Proposed Federal Income Tax Exclusion for Civilians Serving in Combat Zones

Publication Date: January 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance; Military and defense

Type:

Abstract:

In the 109th Congress, H.R. 294 proposes to extend the combat zone income tax exclusion to Department of Defense (DOD) civilian employees on active service in a combat zone. Under present tax law, the designation of an area as a "combat zone" confers tax benefits only to military personnel serving in the combat area. No comparable provision under present tax law provides tax relief for civilian or contract employees serving in combat. However, certain income tax exclusions exist for U.S. citizens who work overseas. The proposed combat zone exclusion would grant added tax relief only to the extent that existing exclusions either do not apply, or are exceeded.

In the case of extending an exclusion to federal civilian employees or civilian contract employees serving in a "combat-type" zone, the primary issues revolve around the purpose of the extension, which has not been stated by proponents. The purpose could be to provide additional compensation for certain individuals serving in combat and thus facilitate recruitment for such work. Alternatively, the purpose could be one of equity, to make civilian employee benefits equal to those of the Armed Forces.

If the purpose of the extension is to provide additional compensation to individuals serving in combat, than a question of efficiency arises as to whether a tax subsidy is more appropriate than a direct payment. Direct spending programs are often more successful at fulfilling policy objectives than indirect subsidies made through the tax system.

If the purpose of extending the combat zone exclusion to civilians is to make civilian benefits equal to those of the Armed Forces, then the distinctions between military service and civilian employment become important in the analysis of the policy. In that context, it has been observed that military personnel cannot resign when facing danger; they cannot refuse assignment; they are considered to be on duty 24 hours a day, every day; and they may be required to work until the job is done with no specific relationship to compensation. Whereas military personnel must perform those duties, civilian employees may or may not, depending on for whom they work, or the contracts they have negotiated, and those contracts could include monetary and other incentives for working in combat zones not available to military personnel. Also, there are distinctions between civilian DOD employees and civilian contractors that complicate the issue of equalization.

This report provides information about the tax treatment of both the earned income of members of the Armed Forces serving in combat zones and the earned income of U.S. citizens working overseas; a brief synopsis of the current legislative proposal to expand income tax incentives to government civilian employees in a combat zone; and an analysis of the relevant policy issues.

This report will be updated as legislative events warrant.