Friday, August 10, 2012

Taxes: The Dems, GoP & Colorado's Civil Union Proposal

This is the first of three pages I plan to create looking at, in series: (a) the taxes, (b) benefits and (c) family leave structures that help or impede peer unions or marriages.  At the bottom of each page, I list a summary recommendation for questions to ask politicians for people wanting to address these issues.  Later, I'll create a page with suggestions for employers and employees on the issues of benefits and leave, which are topics that seem to cause both parties anxiety but can be resolved.

First, I want to mention that I think it is significant that so many families in the U.S. are doing shared earning/shared parenting marriage in spite of these impediments.  The reasons they do it may include financial and economic gains and stability, but they also may include intangibles like (a) they want to free their children from gender role stereotypes that could limit both their success in school, jobs, and careers and their success in forming a healthy partnership themselves and bringing another generation into the world if they choose, (b) they value emotional health and, especially when the parents have enough time to spend each other and with their children, the emotional health benefits for children of this type of union are priceless, (c) they love each other, (d) they want their partnership to last and divorce rates are lower for this type of union, and/or (e) they have religious or spiritual beliefs that this type of union is important, or other reasons.  According to a 2011 Pew Research study, among Millenials (people who became adults in the year 2000 or later) 72% want this type of partnership or union rather than patriarchal marriage (defined as "husband provides/wife takes care of house and children"); among Gen-Xers, 63% want it, among Baby Boomers 59%, and among those over 65, 56%.  http://www.pewsocialtrends.org/2011/03/09/for-millennials-parenthood-trumps-marriage/3/ If you know of other reasons, please tell us about them in the comments . . . .

How many people are doing this?  Some estimates in recent articles by a variety of sources that are cited here http://en.wikipedia.org/wiki/Shared_Earning/Shared_Parenting_Marriage are that 30-50% of married couples in the United States with minor children are in this type of union.  They include very high income people, including billionaires, very prominent people, like Supreme Court Justices, and also middle income and low income people. Some of these may be same sex couples but since people identifying as GLBTQ are only 3%-4% of the U.S. population, there is no doubt that this is popular with hetero couples.  There are some hetero couples who are doing this who have decided not to marry because the tax discrimination is too costly, and they save money by doing specific legal documents (much like those many same-sex couples employ) to govern their partnership, have rights of survivorship, health care directives, and other important issues and reflect their commitment to each other and to any children they have but which keep them recognized as individuals for purposes of taxes.

The one type of person in our economy who is not doing this, however, to my knowledge, is politicians.  I am not aware of any U.S. Senators or Representatives who are in this type of marriage.  If you find one who is, please tell us.  Also, neither the Obamas nor the Romneys are in this type of marriage.  Colorado's Governor, John Hickenlooper, and Helen Thorpe were not in this type of union (and they just announced they are separating).  See  http://www.denverpost.com/breakingnews/ci_21200808/colorado-governor-separate-political-future-still-looks-bright.

Given that our country is facing problems of a ballooning national debt that has now reduced the U.S. credit rating, job stagnation, a very high number of births to parents who are not married (or unioned or in recognized co-parenting relationships) (over 50% of births to people under the age of 30), much higher educational rates in women than in men (women are getting 2/3 of college degrees, for example) and intense political polarization that is crippling the economy, businesses and many families, I find it curious that neither political party is focusing on the full matrix of issues that need attention to recognize these families and end the discrimination against them.  Each party has paid some attention, though, and I'll discuss that in each category of (a) tax, (b) benefits and (c) family leave.  I'll also look at the possibilities Colorado's proposed civil unions law offers for addressing each issue.

One other thing I want to mention: when looking at the tax discrimination issue, I am focusing on how the tax burden is distributed among people in the United States, not on the separate issues of the size of the overall burden or what the tax dollars are spent on.


What is the Tax Discrimination Against Peer Marriage?

First, what is the nature of the discrimination against these families in taxes?  At the federal and state level the primary issue is the marriage penalty.  This occurs both in income tax and Social Security tax; I'll look at the income tax here and the Social Security tax on the benefits page.

Here's an article explaining the marriage penalty as a general concept.  http://en.wikipedia.org/wiki/Marriage_penalty

The marriage penalty derives from two features of the tax code: (a) requiring married couples to be taxed jointly (even if they file separately) and (b) the progressiveness of the rate structure.  The first feature is the focus of this article.  The progressiveness of the federal income tax code is considered to be desirable by most tax authorities because state and local sales and property taxes are regressive by their nature; to have a net taxing system for the political economy that has structural integrity you need to make the income tax progressive.

