Tax Treatment of Away From Home Expenses of State Legislators

Tax Treatment of Away From Home Expenses of State Legislators

Order Code RS20330
Updated February 17, 2005
CRS Report for Congress
Received through the CRS Web
Tax Treatment of Away From Home Expenses
of State Legislators
Louis Alan Talley
Specialist in Taxation
Government and Finance Division
Summary
In general, taxpayers are permitted a deduction for traveling expenses, including
meals and lodging, while away from their tax home in pursuit of a trade or business.
State legislators have unusual problems with the determination of their tax home.1
Accordingly, Congress addressed these problems through enactment of a special tax
code provision which allows state legislators to treat as their tax home the district which
they represent. State legislators are allowed an away-from-home expense deduction
equal to the number of legislative days times a per diem amount. The legislator is
deemed to be away from home on each legislative day, is not required to attend the
legislature for each day counted, and is allowed to include four or fewer consecutive
days of legislative recess in the number of days away from home. The per diem amount
is the greater of the federal or state per diem amount for employees away from home.
The state per diem amount may not exceed 110% of the federal rate. Revenue losses
from this provision appear to remain low because of the limited number of state
legislators. This report will be updated as developments warrant.
Legislative History and Rationale
Beginning with the passage of the Tax Reform Act of 1976 (P.L. 94-455) a special
provision (only for taxable years that began before 1976) was added to the Internal
Revenue Code (IRC) for state legislators. The provision provided that a state legislator
may elect to treat the residence located within the legislative district which he or she
represents as his or her tax home. Accordingly, the legislator was permitted an away-
1 Federal legislators are limited to a $3,000 per year deduction for expenses incurred while away
from home and living in Washington, D.C. The law provides that a Member of Congress is
deemed to reside in the state, congressional district, or possession which he represents in
Congress. The away-from-home deduction is subject to the 2% miscellaneous itemized
deductions limitation (i.e. subtract 2% of the taxpayer’s adjusted gross income from the total
amount of expenses).
Congressional Research Service ˜ The Library of Congress

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from-home living expense deduction that equaled the number of legislative days in
session multiplied by the executive branch federal government (domestic) per diem rate.
The law defined legislative days to include days in session and any day in which the
legislature is in recess for four or fewer consecutive days. Also, legislative days include
when the legislature is not in session but the legislator’s presence is recorded at a state
legislative committee meeting.
The Act limited the deduction claimed as an away-from-home living expense
deduction to the amount declared on tax returns filed before May 21, 1976. This election
was permitted for all tax years not yet expired.
The provision for state legislators’ travel expenses while away from home was
extended for a one-year period (tax years prior to January 1, 1977) by the Tax Reduction
Act of 1977 (P.L. 95-30). Another one-year extension (for tax years before January 1,
1978) was included in an Act titled the Agricultural Act of 1949 — Payments (P.L. 95-
258). A further extension for a three-year period (through January 1, 1981) was part of
an Act known as the Fringe Benefit Regulations — Issuance — Prohibition (P.L. 96-167).
A permanent provision for state legislators’ travel expenses was made a part of the
Internal Revenue Code in 1981. Included in the Economic Recovery Tax Act of 1981
(P.L. 97-34), this provision allowed state legislators to elect to treat as their tax home the
legislative district they represent. The law was modified so a legislator is deemed to be
away from home on each legislative day, is not required to attend the legislature for each
day counted, and is allowed to include four or fewer consecutive days of legislative recess
(and committee meetings). This was accomplished by an exception to the overnight test
of Code §162 for state legislators. As such, elected state legislators are deemed to have
away-from-home living expenses equal to the number of legislative days times the per
diem amount. Under the law, the per diem amount is the greater of the federal or state per
diem amount for employees away from home. However, the law limits the state per diem
amount to no more than 110% of the federal per diem rate.2 These special rules do not
apply to those state legislators living within 50 miles of the state capitol building.
Assessment
Generally the Internal Revenue Service looks to the “facts and circumstances” to
determine the tax home of an individual (i.e. time spent, amount of income derived,
degree of business activity, and other significant contacts in each location). There was
considerable uncertainty, as well as litigation, before enactment of the legislative solution
which provided that the tax home of state legislators is the home district. State legislators
argue that their public service imposes unique obligations and requirements for state
legislative service. For example, the state constitution may require the legislator to be
domiciled within the legislative district he/she represents thereby preventing a permanent
move to the state capital where legislative functions occur. State legislative sessions may
2 The Internal Revenue Service provides federal per diem rates for travel within the continental
United States in Internal Revenue Service’s Publication 1542, Revised Jan. 2005, at
[http://www.irs.gov/pub/irs-pdf/p1542.pdf], visited Feb. 17, 2005.

