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Are Travel Tax Subsidies A Good Idea?

Are Travel Tax Subsidies A Good Idea?

On May 18, 2020, President Trump met with some restaurant execs and suggested a few tax law changes to help the industry. This included “restore the restaurant deduction to help jobless restaurant workers” He also suggested: “Create an “Explore America” — that’s “Explore,” right? Explore America tax credit that Americans can use for domestic travel, including visits to restaurants.”

On June 22, 2020, Senator McSally (R-AZ) introduced S. 4031, American Tax Rebate and Incentive Program Act (the American TRIP Act). This bill would add new IRC §25E, Travel, Hospitality, and Entertainment Expenses. This bill does the following:

-Provide a 100% nonrefundable credit on up to $4,000 of expenses for travel and restaurant usage ($8,000 MFJ) + $500 x # qualifying children (under age 17).
-The credit is for qualifying travel in the U.S. and its territories that is over 49 miles from the taxpayer’s home for food, lodging, transportation, live entertainment (including sporting events), expenses related to attending conference or business meeting).
-For use of a personal vehicle, the amount considered spent is measured using the standard mileage rate in effect under §162(a), with is 57.5 cents/mile for 2020 (this is the rate that includes depreciation so too high for personal travel).
-The credit is based on travel after 12/31/19 and before 1/1/22 per the text of S. 4031 (so 2020 and 2021). However the sponsor’s press release says the credit applies for 2020, 2021 and 2022.
-Travel to the taxpayer’s vacation home is okay if 50 miles or more away, but expenses of the home don’t qualify.
-S. 4031 also allocates $50 million of grant funds to promote tourism and travel in the U.S.

Is this a good idea? Let’s consider the likely purpose and how it stacks up against a few principles of good tax policy.

Purpose: Encourage people to travel and spend money at hotels and restaurants and buy airline, bus or train tickets or gasoline, and to support theaters, amusement parks and sporting events.

Will it be enough for people to risk exposure to COVID-19? Might it be enough for these facilities to put more protection in place for customers? Might it send a message that travel and interaction with others is safer than it might really be? What about helping other industries such as local restaurants, theaters, fitness centers and stores?

Why is this effective starting on January 1, 2020? This means the credit subsidizes behavior that already took place – a retroactive incentive. That is a waste of funds. Personally, I was in DC for two extra days as part of a business trip before the pandemic. That would qualify for the credit, meaning that with a 100% credit, all of my fellow taxpayers would subsidize my expenses on those two days. Why? There is no purpose for this subsidy or gift.

Certainly, the effective date should be after enactment, not before.

Equity: Generally a credit is more fair than a deduction because the credit is worth the same amount to all taxpayers. However, this credit is not refundable so it it not available to many taxpayers or won’t cover all of their travel even if below the specified credit amounts, but the full credit is easily available to higher income taxpayers, so they get a significant subsidy.

For example, assume a married couple with no children has taxable income of $70,500 in 2020. Their tax liability is $8,065. They should think ahead and take a vacation and spend that much money. Basically, instead of paying that total to the U.S. Treasury, they can spend $8,000 on a vacation and just owe $65 to the government. In contrast, if this couple’s taxable income in 2020 is instead $19,000, they owe only $1,900 (less or zero if they are eligible for the EITC, particularly is they have a child). So if they managed to spend $3,000 on their vacation, they get a subsidy of only $1,900.

Simplicity: The terminology seems clear. But, what documentation will need to be maintained and forms completed?

Minimum tax gap: Might some taxpayers just say they took a trip to get the tax break? Hopefully not but if there is no reporting form, it could happen. Also, the credit is better than a business deduction so self-employed individuals who need to travel for business may be better off making sure the trip doesn’t qualify as a business deduction so they can claim the 100% credit instead.

So, while the purpose to help out restaurants and the travel industry may sound good, this large non-refundable credit means that the government (that is, all taxpayers) will in essence, subsidize vacations for individuals with tax liabilities up to $8,000 (more if the married couple has children under age 17). Fairness and the cost to government revenues is a significant issue.

What do you think? Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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One thought on “Are Travel Tax Subsidies A Good Idea?

  1. Michael S Cash, EA says:

    I’m past retirement age and personally like to go on cruise vacations. Because of my age I am flexible enough to book my cruises when they are the cheapest so people who want to go at the most popular times subsidize me. I don’t drink so people who pay the outrageous prices for alcohol on the cruises subsidize me. I don’t gamble in the ship’s casino so all the bells I hear while walking through are from people putting money in the ship’s tight slots and subsidizing me. I bought stock in the company so that I can get and additional $250 credit on my sign and sail card that someone is paying for and since I have a lot of cruses under my belt I get priority service and get to cut to the head of the line. Someone tell me: Am I already getting enough gaming the system or should I encourage my congressman to vote for this bill and then book an upgrade to my cabin courtesy of the taxpayers?

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