Currently, couples in the 10% and 15% brackets are relieved somewhat of this penalty by the Bush Tax Cuts.  The Bush Tax Cuts are set to expire at the end of 2012 (more on each party's proposals on that issue below); here's an article about what will happen if they expire http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/.  As the article notes, if the Bush Tax Cuts expire, "lots of lower and middle-income income couples will face higher tax bills due to a harsher marriage penalty."

Even with the Bush Tax Cuts in place, higher earners (couples who make more than $130,000 combined) are not getting any relief at all from the marriage penalty.  For illustration purposes, here's an explanation from the Tax Policy Center of how the marriage penalty works for a shared earning/shared parenting couple that earns $250,000 per year and a male breadwinner/female primary parent couple that earns the same amount.   http://taxvox.taxpolicycenter.org/2011/04/20/marriage-children-tax-credits-and-the-alternative-minimum-tax/

The mechanics of the $250,000 example are similar to those lower income couples will face if the Bush Tax Cuts expire.

One caveat I'd like to suggest to this Tax Policy Center study is the characterization of a "marriage bonus" for the male breadwinner/female primary parent couple.  It is true that this is a bonus or a subsidy from the peer marriage couple (including for this purpose a shared earning couple with no children).  But, within this marriage, this is actually a type of tax bonus only for the high earner (in this case, the man) and is instead a tax penalty for the low earner (in this case, the woman).  This is because before the marriage, the woman who earned $25,000 would have been taxed at a 15% marginal rate and the man who earned $225,000 would have been taxed at a 33% marginal rate.  After the marriage their combined marginal rate becomes 33%.  The woman's marginal rate went from 15% to 33%, a 20% marriage penalty for her!  In practice, many of these couples actually reinforce this tax penalty for the woman, by seeing the woman's income as non-essential and thus counted after the man's income; that is exactly what the marginal rate is, it is the rate charged on the last dollars earned.  

This type of marriage where the woman is earning $25,000 and is seen as the primary parent is probably not a patriarchal marriage, but more a "near-peer" or transitional marriage.  To be a peer marriage, both of the following need to be true: (a) she would need to be making enough money to provide half the basic support for the family (which can include an assumption that she could do this if they cut expenses or moved to lower-cost housing if they needed to) and, (b) each parent would be defined as primarily responsible for half the unpaid work of the family, including parenting. 

This example would be even more stark if the woman made no money at all; this would be more clearly a patriarchal marriage and would receive an even larger subsidy from the peer marrieds and near-peer marrieds (including childless couples).

Have the Democrats Proposed Anything to End This Discrimination?

In July 2012, in a document entitled "The President's Proposal To Extend The Middle Class Tax Cuts", the Obama Administration has proposed keeping the Bush Tax Cuts in place for families earning less than $250,000.   http://www.whitehouse.gov/sites/default/files/extending-middle-class-tax-cuts-nec.pdf  This doesn't mean marriage penalty relief for all families earning less than $250,000, though, because the Bush Tax Cuts only provide marriage penalty income tax relief for families earning less than about $130,000.  (The Bush Tax Cuts also don't address the marriage penalty problem in Social Security taxes and benefits that all peer or near-peer married couples face, regardless of income, that I'll discuss in the benefits section).   The example above from the Tax Policy Center would still apply.

The Obama Administration may have made other tax proposals that I'm not aware of; if you know of any that help with the marriage penalty, please let us know.


Have the Republicans Proposed Anything To End This Discrimination?

In several releases over the last couple years, the Romney campaign has offered very specific tax proposals.  Here's a summary: http://factcheck.org/2012/08/romneys-impossible-tax-promise/  These include (a) keeping the Bush Tax Cuts in place for everyone, so this would mean income tax marriage penalty relief would continue for couples earning less than about $130,000 and (b) eliminating the Alternative Minimum Tax (the "AMT").  The AMT is a contributor to the substantial marriage penalty that higher income couples (such as the $250,000 couple in the Tax Policy Center example) face, but is not the whole reason for it, so just eliminating the AMT will not resolve all the income tax discrimination against peer marrieds who make more than $130,000 combined.  The example above from the Tax Policy Center would still apply in part, and the problem of the marriage penalty in Social Security taxes and benefits that all peer or near-peer married couples face, regardless of income, would still apply.

The Romney campaign has also suggested introducing a progressive capital gains tax.  In combination with the current requirement that married couples file jointly, this would add a marriage penalty to the capital gains tax and an incentive to consolidate all marital assets into one person's name.  This is not just a concern of wealthy people; it is an issue for peer marrieds who have investments for retirement and who expect to use capital gains on those investments to pay for their retirement.

