Questionable Moments in Tax History: Why the Word “Hoensbroek” is in IRS Instruction Booklets

June 06, 2014
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In 2005, Congress created a large omnibus tax bill called the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA.) Like most large tax bills, it had some actually-important provisions, like its two-year extension of President Bush’s reduced rate on capital gains.

However, like most large tax bills, it had some trivial and weird provisions as well. One of these provisions was a small, barely-noticeable change to the foreign housing exclusion.

The foreign housing exclusion is a policy designed to go along with the foreign income exclusion. The US does not tax income its citizens earn from working abroad, except when it reaches very high levels. For example, in 2013 only income above $97,600 was taxable. This is a recognition of a fact that those citizens pay taxes to the countries in which they work. Most countries simply don’t tax labor income earned abroad at all.

In addition to the foreign income exclusion, one can exclude the cost of housing up to a certain amount. TIPRA made this subtle change to the housing exclusion:

The Secretary may issue regulations or other guidance providing for the adjustment of the percentage under subparagraph (A)(i) the basis of geographic differences in housing costs relative to housing costs in the United States.

While this is a (relatively) simple piece of legislative text, it authorizes the IRS to devise a worldwide cost-of-living adjustment for housing across the entire planet. This is not a particularly easy task, and it’s not within the IRS’s typical area of specialty. But nonetheless, it was made, and the IRS went to work.

They added to their foreign tax instruction booklet precisely what Congress had asked for. And there, you see it, in all of its glorious silliness. The IRS has different housing exclusions for a variety of world cities. Now I can see that, if I need to be in Hampshire, England, for my job, I can exclude a slightly higher per-diem housing cost ($121.10) for living in Southampton than if I lived twenty miles east in Portsmouth ($119.45). Is this really worth paying an IRS official to determine and print in a table?

The way they went about it is rather odd, too. It’s a very weird list; it includes many obscure towns in the Netherlands while ignoring, say, Calcutta, Prague, or Istanbul. It includes the Holy See, an ecclesiastical jurisdiction with fewer than a thousand residents, while ignoring the entire country of Sweden.

The main reason to question this policy is that it is bizarre and unnecessary. But it also violates the basic principle of tax neutrality. If Southampton rents are too high relative to Portsmouth rents, that is not a problem that American tax collectors should be trying to solve.

It is worrying to see non-neutral tax treatment extend even beyond American borders, and it is even more worrying to see little throwaway lines in hundred-page tax bills turn the IRS into some sort of worldwide arbitrator of fair real estate prices.

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