B. Itemized Deductions 1. Repeal of deduction for State-local nonbusiness gasoline and other motor fuel taxes (sec. 111 of the bill and sec. 164(a)(5) of the Code) Present law Under present law, an individual who itemizes deductions can deduct State and local taxes imposed on gasoline, diesel, and other motor fuels not used in business or investment activities (sec. 164 (a) (5)). For example, taxes on gasoline consumed in personal use of a family car are deductible by an itemizer. A taxpayer who purchases and uses gasoline for nonbusiness purposes may obtain the deductible amount of State gasoline taxes from tables printed in the instructions for the return (IRS Form 1040).1 The table amounts are based on mileage driven during the year, the number of cylinders in the engine, and the gasoline tax rates in each State. Two or more calculations must be made from the tables if the tax rate in the particular State changed during the year, or if the taxpayer purchased gasoline in States having different tax rates. If an itemizer does not want to use the gasoline tax tables, or has purchased and used other motor fuels for nonbusiness purposes, he or she must obtain and keep receipts showing the exact amounts of State and local taxes paid. Reasons for change The committee believes that State-local gasoline taxes essentially constitute charges for the use of highways, comparable to the nondeductible Federal gasoline tax. Therefore, these taxes are more like personal expenses for automobile travel (as are highway tolls or the cost of gasoline itself) than like income or other general State-local taxes. To allow deduction of the gasoline tax is inconsistent with the user-charge nature of the tax, in that deductibility serves to shift part of the cost from the highway user to the general taxpayer. The committee also believes that the availability of this deduction places recordkeeping burdens on those taxpayers who keep receipts for all motor fuel purchases (as is required except for State gasoline taxes) or keep records as to miles driven; and if the taxpayer fails to keep such records, the amounts claimed may be based on guesswork. In addition, the deduction (which is claimed by virtually all itemizers) presents audit difficulties for the Internal Revenue Service, since there is no ready way of gauging the correctness of the amount claimed from data on the return or from easily obtainable records, or of verifying mileage claims made by taxpayers using the gasoline tax tables. Accordingly, repeal of the deduction will help 1 1 For taxpayers in Hawaii, county gasoline taxes must be calculated from receipts and added to the table amount. (41) achieve tax simplification for taxpayers and will reduce audit problems for the IRS. Also, the average amount of tax savings to itemizers resulting from the present deduction is relatively small. In addition, the committee believes that, in view of the pressing national need to conserve energy and reduce oil imports, the Federal Government should not in effect partially subsidize nonbusiness consumption of motor fuels through a deduction for State-local taxes on such fuels. The repeal of this deduction therefore is an indication that the Congress is concerned with gasoline consumption. Explanation of provision The bill repeals the itemized deduction for State and local taxes on gasoline, diesel, and other motor fuels not used by the taxpayer in business or investment activities. Effective date The repeal of the deduction is effective for taxable years beginning after December 31, 1978. Revenue effect It is estimated that this provision will reduce calendar year liabilities by $1,151 million in 1979, $1,358 million 1980 and $2,231 million in 1983. Budget receipts will be reduced by $471 million in fiscal year 1979, $1,237 million in 1980, and $2,029 million in fiscal year 1983. 2. Revision of deduction for medical, dental, etc., expenses (sec. 112 of the bill and sec. 213 of the Code) Present law Under present law, an individual who itemizes deductions generally can deduct unreimbursed medical and dental expenses paid for the medical care of the individual, and his or her spouse and dependents, to the extent that the total of such expenses exceeds 3 percent of adjusted gross income (sec. 213). Amounts paid for medicine and drugs may be counted toward the deductible amount only to the extent exceeding one percent of adjusted gross income. In addition, one-half the amount of medical insurance premiums (up to $150) can be deducted by itemizers without regard to the 3percent limitation. The balance of medical insurance premiums is added to other medical expenses and is subject to the 3-percent limitation. Reasons for change The primary rationale for allowing an itemized deduction for medical expenses is that "extraordinary" medical costs-those over a floor designed to exclude predictable, recurring expenses reflect an economic hardship, beyond the individual's control, which reduces the ability to pay Federal income tax. Inasmuch as incurring the costs of medical insurance is neither unanticipated nor nonrecurring (as compared with the happening of a major illness or accident), the committee believes that allowing a separate deduction-outside the 3-percent floor-for part of such costs is inconsistent with the basic rationale underlying the medical expense deduction. Moreover, the committee believes that the separate deduction for part of medical insurance premiums without regard to the 3-percent floor, and the inclusion of the balance of insurance costs and other medical expenses subject to the floor, foster complications, contribute to taxpayer errors, and