The factcheck.org summary seems to capture all of the Romney tax reform proposals.  If you know of others not reflected there that affect the marriage penalty please let us know.

Will Colorado's Proposed Civil Unions Law Help?

The civil unions bill that the Colorado legislature debated in its last session, and again in special session, can be found here.    http://www.leg.state.co.us/clics/clics2012a/csl.nsf/fsbillcont3/F952C7C4927957FA87257981007CC33C?open&file=002_01.pdf

Several legislators have expressed intention to reintroduce this bill or something similar in the next session.  To analyze this, I'll look at last year's bill.  As I note below, though, Colorado voters (and politicians if they are reading this) may want to seek some changes in the bill to help with the discrimination against peer partners.

The bill expressly provides that civil unions may be entered by both heterosexual and same-sex couples.

To examine whether it helps with the marriage penalty, first I'll quote the language of the bill and then I'll explain some of the implications of this for peer marrieds.

The bill provides that:

"14-15-116. Tax equity - joint tax returns - commission - report
25 - construction of article relating to tax returns - repeal.


(1) (a) THE 26 GENERAL ASSEMBLY FINDS THAT CURRENT FEDERAL LAW PROHIBITS THE FILING OF A JOINT INCOME TAX RETURN BY PARTIES WHO ARE NOT CONSIDERED LEGALLY MARRIED UNDER FEDERAL LAW.SINCE COLORADO INCOME TAX FILINGS ARE TIED TO THE FEDERAL INCOME TAX FORM BY 3 REQUIRING TAXPAYERS TO PAY A PERCENTAGE OF THEIR FEDERAL ADJUSTED GROSS INCOME AS THEIR STATE INCOME TAXES, THIS PREVENTS THE FILING BY THE PARTIES TO A CIVIL UNION OF A JOINT STATE INCOME TAX RETURN. THE GENERAL ASSEMBLY FINDS THAT IT WOULD ASSIST POLICYMAKERS TO STUDY THE CONSEQUENCES OF AND DIFFICULTIES ENCOUNTERED BY PARTIES TO CIVIL UNIONS FROM NOT BEING ABLE TO FILE JOINT TAX RETURNS, WHETHER IT IS BENEFICIAL OR ADVANTAGEOUS TO PARTIES TO FILE JOINT TAX RETURNS INSTEAD OF SEPARATE RETURNS, THE POTENTIAL BENEFITS TO THE DEPARTMENT OF REVENUE OF HAVING PARTIES TO A CIVIL UNION FILE JOINT TAX RETURNS, AND HOW THE STATE STATUTES COULD BE CHANGED TO PERMIT THE PARTIES TO A CIVIL UNION TO FILE A JOINT STATE INCOME TAX RETURN.

 (b) THE EXECUTIVE DIRECTOR OF THE DEPARTMENT OF REVENUE MAY CREATE A STUDY COMMISSION TO INVESTIGATE AND CONSIDER WHAT CHANGES IN THE STATE STATUTES COULD BE MADE TO ENSURE EQUITABLE TAX TREATMENT FOR PARTIES TO A CIVIL UNION AND TO ALLOW PARTIES TO A CIVIL UNION TO FILE A JOINT STATE INCOME TAX RETURN WITHOUT
VIOLATING THE FEDERAL TAX LAWS. IF A STUDY COMMISSION IS CREATED, THE COMMISSION SHALL CONSIST, AT A MINIMUM, OF TAX ACCOUNTANTS AND STAFF OF THE DEPARTMENT OF REVENUE APPOINTED BY THE EXECUTIVE DIRECTOR OF THE DEPARTMENT OF REVENUE AND THE CHAIRS OR THEIR DESIGNEES OF THE FINANCE COMMITTEES OF THE HOUSE OF REPRESENTATIVES AND THE SENATE, OR ANY SUCCESSOR COMMITTEES. IF APPOINTED, THE COMMISSION SHALL PREPARE A REPORT OF ITS FINDINGS AND RECOMMENDATIONS AND SUBMIT THE REPORT TO THE EXECUTIVE DIRECTOR AND THE FINANCE COMMITTEES OF THE HOUSE OF REPRESENTATIVES AND THE SENATE, OR ANY SUCCESSOR COMMITTEES, ON OR BEFORE JANUARY 1, 2013.

