Why Congress needs to bring back tax deduction for worker expenses

Why Congress needs to bring back tax deduction for worker expenses
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When Congress overhauled the tax code in late 2017, it scrapped the tax deduction that employees were allowed to claim for costs related to work. That change violates basic tax policy principles and imposes heavy tax burdens on workers with large job expenses. Congress should reverse course and let workers deduct the costs of earning their income.

Before the 2017 overhaul, workers who itemized their deductions could write off some employee business expenses that they paid out of pocket. Some examples included the union dues, some home office expenses, costs for uniforms and protective clothing, education costs related to work, food and lodging costs for temporary work assignments away from home, and travel expenses related to work. The deduction was available to workers with job costs above 2 percent of income, and those workers could deduct the excess of their job costs over the 2 percent level.

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Under the new tax law, the employee business expense deduction was repealed through 2025. By denying a deduction for the costs of earning taxable income, that change violates a fundamental rule of good tax policy. It is safe to assume everyone agrees that business expenses should be deductible. If businesses are taxed on their revenue, they should be able to deduct their costs and pay tax only on their net profits. Workers deserve the same treatment. If they are taxed on their wages, they should be able to deduct the costs they incur to earn the wages.

An employee who earns $40,000 of wages but has to spend $1,000 in job expenses should pay the same income tax as an employee who makes $39,000 with no job expenses. Both employees net the same $39,000 and have the same ability to pay income taxes. Letting the first employee deduct the $1,000 puts both of the employees on equal footing.

Job expenses are different from personal expenses. A worker who buys a home entertainment system should not get a tax write off. The tax code should not artificially favor particular types of consumer spending. However, a worker who buys protective clothing for her job should get a tax write off. The payoff from that purchase is not personal enjoyment. The payoff is the wages that the clothing allows the worker to earn. Unlike personal enjoyment, the wages are already taxed. Therefore, allowing a deduction for the cost of the clothing prevents double taxation.

The repeal of the employee business expense deduction exposes workers to unwarranted tax burdens. For example, an article published late last year described the devastating impact on two employees, a cable installer and a construction worker, with travel costs for work that take more than one-third of their pay. Although the tax burdens on most of the affected workers are far smaller, they are still an unjustified consequence.

Some workers may be able to get around the new rules, at least if they have good tax advice. They may take a salary cut in exchange for their employer picking up the job costs or even become independent contractors, who are still allowed to deduct their expenses. However, those options will be impractical for many workers. Besides, workers should not have to jump through hoops to get proper tax treatment.

It would have made sense for Congress to tighten the employee business expense tax rules to better distinguish true work costs from expenditures with a large personal component. In exchange, Congress could have extended the deduction to workers who claim the standard deduction, as well as those who itemize. Instead of pursuing sensible reforms, however, Congress scrapped the entire deduction, forcing workers to pay taxes on their wages with no deduction for the costs of earning those wages.

Fortunately, efforts to reverse this misguided policy are underway. Democratic Senator Bob CaseyRobert (Bob) Patrick CaseyHere are the Senate Democrats backing a Trump impeachment inquiry over Ukraine call Ex-GOP congressman to lead group to protect Italian products from tariffs The Hill's Morning Report - Progressives, centrists clash in lively Democratic debate MORE and Democratic Representative Conor Lamb have introduced bills to bring back the employee business expense deduction. Congress should heed the principles of good tax policy and restore the right of workers to deduct the costs of earning income.

Alan Viard is a resident scholar at the American Enterprise Institute.