Republicans wrote their 2017 tax law so fast that the Senate voted at 2 a.m. on a version that still had edits hand-scribbled in the margins. They knew they would probably need to fix a few mistakes at some point later on.
Two years later, the economic boom the law was supposed to produce has failed to materialize ― but the mistakes have become very clear, and lawmakers are still trying to clean up after themselves.
Elizabeth Davis of Stafford, Virginia, is one person caught up in the mess. Davis normally owes a few hundred dollars around tax time. This year, she found herself with a nearly $10,000 bill thanks to wildly increased taxes on the death benefits she receives as a military widow.
“It was like a gut punch,” said Davis, 33, who is a full-time student working toward a communication degree.
Davis and her 11-year-old daughter have been receiving about $2,000 per month via two kinds of military survivor benefits since her husband Matthew Davis, a Marine Corps first lieutenant, was killed by a drunk driver at Camp Pendleton, California, five years ago this week.
Hers is just one of thousands of Gold Star families ― the name given to surviving relatives of deceased members of the armed services ― who got slapped with a giant tax bill because of a mistake in the law. Military families have long complained about how the government distributes death benefits, and the tax goof worsened a problem that was complicated enough to begin with.
“All of us had big bills, varying from a couple grand into tens of thousands of dollars.”
Davis said not even her tax preparer understood what had gone wrong.
“I was in complete and utter disbelief. I contacted friends who were lawyers, seeing if something had changed,” Davis said. She also reached out to certified public accountants, veterans groups like the Tragedy Assistance Program for Survivors, and through social media she contacted other Gold Star widows. A pattern emerged.
“All of us had big bills, varying from a couple grand into tens of thousands of dollars,” Davis said.
As she started figuring out how to pay what she owed, Davis also wanted to make sure she wouldn’t have to do it again next year. So she’s undertaken her own lobbying effort to fix the flaw.
Here’s What Lawmakers Did Wrong
The Tax Cuts and Jobs Act simplified many parts of the tax code, resulting in both lower taxes and easier filing for a lot of people. Far fewer taxpayers now make an itemized list of deductions, for instance, opting instead for a standard deduction that is much more generous than it used to be.
Another simplification junked a complicated rule regarding unearned income for children that was originally drafted in 1986 to discourage wealthy parents from gifting large sums of money to their offspring to dodge taxes. The so-called “kiddie tax” required parents to do their kids’ taxes first, and then add the taxable portion of their children’s income to their own return.
The new, simpler arrangement lets parents file wholly separate returns for themselves and their kids, but the tax rates on even low levels of unearned income for children can near 40%. Republicans had long wanted to make this change; a stalled GOP tax reform bill had the same provision in 2014.
“It had been vetted thoroughly for years,” Rep. Kevin Brady (R-Texas) told HuffPost last month. Brady chaired the House Ways and Means Committee and was a principal author of the new tax law in 2017.
But nobody seemed to realize the change would clobber households with children who are receiving benefits because a parent died on active duty or in retirement from the military. “It’s an unintended consequence because Congress enacted it quickly without hearings,” said Mark Mazur, the Robert C. Pozen director of the Urban-Brookings Tax Policy Center.
The Gold Star glitch is just one of several unintended consequences of the tax law.
Soon after the bill passed, the agriculture industry noticed that a new tax deduction for certain types of businesses gave farms an absurd incentive to sell their crops to cooperatives rather than private firms. Democrats worked with Republicans to fix the so-called “grain glitch” in March 2018, just a few months after Trump had signed the bill into law.
Democrats have seemed less enthusiastic about fixing other problems. They say they want to fix the “retail glitch” ― a drafting error that has disallowed firms such as restaurants from writing off upgrades to commercial properties. Democrats have used that fix as leverage, suggesting in letters to a large casino operator that if it wants their help to deduct the cost of a recent $600 million renovation, it should be nicer to its workers.
Fixing the Gold Star glitch has also become a bit of a bargaining chip. In May, the Senate passed a standalone bill that would solve Gold Star families’ tax problem. A similar House measure has 169 Republican and Democratic co-sponsors. But rather than address the glitch directly, Democratic leadership added a fix to the SECURE Act, a package aimed at boosting retirement security that passed the House in May by a vote of 417 to 3.
Now the SECURE Act has hit a roadblock in the Senate, where a handful of Republicans have put a hold on it ― an old legislative trick that allows individual senators to stall bills.
What’s Going Wrong Now
Sen. Ted Cruz (R-Texas), one of the most vocal senators holding up the SECURE Act, actually has no beef with what’s in the bill ― he’s just mad that House Democratic leaders removed a provision that he had championed that would allow parents to use tax-advantaged 529 savings accounts for K-12 educational expenses such as tutoring and homeschooling. (For the most part, such accounts are reserved for college expenses.)
“House leadership vindictively stripped it from the bill,” Cruz said, blaming teachers unions. “I’m pressing to get it added back to expand the educational choices and options for millions of kids across the country.”
Cruz and his fellow holdouts are agitating for a chance to add amendments to the SECURE Act, including one for 529s and one to fix the retail glitch. But it’s not clear how the strategy will work since it seems most of their colleagues in the Senate favor the bill as is and Senate Majority Leader Mitch McConnell (R-Ky.) is miserly with floor time for legislation.
“You’re holding up taxes on death benefits for orphans for the sake of an extra-curricular financial account.”
