Tax Policy and the Defense of Marriage Act
March 26, 2013
Tomorrow, the Supreme Court will hear oral arguments in United States v. Windsor. While the overall issue at stake is the constitutionality of Section III of the Defense of Marriage Act (DOMA), which defines marriage as the union of a man and a woman for federal purposes, the heart of this particular case is the $363,053 federal estate tax bill from which the plaintiff, Edith Windsor, would have been exempt had her marriage to her same-sex partner, Thea Spyer, been recognized by federal law.
The overall effect of DOMA on federal estate tax revenue is hard to measure—estate tax revenues are likely higher than otherwise, because of gay couples in similar situations as Edith Windsor—and its effect on income tax revenue is also unclear. Marriage can cause income tax penalties as well as tax bonuses, and the exact effect depends on a number of factors. Couples with unequal incomes are more likely to receive a tax bonus by getting married, while couples with similar incomes are more likely to face a tax penalty, so DOMA’s effect on income tax revenues depends on the number of married gay couples that would face penalties and bonuses if required to file a joint federal return.
Viewed purely from a tax perspective, DOMA is bad policy. It violates two important principles of sound tax policy—simplicity and neutrality. The law fails from a tax neutrality perspective because of the arbitrariness of the way it imposes complexity on, and withholds possible tax benefits from, particular classes of married couples.
The principle of simplicity is violated because couples whose marriage is recognized at the state level but not at the federal level face an incredibly complex, burdensome filing process. Gay couples living in states that recognize gay marriage must complete four different tax returns every year: one federal tax return per person, one “dummy” joint federal tax return, and then one joint state return. The dummy federal return is necessary so that couples may file their joint state tax return, which requires a joint federal filing be completed first. The dummy return is then discarded (unfiled), constituting a waste of preparation time and costs.
The situation worsens when a same-sex couple jointly owns an asset like rental property, where federal law will permit only one spouse to claim the property for tax purposes because the couple is not recognized as married. In this case, six returns must be completed to determine which spouse should claim the property: the dummy joint federal return, an individual return with the rental property included (for each spouse), an individual federal return without the rental property included (for each spouse), and a joint state return. The spouses then decide who gets the best tax treatment by including the jointly-held asset and then proceed with the appropriate federal returns. Thus, three of the returns completed, the dummy return and at least one of the federal returns completed by each spouse, are discarded without filing. This is pure waste of time, effort, and money.
Gay couples are also placed in a position whereby they must effectively lie on their federal tax return. Marriages are regulated by the states and so couples must indicate whether or not they are married on their federal tax return based on what the law of their state of residence provides. However, for federal purposes, same-sex marriages do not exist. Thus, filers must check the “single” box, even though they are married under the law of the state in which they reside. The penalties for perjury on a tax form can be substantial, so many same-sex couples opt to include a disclaimer form or otherwise make a notation on their form that they are choosing “single” as required by federal law but are married under their state’s law.