Proposed moving expense limitation.

On June 28, 1992, Tax Executives Institute filed the following comments with the numbers of the congressional tax-writing committees on the proposed limitation on the deductibility of moving expenses in excess of $5,000. The provision was included in the House version of H.R. 11. The comments

were prepared in connection with the Senate Finance Committee's, and ultimately, the Conference Committee's, consideration of the bill. TEI's comments were prepared under the aegis of its Federal Tax Committee, whose chair is David F. Nitschke of Amerada Hess Corp. and that committee's Employee Benefits Subcommittee, whose chair is David L. Klausman of Westinghouse Electric Corp.

On July 2, the House of Representatives approved H.R. 11, the Revenue Act of 1992. As International President of Tax Executives Institute, I am writing to voice the Institute's opposition to the legislative proposal contained in H.R. 11 to limit the deductibility of moving expenses in excess of $5,000 per move. The proposal is devoid of any legitimate tax policy rationale. TEI recommends that the provision be rejected.

Background

Tax Executives Institute is the principal association of business tax executives in North America. The Institute's approximately 4,700 members represent more than 2,000 of the largest companies in the United States and Canada. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the legislative proposal to limit the deductibility of moving expenses.

Description of House Proposal

Among the revenue-raising provisions in H.R. 11 is a proposal to amend section 217 of the Internal Revenue Code to modify the deduction for moving expenses. The modifications include (1) removing the separate $1,500 limitation for pre-move house-hunting expenses and temporary living expenses in the general location of the new employment, (2) imposing an overall cap of $5,000 on moving-expense deductions, (3) making reimbursed moving expenses an "above-the-line" deduction to the extent of any reimbursement, and (4) subjecting unreimbursed expenses to the two-percent floor for miscellaneous itemized deductions.

Discussion

The House proposal to limit the deduction to an overall cap of $5,000 should be rejected because it violates the fundamental principle of a net income tax system that taxpayers should be able to deduct all expenses necessary for the production of income. The House Ways and Means Committee Report states that the rationale for limiting the deduction to $5,000 is to eliminate the deduction for "excessive" moving costs. TEI believes that the rationale is flawed for several reasons.

First, the majority of employee relocations are motivated by business needs. Employers transfer employees to new locations as necessary to match the skills of an employee to the job to be performed. Employers do not willingly pay "excessive" relocation packages, just as they do not willingly pay "excessive" amounts for any cost of doing business.(1) Employers reimburse moving expenses as part of a compensation package based on a judgment of what is necessary under existing market conditions to attract, motivate, and retain employees. What is necessary in the circumstances is a business judgment and the discipline of market competition requires employers to control those costs as best as possible. The market for employee skills serves as a curb to "excessive" costs.

Just as employers are interested in curbing employee-relocation costs, the self-employed and those who incur moving expenses without benefit of employer reimbursements have a natural self-interest to restrain the amount of expense incurred. It would be economically irrational for a person to spend a dollar more than necessary for legitimate moving expenses to save, at most, an additional 31 cents in taxes.

Second, in the absence of congressional hearings on the issue, there is a paucity of evidence to document the norms for moving-expense costs. Based on information supplied by our members, we understand that an average family of four would incur far more than $5,000 in expenses simply to hire a common carrier to move their household possessions cross-country, without taking into account other costs incident to the relocation. We therefore question the statement that moving expenses of more than $5,000 are "excessive." Indeed, some industry statistics suggest that average relocation costs exceed $15,000. Many relocations, especially for transfers to foreign locations, will involve a substantially greater than average amount of expense. Thus, any dollar limitation on overall moving expenses is, at best, arbitrary and would cause hardships in many circumstances. A limitation on moving expense deductions will impair the ability of American businesses to globalize their operations and remain competitive.

Furthermore, the proposal may increase the government's own compensation expenditures as affected public sector employees seek reimbursement for the increased tax cost of their moves. Indeed, the average cost of moving managers in government positions, such as IRS employees, has been estimated to be approximately $40,000.

Finally, the $1,500 and $3,000 caps on certain moving expenses in current section 217 have not been ad;. justed since 1976 despite significant inflation in general and moving costs in particular.(2) Indeed, the 1976 amendment to section 217 increased the limitations by $500 per category to recognize the effect of inflation. A nonindexed dollar limitation for deductions is contrary to the policy of indexation for individual taxation. Moreover, to the extent an overall cap is set without a congressional hearing to determine the range of expenses incurred for domestic and foreign moves, the provision in H.R. 11 is exposed for what it is: a naked tax increase for employers and individual taxpayers who seek to improve their economic situation through an unreimbursed relocation. If the overall intent of H.P, 11 is to assist the economy, taxing the mobility of labor indirectly through a cap on moving expenses will undermine the incentives in the bill.

(1.) Although the overall section 217 expense cap is a limitation on individual deductions, the tax will likely be borne by employers through an increase in so-called gross-up amounts paid to employees to compensate for the individual's increased income tax. In addition, since the average compensation for relocated employees is approximately $45,000 (which is less than the FICA ceiling), employers likely win bear additional costs for both the employer and employee portions of the FICA tax. (2) The limitations in the text are increased to $4,500 and $6,000 respectively for foreign moves.