necessitate additional lines on the income tax return (IRS Form 1040). The elimination of the partial separate deduction for medical insurance premiums will simplify the computation of the medical expense deduction. The separate one-percent floor on medicine and drugs is a further source of complexity. The principal purpose of this floor has been to provide a rough method of distinguishing between expenditures for medicine and drugs, and items that taxpayers also may purchase in drugstores and tend to group with medicine and drugs as deductible 1 The term "medical care" means amounts paid for (1) diagnosis, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body; (2) transportation primarily for and essential to such medical care; or (3) insurance covering medical care (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged). Sec. 213(e)(1). (43) medical expenses. The committee believes that removing the one-percent floor on medicine and drugs will achieve substantial simplification for individuals. Moreover, the intended result of the present floor largely will be achieved by the limitation of the deduction to prescription medicine and drugs (and insulin). Explanation of provision The bill repeals the provision of present law which allows an itemized deduction for one-half of the cost of medical insurance premiums (up to $150) without regard to the general limitation that medical expenses are deductible only to the extent they exceed 3 percent of adjusted gross income. In addition, the bill repeals the special limitation in present law which permits deduction of prescription and nonprescription medicine and drug costs only to the extent they exceed one percent of adjusted gross income. The bill provides that only "prescribed drugs" and insulin are to be eligible for the medical expense deduction.2 As a result of the modifications made by the bill, the full amount of medical insurance premiums, the costs of prescription drugs (and insulin), and other qualifying medical expenses are deductible to the extent that in the aggregate they exceed 3 percent of adjusted gross income. Effective date The modifications in the itemized deduction for medical expenses are effective for taxable years beginning after December 31, 1978. Revenue effect It is estimated that this provision will reduce calendar year liabilities by $40 million in 1979, $47 million in 1980 and $78 million in 1983. Budget receipts will be reduced by $16 million in fiscal year 1979, $43 million in 1980, and $71 million in fiscal year 1983. 'For this purpose, the term "prescribed drug" means a drug or biological which requires a prescription of a physician for its use by an individual. The term "physician" generally has the same meaning as defined by section 1861 (r) of the Social Security Act (42 U.S.C. 1395x (r)). 3. Repeal of deduction for political contributions (sec. 113 of the bill and sec. 218 of the Code) Present law Under present law (sec. 218), an individual who itemizes deductions can deduct political or newsletter fund contributions up to $100 per year ($200 in the case of a joint return). Contributions eligible for the deduction may be made to (1) candidates for nomination or election to Federal, State, or local office in general, primary, or special elections; (2) committees sponsoring such candidates; (3) national, State, or local committees of a national political party; and (4) newsletter funds of an official or candidate. Alternatively, a taxpayer can elect an income tax credit equal to one-half of such political and newsletter fund contributions, but not more than $25 ($50 in the case of a joint return) (sec. 41). The credit cannot exceed the taxpayer's income tax liability as reduced by the sum of any credits claimed for foreign taxes, for the elderly, and for investments in certain property.1 An individual who does not itemize deductions can utilize the tax credit. If an individual itemizes deductions and makes political contributions of $50 or less ($100 or less on a joint return), the credit generally will result in a greater tax benefit than the deduction, unless the contributor's marginal tax bracket is 50 percent or higher. For contributions of $100 or more ($200 or more on a joint return), the deduction (if the taxpayer itemizes) will result in a greater tax benefit than the credit, unless the contributor's tax bracket is less than 25 percent. To determine whether the credit or deduction will produce the greater tax benefit if a $50-$100 contribution is made ($100-$200 in the case of a joint return), taxpayers must calculate their tax both ways. The result will depend on the amount of the contribution, other items on the return, and the taxpayer's marginal income tax bracket. Reasons for change The committee believes that the availability of an itemized deduction for political or newsletter fund contributions, as an alternative to the credit available for such contributions, results in complications by requiring additional lines on the income tax return (IRS Form 1040), and additional instructions for the return. As a practical matter, the deduction-credit alternative may compel many taxpayers to calculate their tax liability both ways to determine which option would produce the greater tax benefit. The repeal of the deduction will free taxpayers from certain calculations and provide some tax simplification. 1 Apart from the political contribution deduction and credit provisions, the Federal Election Campaign Act allows a taxpayer to earmark $1 ($2 on a joint return) of his or her Federal income tax liability for contribution to the public financing of Presidential campaigns. (45) |