Should Gay Couples Pay the Same Taxes as Straights?

Interesting discussion today at a TPC forum on the tax and benefits consequences of being gay. The benefit issues are probably larger, but this is TaxVox, so let’s look at taxes.

As my TPC colleague Bob Williams noted, when it comes to federal taxes the question is not whether you are gay or straight, but whether or not you are married. Depending on the relative income of each spouse, married couples either enjoy a marriage bonus or suffer a marriage penalty. Of course, heterosexuals can choose to marry or not and live with the tax consequences. Gays and lesbians have no such option. Even though a handful of states now recognize gay marriage, for federal tax purposes their marital status is irrelevant. As a result of the 1996 Defense of Marriage Act, gays cannot be married for federal law purposes.

This creates a number of problems for these couples, some very serious, others merely annoying. For instance, Massachusetts recognizes gay marriage. But it requires all married couples to file jointly and it piggybacks its returns on the federal 1040. Trouble is, gay couples are not allowed to file a joint federal return. So they must fill out two single IRS returns, then a joint federal return that they are not allowed to file, and finally a state return based on their illegal Form 1040. More seriously, while many businesses now provide spousal benefits to gay couples, the value of the non-employee’s benefits is taxable for unmarried couples, but tax free for those who are married.

While many politicians are perfectly happy with this state of affairs, there is growing interest in treating gay couples equally with heterosexual couples under the Tax Code. So how to do it? One option would be to eliminate joint filing entirely and have everyone file as an individual. That would run into some old Supreme Court cases that draw a sharp distinction between income earned in community property states and in those states where each earner’s income is presumed to be theirs and not divided equally between the spouses.

A second option might be to redefine eligibility for joint filing (as well as for tax treatment of benefits) to those who have entered into civil unions under state law. This would avoid the community property problem and bring federal tax law more in line with what appears to be a growing legal trend. Currently, about a dozen states grant some domestic partnership rights to gays and public opinion polls suggest there is broad support for these rights. By contrast, most Americans still oppose gay marriage.

There are downsides to this solution as well. A person’s tax liability in one state would be different than the liability of someone in exactly the same economic situation who lives in another state. And eliminating joint filing would still be hugely controversial, in no small part because it would raise the tax bills of millions of couples. But it would treat taxpayers equally, and, by using the civil union definition, would avoid most of the political baggage that goes with that word “marriage.”