CRS Lukewarm on Combat Zone Tax Proposal

The Congressional Research Service has said that although proposals have been made to extend the favorable “combat zone” tax treatment to federal civilian employees, sponsors of the idea have not clarified what the purpose of such an extension would be in order to make a case that the idea should be enacted into law. Currently, military, but not civilian, personnel do not have to pay income taxes on income earned while in a designated combat zone—although certain other favorable tax features do apply to civilian federal employees working overseas. Legislation to extending the combat zone exclusion to civilian federal employees was offered in the last Congress and is expected again in this Congress. 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,” CRS said. “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.”