As I mentioned earlier (here and here and here) the 2017 Tax Act took a wrong turn in denying most workers a deduction for their work expenses. The House Ways and Means Committee is now about to vote on a proposal to reinstate tax breaks for a type of work-related expense – union dues. Comprehensive tax breaks for all types of work-related expenses would be better.
A fundamental principle of tax policy requires that taxpayers be able to deduct the costs of generating the income on which they are taxed. A taxpayer who incurs $ 1,000 in expenses to make $ 30,000 should pay the same taxes as someone who makes $ 29,000 without incurring any expenses, since both taxpayers are the same net amount of $ 29,000 is available for personal expenses.
In accordance with this principle, Congress has always allowed corporations and self-employed taxpayers to write off the cost of income. However, employees are treated less favorably.
Prior to the 2017 Tax Act, Congress allowed employees to request a separate deduction for their work-related expenses, but only to the extent that the expenses (along with some other deductions) exceeded 2 percent of the employee’s income. Even this allowance was not available to two-thirds of taxpayers because they requested the standard allowance instead of breaking it down individually. However, Congress granted special tax breaks for certain work-related expenses incurred by teachers, performing artists, state and local officials, disabled workers, and members of the armed forces reserves.
The 2017 Tax Act took an even bigger step away from tax policy principles. The law abolished the separate deduction for personnel expenses from 2018 to 2025, but retained the special tax benefits.
The proposal that the Committee on Means and Ways will consider (as part of Subtitle I of the Committee’s part on the Budgetary Alignment Package) would add another special tax break. In response to demands from some unions, the proposal would allow union members to deduct up to $ 250 in contributions each year from 2022 onwards from taxpayers claiming the standard withholding.
The story goes on
The proposal explicitly limits the deduction to union members, which would lead to severe inequality in establishments where the union and employer have a works agreement. Under such agreements, which are legal for private sector establishments (but not public sector establishments) in 23 states, workers who choose not to join the union must pay agency fees to the union to cover their representation costs. According to the proposal, they are not allowed to deduct their dues, even though the dues are work-related in the same way as those of workers joining the union.
In a broader sense, the proposal would not offer tax breaks to 89 percent of non-union American workers.
Some restrictions on employee expense deduction are required because it would be administratively cumbersome to keep track of every small expense that employees incur and it is sometimes difficult to distinguish real work-related expenses from personal expenses. However, there is no justification for limiting tax breaks to a few preferred types of spending.
The proposed deduction of union dues, along with the existing special tax breaks, is to be replaced by a wider deduction based on tax policy principles. Congress should allow all employees to deduct any significant expenses that are clearly work-related.
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Keywords: Think tanks
Original author: Alan D. Viard
Original location: Tax breaks for workers’ labor costs should not be limited to union dues