By Alan D. Viard
As I have previously pointed out (here and here and here), the 2017 tax law took a wrong turn by denying most employees a deduction for their work-related expenses. The House Ways and Means Committee is now poised to vote on a proposal that would reinstate tax relief for one type of work-related expense — union dues. A better course would be to provide broad tax relief for all types of work-related expenses.
A fundamental tax policy principle requires that taxpayers be allowed to deduct the costs of earning the income on which they are taxed. A taxpayer who must incur $1,000 of expenses to earn $30,000 should pay the same tax as one who earns $29,000 without incurring any expenses, because both taxpayers have the same $29,000 net amount available for personal spending.
In line with that principle, Congress has always allowed businesses and self-employed taxpayers to write off the costs of earning income. Employees, however, have been treated less favorably.
Before the 2017 tax law, Congress allowed employees to claim an itemized deduction for their work-related expenses, but only to the extent that the expenses (along with a few other deductions) exceeded 2 percent of the employee’s income. Even that deduction was unavailable to two-thirds of tax filers, because they claimed the standard deduction rather than itemizing. However, Congress provided 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 law took an even bigger step away from tax policy principles. The law scrapped the itemized deduction for employees’ expenses in 2018 through 2025, although it preserved the special tax breaks.
The proposal that the Ways and Means Committee will consider (as part of subtitle I of the committee’s portion of the budget reconciliation package) would add yet another special tax break. In response to calls by some labor unions, the proposal would allow union members to deduct up to $250 of dues each year, starting in 2022. The deduction would not be subject to a 2-percent-of-income floor and would be available to taxpayers who claim the standard deduction.
The proposal expressly limits the deduction to union members, which would cause a stark inequity in workplaces in which the union and the employer have an agency-shop agreement. Under such agreements, which are legal for private-sector workplaces in 23 states (but not for public-sector workplaces), employees who choose not to join the union are required to pay agency fees to the union to cover its costs in representing them. Under the proposal, they would not be allowed to deduct their fee payments, even though the fees are just as work-related as the dues paid by employees who join the union.
More broadly, the proposal would provide no tax relief for the 89 percent of American workers who are not union members.
Some limits on employee expense deductions are necessary, as it would be administratively cumbersome to track every small expense that employees incur and it is sometimes hard to distinguish genuine work-related expenses from personal spending. However, there is no justification for limiting tax relief to a few favored types of expenses.
The proposed deduction for union dues, along with the existing special tax breaks, should be replaced by a broader deduction based on fundamental tax policy principles. Congress should allow all employees to deduct all significant expenses that are clearly work-related.
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