(2) UNTIL A STATUTORY CHANGE IS ENACTED TO AUTHORIZE THE FILING OF A JOINT STATE INCOME TAX RETURN BY PARTIES TO A CIVIL UNION, THIS ARTICLE SHALL NOT BE CONSTRUED TO PERMIT THE FILING OF A JOINT STATE INCOME TAX RETURN BY THE PARTIES TO A CIVIL UNION.

9 14-15-117. Construction. (1) THE PROVISIONS OF THIS ARTICLE SHALL NOT BE CONSTRUED TO CREATE A MARRIAGE BETWEEN THE PARTIES TO A CIVIL UNION OR ALTER THE PUBLIC POLICY OF THIS STATE, WHICH RECOGNIZES ONLY THE UNION OF ONE MAN AND ONE WOMAN AS A
MARRIAGE."

First, the law's default rule is that the parties to the civil union must file individually.  This means no marriage penalty, but also no marriage bonus.  The law suggests the Department of Revenue study whether to allow civil unioned couples to file jointly; this suggests that even if they are ultimately allowed to file jointly, they will also probably keep the ability to file individually.  Since our focus here is the marriage penalty, we want to see these couples have at least the right to file individually.

Having the ability to file individually means it may make sense for a shared earning/shared parenting couple to civil union rather than marry given that the Bush Tax Cuts' relief for marriage penalty relief in the 10% and 15% brackets may expire (if it does, hopefully it will be replaced with something similar, preferably something more comprehensive that addresses all the marriage penalty problems for people in those and other brackets.  If the shared earning/shared parenting couple expects to make more than $130,000 per year now or in the future, it may be an even clearer case for civil union rather than marriage.

Can we be sure the tax authorities won't deem a hetero civil unioned couple to be "married" for tax purposes?  (A same-sex couple would not have this issue because of the Defense of Marriage Act, which defines marriage as requiring one woman and one man and because of a Constitutional Amendment in Colorado that provides the same definition.)  A hetero civil unioned couple would be at risk of being deemed to file jointly and suffering the marriage penalty, however, there are few arguments such a couple would have in their favor in arguing that they can, and perhaps must, file individually:

(1) The plain language of the law quoted above expressly provides that "THE PROVISIONS OF THIS ARTICLE SHALL NOT BE CONSTRUED TO CREATE A MARRIAGE BETWEEN THE PARTIES TO A CIVIL UNION."

(2) A IRS interpretation of Illinois' civil union law may actually mean that Colorado's Constitutional amendment defining marriage works to render a civil union a different type of partnership that must be taxed individually.  Here is a summary of the IRS interpretation.  http://www.proskauer.com/news/detail.aspx?news=7056 Because Colorado's civil unions law does not (and cannot because of the Constitution amendment) render a civil union equivalent to a marriage, it seems there is an argument that individual tax returns are possibly required, and at least an option.

Ideally the civil unions law would make this issue clearer, though, and give express permission to parties to the civil union, especially hetero parties, to file individual tax returns.

Same sex couples have been able to use the benefits of filing individual tax returns to help them with the problems of tax discrimination outlined here and other related tax problems in a number of ways, and hetero couples considering the possibility of the individual taxation offered through a civil union may want to look at resources like these:  http://www.cch.com/wbot2012/014Married.asp and http://www.journalofaccountancy.com/Issues/2011/Dec/20114643.htm

What To Ask A Politician?

Here are my suggestions.  If readers have other suggestions, please tell us in the comments:

1.  The simplest question to ask a politician, including Colorado politicians who will debate the proposed civil unions law is: Do you have a proposal to address the marriage penalty?  If it's a Colorado politician you may want to ask, Could the civil unions law more clearly ensure that hetero civil unioned couples can file individual tax returns?

2.  The more comprehensive question to ask is: In order to avoid family structure bias, what do you think of making tax return filing simply an individual matter for everyone?  This is the ideal, comprehensive solution that would make the tax code neutral as to family structure.   Whether you are in a patriarchal, near peer/transitional, or peer marriage/union (or whether you are single, divorced or in a blended family), the tax code would be neutral and no particular family structure would be subsidizing another. Deductions for children could be required to be divided equally between the custodial parents provided they are married (or current on child support if they are divorced and required to pay it).  Income or deductions from joint ownership of property (such as interest, dividends, capital gains and mortgage deductions) could be required to be divided equally between the joint owners.

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I welcome any comments, suggestions, corrections or discussion in the comments.  Thanks for reading!


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This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice (or any legal advice). By using this blog site you understand that there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state or jurisdiction. This blog is not published for advertising or solicitation purposes and the author is not a specialist in family law.

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