A Small Step toward Tax Equality for Same-Sex Couples

A trio of recent IRS rulings (here, here, and here) has rekindled debate on how our tax system should treat same-sex couples.

Under the Defense of Marriage Act, the federal government does not recognize same-sex marriages. As one consequence, same-sex couples must file individual tax returns even if they are married or registered as domestic partners under state law.

The new rulings were prompted by a 2007 California law that requires registered domestic partners to treat their earnings and some investment returns as common property for state tax purposes. Under this approach, the partners share equally in their combined income, regardless of which partner earned it. If one partner earned $50,000 and the other nothing, for example, they would each be viewed as having $25,000 of income.

Because “federal tax law generally respects state property law characterizations and definitions,” the IRS decided to apply that approach to federal taxes. As a result, domestic partners in California (most of whom are same-sex couples) will each report half their combined income from earnings or community property on their individual federal tax returns.

That approach will lower the tax burden for many eligible same-sex couples. For example, if one partner earns $50,000 per year and the other has no earnings, the couple’s combined federal tax bill would fall from about $6,000 to $3,000 (assuming they have no children). That decline is identical to the “marriage bonus” that the federal tax code currently provides to heterosexual married couples at that income level.

For that reason, some commentators have characterized the rulings as tax equality for same-sex couples (e.g., the Wall Street Journal ran the headline “Gay Couples Get Equal Tax Treatment”). But that interpretation exaggerates the impact of the rulings and understates the differences in taxation between same-sex and heterosexual couples.

First, the rulings apply only in states with these community property rules for same-sex partners. According to the WSJ, besides California, only Nevada and Washington might currently be affected.

Second, same-sex partners still can’t file joint returns. As a result, their tax burdens can differ from those of otherwise identical heterosexual couples. For example, one domestic partner might have investment income from assets that are not community property and thus are not shared with the other partner. Depending on their income, that can result in the same-sex couple paying more or less than a heterosexual couple.

Dividing income under the community property approach may also allow same-sex couples with high incomes to pay less in federal taxes than heterosexual couples. For example, a same-sex couple that earns $300,000 would pay about $66,000 in tax under the new ruling, while a heterosexual married couple would pay about $78,000.

Finally, the rulings don’t address a host of other ways in which same-sex couples face less-favorable tax treatment. At a recent TPC event, for example, Michael Steinberger of Pomona College noted that same-sex couples can face significantly higher estate taxes because they aren’t eligible for tax-free bequests to spouses.

For all these reasons, same-sex couples and heterosexual couples still aren’t treated the same under the tax code. The recent IRS rulings narrow the gap in some cases, but create new gaps in others. Given the complexities of our tax code, separate treatment will inevitably mean that some same-sex couples will pay more or less in taxes than comparable heterosexual couples do. If policymakers ever want same-sex couples to be taxed the same as heterosexual couples, the only practical way to do so would be to allow same-sex couples to file their tax returns as married couples.

This post first appeared on TaxVox, the blog of the Urban-Brookings Tax Policy Center.

The Second Rule of Hospitals

The first rule of hospitals is to try to stay out of them. Unfortunately, that rule must sometimes be broken. So let me suggest a second rule: no one should be alone in a hospital.

Hospitals can work miracles, saving lives and improving quality of life. But they can still be dangerous and (ironically) inhospitable places. Patients need someone by their side not just to provide comfort, but often to monitor their care and act as their advocate.

A natural corollary is that patients should be free to choose as their companions and advocates whomever they most trust in those roles.

I thus find it astounding that, at least until last night, hospitals could refuse to honor advance directives in which a patient had specified who they wanted to have visitation rights and the power to make decisions on their behalf. As President Obama wrote in a memo to HHS Secretary Sebelius:

Yet every day, all across America, patients are denied the kindnesses and caring of a loved one at their sides — whether in a sudden medical emergency or a prolonged hospital stay. Often, a widow or widower with no children is denied the support and comfort of a good friend. Members of religious orders are sometimes unable to choose someone other than an immediate family member to visit them and make medical decisions on their behalf.

Also uniquely affected are gay and lesbian Americans who are often barred from the bedsides of the partners with whom they may have spent decades of their lives — unable to be there for the person they love, and unable to act as a legal surrogate if their partner is incapacitated.

The President’s executive order forbids this conduct for any hospitals that receive Medicare or Medicaid money:

It should be made clear that designated visitors, including individuals designated by legally valid advance directives (such as durable powers of attorney and health care proxies), should enjoy visitation privileges that are no more restrictive than those that immediate family members enjoy.

You should also provide that participating hospitals may not deny visitation privileges on the basis of race, color, national origin, religion, sex, sexual orientation, gender identity, or disability. The rulemaking should take into account the need for hospitals to restrict visitation in medically appropriate circumstances as well as the clinical decisions that medical professionals make about a patient’s care or treatment.

Sounds right to me.

Love Wins

The photos on the front page of the Washington Post are usually depressing. War, natural disasters, and other tragedies provide a seemingly endless stream of sad or horrifying images.

Not so this morning. When I picked up my paper, the images were joyful, depicting happy same-sex couples who were finally able to apply for marriage licenses in our nation’s capital. I went to the WaPo’s web site and discovered that it has a whole slide show of photos of happy couples. Here’s my favorite (note the poster):

I often tell my students that, in my humble opinion, one purpose of government is to help people be happy. The DC government did a good job on Wednesday.

Another Argument for Legalizing Same-Sex Marriages

The voters of Maine disappointed me last week, voting to overturn a state law that allowed same-sex marriages.

Many public policy issues involve difficult tradeoffs. Health care, for example, is a hard issue. So is climate change. But same-sex marriage? That’s always struck me as a lay-up. It would benefit those who want to get married, while harming, as best as I can tell, no one. (In econo-speak, that’s called a Pareto improvement, and the first rule of economics is to take every Pareto improvement that life offers you.)

One sometimes hears the argument that allowing same-sex unions would weaken the institution of marriage. But I’ve never seen a plausible explanation of how that could happen. At best, the argument seems like a non-sequitur. And at worst, it may be exactly backwards.

As Theresa Vargas describes in today’s Washington Post, one group of people–the former spouses of homosexuals who tried to live as heterosexuals–believe that legalizing same-sex marriages would strengthen the institution of marriage: 

As the debate over legalizing same-sex marriage in the District grows louder and more polarized, there are people whose support for the proposal is personal but not often talked about. They are federal workers and professionals, men and women who share little except that their former spouses tried to live as heterosexuals but at some point realized they could not.

Many of these former spouses — from those who still feel raw resentment toward their exes to those who have reached a mutual understanding — see the legalization of same-sex marriage as a step toward protecting not only homosexuals but also heterosexuals. If homosexuality was more accepted, they say, they might have been spared doomed marriages followed by years of self-doubt.

In short, the Pareto improvement from allowing same-sex marriages may be even bigger than I thought.