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vary in length from year to year, and without a special rule to determine the legitimate
“tax home” of state legislators, the legislator’s tax home could change from one year to
the next.
State legislators may not find it possible to rent accommodations “on demand” for
just those times when the legislature is in session. The job of a state legislator requires
frequent travel between the state capital and the legislative district. Some states have
citizen legislators3 and provide low pay. If state travel reimbursements are included in
legislators’ income without benefits from offsetting deductions, it forces such legislators
to further subsidize the costs of their state service. It has also been argued by legislators
that costs incurred for campaigning and entertaining (of constituents at the state capital)
would be deductible as a cost of doing business for a businessman but were unavailable
as a deduction for state legislators.
One underlying factor in providing a special rule for state legislators is that some
state legislatures meet for extended periods of time which may require the establishment
of a second home or an office near the Capitol, or both. The maintenance of two places
results in legislators incurring duplicate living expenses. Further, it has been noted that
the costs of maintaining a residence or office do not stop when the legislature is out of
session.
It is generally conceded that it is appropriate to have statutory rules and that without
a special rule to determine the legitimate tax home of state legislators the tax home may
change from one year to the next year under a facts and circumstances test. Thus, it is
generally conceded that establishing the tax home of state legislators eliminates
uncertainty when filing federal taxes. Legislators were also concerned about adverse
public opinion for claiming a deduction not specifically authorized which could lead to
a tax audit.
Economists typically apply the principle of horizontal equity, that taxpayers with
identical incomes in like circumstances should be treated equally when evaluating income
tax policy — essentially a fairness doctrine. In that context, the provision of special rules
for state legislators provides greater advantage to those in the business of representing
their districts or counties than persons engaged in other trades or businesses. Generally,
a taxpayer must either be away from home overnight or for a sufficient period that
requires sleep or rest to qualify for travel expense deductions. Current law grants
legislators a uniquely favorable tax status based upon a statutory formula of legislative
days times a daily per diem rate. Thus, unlike other business taxpayers, the law does not
require legislators to be away from home overnight nor does it require the legislator’s
presence at the state capital that day. Allowance of days when the state legislator has
returned to his legislative district makes this the only group of taxpayers able to deduct
personal living expenses. Additionally, the availability of a statutory formula means that
normal substantiation rules do not apply (i.e. a safe harbor) and legislators, unlike other
taxpayers, are not required to substantiate away-from-home expenses. Finally, no other
group of taxpayers may “elect” their tax home.
3 This term implies that persons expect relatively short legislative sessions and the position is not
a full-time occupation.

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The law allows the deduction equal to the greater of the federal or state rate (as long
as the state per diem does not exceed 110% of the federal per diem). This adds
complexity. Since the deduction is for a computation for federal tax liability some have
argued that the federal per diem should be used in determining federal tax liability. While
some have argued that the General Services Administration has been slow to adjust
federal per diem rates, the per diem amounts may change over the course of a year and are
generally viewed as fair.
It appears likely that this provision leads to greater federal revenue losses than if state
legislators were required to deduct business expenses in the same manner as other
taxpayers. Some may argue that it is not fair to incur such federal revenue losses for state
legislators while federal legislators are provided a more limited maximum away-from-
home deduction amount of $3,000. However, others would note that the particular
circumstances of many state legislators would constitute a significant hardship if this
special tax deduction were eliminated or reduced.
Revenue Loss
In 1981 the provision was estimated to reduce federal budget receipts by
approximately $9 million in 1982, $5 million in 1983, $6 million in 1984, $6 million in
1985, and $7 million in 1986. These estimates were prepared by the Joint Committee on
Taxation. Revenue losses from this provision remain low primarily because of the limited
number of state legislators. However, since per diem rates are adjusted periodically to
reflect cost-of-living increases, the yearly revenue costs have probably risen since
establishment. In general, the Joint Committee on Taxation does not estimate provisions
which lose less than $50 million per year in their annual committee print Estimates of
Federal Tax Expenditures. The projected revenue loss did not appear in the most recent
issue.4
4 U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal
Years 2005-2009, committee print, 109th Cong., 1st sess., JCS-1-05 (Washington: GPO, 2005),
at [http://www.house.gov/jct/s-1-05.pdf], visited Feb. 17, 2005.