More Overlooked but Needed Tax Reforms

Continuing with my list of reforms I think would help our tax system (see prior lists of 8/29/21 and 6/21/21), here are three more.

1. Consolidating education provisions further. Need to better identify purpose of these provisions and if their “cost” is appropriate and in line with direct spending such as Pell grants.

2. If higher education incentives are retained, be sure they also cover post-secondary trade schools and only for reasonable costs.

3. Make the IRC gender neutral – “his” is often used in the Code, sometimes even to describe a business (such as at §446(a)). Also, references to husband and wife should be changed to spouses.

Examples:

• §213 – Medical, dental, etc., expenses. (a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.
• §446(a) – General Rule. Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
• §7701(a)(17) defines “husband and wife”.
• §121(d)(1) – “If a husband and wife made a joint return for the taxable year of the sale or exchange of the property, ….”

While Rev. Rul. 2013-17 suggests a gender-neutral reading of the Internal Revenue Code, changes have not been made throughout.[1] This ruling was obsoleted by TD 9785 (9/8/16), adding Reg. 301.7701-18 defining spouse, husband and wife, husband, wife and marriage. No changes are made to the Code or other regulations to make them gender neutral.

H.R. 3833, Equal Dignity for Married Taxpayers Act of 2021, proposed to make numerous changes to the IRC to, for example replace “himself” with “self” and “husband and wife” with “married couple.” It would also repeal §7701(a)(17) that defines “husband and wife” and modify §7701(a)(38) that defines “joint return” to say it is by a “married couple” rather than a “husband and wife.”

There should also be a requirement to update regulations.

#letsfixthis

What do you think?

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[1] For example, Rev. Rul. 2013-17 states: “consistent with the statutory context, the Supreme Court’s decision in Windsor, Revenue Ruling 58-66, and effective tax administration generally, the Service concludes that, for Federal tax purposes, the terms “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if they were lawfully married in a state whose laws authorize the marriage of two individuals of the same sex, and the term “marriage” includes such marriages of individuals of the same sex.”

Let's Avoid Unnecessary Costs and Complexities

Let's skip a tax credit subsidy for electric bikes;
buy a less expensive one instead;
don't make the tax law any more complex.

The House Ways and Means markup of the Build Back Better Act (H.R. 5376) has over 120 tax changes included. This includes a lot of energy credits. Subtitle G on Green Energy is laid out in 257 or the 2466 pages of legislative text. The cost estimate over ten years from the Joint Committee on Taxation is $235 billion. In comparison, the social safety net provisions in Subtitle H cost almost four times as much, but will likely provide benefits to those more than in need than for the energy credits.

For example, there is a new refundable credit proposed at new IRC §36E for the purchase of an electric bicycle costing up to $5,000 (for a $750 credit) but the bike can't cost more than $8,000. My Google search indicates that these bikes cost under $2,000. While there likely are ones costing more, if the buyer needs the $750 credit to buy it, why not skip the credit and the complexity it will add to our tax law and the buyer can instead buy one that costs $750 less.

Here is a summary of this one credit, which easily illustrates the complexity. It is also inequitable in that the people who will claim this likely have the funds to buy the bike even without the credit. That makes it a poor use of funds - giving money to reward behavior likely to occur anyway.  And, isn't it better to have a non-electric bike and get some good exercise and use the existing bike lanes?  I assume electric bikes can't use bike lanes for safety reasons and it likely isn't that safe to have them in the vehicle lanes.

The many complex rules to make this new credit possible include:

• Equipped with: “(A) fully operable pedals, (B) a saddle or seat for the rider, and (C) an electric motor of less than 750 watts which is designed to provided assistance in propelling the bicycle and—(i) does not provide such assistance if the bicycle is moving in excess of 20 miler per hour, or (ii) if such motor only provides such assistance when the rider is pedaling, does not provide such assistance if the bicycle is moving in excess of 28 miles per hour.”
• Original use must start with taxpayer; must be used in US.
• Acquired for use rather than resale.
• Made by qualified manufacturer (includes requirement that they have agreement with IRS) with appropriate label.
• VIN must be reported on return.
• Limited to 2 per MFJ; otherwise 1, but reduced by any taken into account for 2 preceding tax years.
• Modified AGI (MAGI) phaseout starts when MAGI exceeds $150K (MFJ), $112,500 (HH), $75K (S).
• Recapture if bike no longer eligible (per regs to be provided by IRS).
• Reduce basis by credit amount.
• Terminates for bikes placed in service after 12/31/31.

Let's look at all of the new credits and be sure they meet principles of good tax policy including equity, neutrality and simplicity. Also, let's be sure each has three good reasons why it is needed and that there is no alternative other than providing a tax rule. I think this exercise will reduce the size of H.R. 5376.

#letsfixthis

What do you think?