Davis had a face-to-face meeting with Cruz’s office over the summer to lobby for the SECURE Act. She said Cruz’s staff expressed sympathy for her plight and said nobody had intended to hike taxes on grieving military families, but the senator wants a vote on his education thing before moving forward.
Which, to Davis, seems less important than fixing her tax problem.
“You’re holding up taxes on death benefits for orphans for the sake of an extra-curricular financial account,” she said.
(Cruz voted in favor of the Senate bill that solely addresses the taxes on death benefits, but the House has no plans to take up that legislation.)
An irony about blocking the retirement bill for education policy reasons is that military widows and widowers are not the only ones with a new kiddie tax problem. The glitch also affected recipients of scholarship grants and the children of fallen police officers and firefighters who receive benefits from state and local governments. The American Council on Education estimates the glitch has affected 1.4 million students, mostly from middle- and lower-income families.
“This is what happens when you do an enormous bill so quickly,” ACE’s government affairs director Steven Bloom said.
The SECURE Act would fix the glitch for students and first responders, but the standalone House and Senate bills would not.
Another Possible Solution
Even if the Senate never passes SECURE Act, military families could catch a break in another upcoming piece of legislation.
The House passed a defense spending bill this year that would make it unnecessary for Gold Star widows and widowers to designate children as beneficiaries of their late spouse’s death benefits ― something veterans service organizations have complained about for decades.
When a service member dies, the Department of Veterans Affairs pays most surviving spouses Dependency and Indemnity Compensation benefits averaging about $1,300 a month. The surviving spouse might also be eligible for compensation from the Survivor Benefit Plan, a Defense Department insurance policy that usually pays about $1,050 a month.
The problem is that benefits from the two agencies offset each other, meaning a dollar of the latter benefit is subtracted for every dollar of the former. The only way to avoid that scenario is for a surviving spouse to designate a child as the Survivor Benefit Plan beneficiary. The military community calls this benefit offset the “widow’s tax,” though it is not actually a tax ― it’s just a bad thing they gave a nasty name.
The underlying benefit offset affects more military families than those who got surprise tax bills. There are roughly 10,000 children receiving Survivor Benefit Plan annuities whom the tax law may have adversely affected. There are 65,000 surviving spouses paying the widow’s tax.
The House defense bill, which sets the Pentagon’s budget, would undo the benefit offset, allowing surviving spouses to receive both benefits directly without a child intermediary.
Service member advocacy groups like Veterans of Foreign Wars (VFW) and Tragedy Assistance Program for Survivors (TAPS) have been intensely lobbying Congress to finally undo the offset. Passing the defense bill in the House is as close as lawmakers have ever come to killing the widow’s tax.
That legislation is now being merged with a Senate version of the defense bill that did not include a widow’s tax repeal. Senate Republicans are wary of the provision’s $5 billion cost, but Sen. James Inhofe (R-Okla.), chairman of the Armed Services Committee, suggested they might let it go.
“I think we’re pretty much decided that there’s such a strong support for that that in spite of the costs they’re going to go ahead and accept that,” Inhofe said last month.
The whole episode is a tangle of two overlapping policy issues. Different groups of lawmakers handle tax and military policy and have been pursuing their respective solutions on separate but parallel tracks. Fixing the benefit offset would resolve the tax problem that cropped up this year for widows like Davis. But attacking the tax problem itself would not fix the underlying benefit offset issue (which, remember, is called the widow’s tax even though it’s not actually a tax).
In a perverse way, the Gold Star glitch in the 2017 tax bill may have been helpful to the military community, bringing additional attention to the underlying problem of the widow’s tax.
“While everyone said, ‘Yes, the widow’s tax is bad,’ when they got hit with another round of taxes, now the message is really starting to permeate through every office in the House, every office in the Senate,” the VFW’s deputy legislative director Pat Murray said.
Time’s Running Out For 2019
But it looks like negotiations for the defense bill are not wrapping up fast enough, and Inhofe has started talking about doing a partial defense bill that might omit even mildly controversial provisions. There are bigger disagreements, such as replacing funds that had been taken from the defense budget to pay for wall construction along the U.S.-Mexico border, but some senators involved in negotiating the final bill are still concerned about the cost of the widow’s tax repeal.
“Our biggest challenge right now is time,” said TAPS deputy policy director Ashlynne Haycock. Congress has fewer than 20 days left in session this year.
“To be hit with a $10,000 bill on death benefits for the orphan of a fallen service member ― it is so absolutely horrendous.”
Haycock has been lobbying on the widow’s tax since 2002, when she was 10. She accompanied her mother to Capitol Hill after her father died in an April 2002 accident at Fort Sill, Oklahoma. She wrote a September op-ed saying she had been thrilled when Inhofe, her home state senator, became chair of the Armed Services Committee, but was baffled that he omitted a widow’s tax fix from the Senate defense bill.
“I trust Senator Inhofe will keep his word to us,” Haycock wrote, exhorting the senator to honor a commitment to her mother, Nichole Haycock, a U.S. Air Force veteran who died in 2011.
For Davis, a full-time student who is now engaged to remarry and has a 1-year-old, there was not a lot of cash lying around to pay her surprise tax bill.
She had to withdraw money from an Individual Retirement Account, which was subject to a 10% early withdrawal fee ― so Davis will have to pay a tax to pay her tax. She thinks it’s all pretty stupid.
“There’s all these promises from a grateful nation that we’re going to take care of all these things,” she said. “And then to be hit with a $10,000 bill on death benefits for the orphan of a fallen service member ― it is so absolutely horrendous that that happened.”