are designed to favor a particular industry, activity, or class of persons. They partake of many forms, such as permanent exclusions from income, deductions, deferrals of tax liabilities, credits against tax, or special rates. Whatever their form, these departures from the “normative” income tax structure essentially represent government spending for the favored activities or groups made through the tax system rather than through direct grants, loans, or other forms of government assistance.189 In this “rhetorically brilliant move”190 Surrey urged lawmakers to view these “tax expenditure provisions” as direct government spending programs191 in order to encourage lawmakers to subject these provisions to a higher level of scrutiny than they were then receiving. To illustrate, suppose a taxpayer received a loan to purchase a home for his family, using that

184. Stanley S. Surrey & Paul R. McDaniel, The Tax Expenditure Concept and the Budget Reform Act of 1974, 17 B.C. Indus. & Com. L. Rev. 679, 687–88 (1976) (footnote omitted).

185. Surrey served as Assistant Secretary from 1961 to 1969 while on leave from his position as a professor at Harvard Law School. Erwin N. Griswold, A True Public Servant, 98 Harv. L. Rev. 329, 330 (1984).

186. See Stanley S. Surrey, Pathways to Tax Reform: The Concept of Tax Expenditures vii–viii (1973).

187. Surrey & McDaniel, supra note 184, at 680.

188. Id.

189. Id.

190. Victor Thuronyi, Tax Expenditures: A Reassessment, 1988 Duke L.J. 1155, 1158.

191. Surrey & McDaniel, supra note 184, at 718.

596 Michigan Law Review [Vol. 114:559 residence to secure the loan. Under the basic principles discussed in Part II, the taxpayer should not be able to deduct the interest payments associated with this home mortgage.192 This interest is a purely consumptive cost. The tax law, however, allows taxpayers to (up to generous limitations) deduct this interest by providing for a specific exception in Code § 163(h).193 While there are reasons lawmakers might wish to do this—for example, the deduction might encourage home ownership194—these reasons have nothing to do with accurately calculating the homeowner’s income tax liability. By encouraging lawmakers to view this provision as a direct spending program,195 Surrey hoped lawmakers would scrutinize the wisdom of granting the home mortgage interest deduction in the same way it would scrutinize the wisdom of a program that directly paid a portion of the interest on a homeowner’s mortgage.196 In response to Surrey’s pleas, the Congressional Budget and Impoundment Control Act of 1974 (CBICA) created a requirement that the Congressional Budget Office (CBO) and the Treasury Department each publish an annual list of tax expenditure estimates197 that would “measure the decrease in individual and corporate income tax liabilities that result from [tax expenditure provisions].”198 CBICA defines “tax expenditures” as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”199 The concept of tax expenditure is not elucidated further in CBICA and its legislative history only states that tax expenditures should be viewed as departures from a “normal” tax structure.200 Thus, to fulfill the responsibilities created by CBICA, both the CBO and the Treasury Department must determine which tax provisions represent “tax expenditures.” With only the explicit guidance that these provisions are “special,” the Joint Committee on

192. See supra Part II. See generally I.R.C. § 163 (2012).

193. I.R.C. § 163(h).

194. But see Dorothy A. Brown, Shades of the American Dream, 87 Wash. U. L. Rev. 329, 336–37 (2009) (arguing that tax benefits do not impact the decision to purchase a home).

195. Thuronyi, supra note 190, at 1155 (“The concept of ‘tax expenditures’ holds that certain provisions of the tax laws are not really tax provisions, but are actually government spending programs disguised in tax language.”).

196. In many instances, Surrey believed that this analysis would often reveal that the tax expenditure was an absurd use of government funds. See, e.g., Surrey, supra note 186, at 223–32 (explaining how the charitable deduction, if reformulated as a direct spending program, would look absurd).

197. 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, and 31 U.S.C. § 1105(a)(16) (2012)).

198. Staff of Joint Comm. on Taxation, 97th Cong., Estimates of Federal Tax Expenditures for Fiscal Years 1982–1987, at 2 (Comm. Print 1982) [hereinafter 1982–1987 Estimates].

199. Pub. L. No. 93-344, § 3(3), 88 Stat. at 299 (1974).

200. See 1982–1987 Estimates, supra note 198, at 2–3.

Uncle Sam and the Childcare Squeeze 597 February 2016] Taxation201 (on behalf of the CBO)202 and the Treasury Department have developed various methodologies for separating tax expenditures from other tax provisions.203 Since issuing its first report, the Joint Committee on Taxation (the JCT) has characterized §§ 129 and 21 as tax expenditure provisions.204 Considering this characterization, which this Article later shows to be misguided, it is not surprising that lawmakers have mischaracterized the tax relief provided by these sections as legislative giveaways that could be limited or repealed without compromising the accurate calculation of tax. Perhaps highlighting this confusion, some recent legislative proposals have actually called for the complete repeal of § 21’s credit. For instance, in 2014, David Camp, thenChairman for the House Committee on Ways and Means, released a proposal to overhaul the United States’ individual tax regime and suggested that § 21’s credit be repealed along with a host of other provisions that grant tax relief for purely consumptive expenditures.205 Considering this historical background, if lawmakers wish to enact longlasting reform that truly protects the working family, they should not simply provide first aid to §§ 21 and 129. Instead, Congress should allow parents to deduct the costs of childcare in the same way that other costs of earning income are deducted. The next Part provides a blueprint for enacting this reform.

201. As explained on its website, the committee “is a nonpartisan committee of the United States Congress, originally established under the Revenue Act of 1926. The Joint Committee operates with an experienced professional staff of Ph.D economists, attorneys, and accountants, who assist Members of the majority and minority parties in both houses of Congress on tax legislation.” About Us: Overview, Joint Committee on Tax’n, https://www.jct.gov/aboutus/overview.html [http://perma.cc/F4GX-TF94].

202. Staff of Joint Comm. on Taxation, 113th Cong., Estimates of Federal Tax Expenditures for Fiscal Years 2012–2017, at 2 n.4 (Comm. Print 2013) (citing Act of Dec.

12, 1985, Pub. L. No. 99-177, § 273, 99 Stat. 1037, 1098 (codified as amended at 2 U.S.C.

§ 601(f) (2012))) (“The Joint Committee staff issued reports prior to the statutory obligation placed on the CBO and continued to do so thereafter. In light of this precedent and a subsequent statutory requirement that the CBO rely exclusively on Joint Committee staff estimates when considering the revenue effects of proposed legislation, the CBO has always relied on the Joint Committee staff for the production of its annual tax expenditure publication.”).

203. See generally Staff of Joint Comm. on Taxation, 114th Cong., Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates (2015).

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