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A mistake by Congress hiked taxes on families of fallen soldiers. Lawmakers still haven’t fixed it

Veteran Cemetery Flag (nosheep/Pixabay)

Relief seemed imminent for Becky Welch from tax legislation that inadvertently created a financial burden for the Wylie mother of two, along with thousands of other Gold Star families who’ve had loved ones die while serving in the military.

The GOP-run Senate had passed a fix. The Democrat-run House had done the same, folding a similar correction into a broader bill. The two chambers needed only to reconcile their differences – more over procedure than policy – to rectify the costly error.

That was just before Memorial Day in late May.

Six months later – with Veterans Day now having come and gone – nothing has changed, leaving Welch and others with bruised bank accounts as Congress proves incapable of passing a simple fix that has universal support in both political parties.

“It’s frustrating,” said Welch, whose husband, Army 1st Lt. Rob Welch, was killed in combat in Afghanistan in 2011. “It’s almost like our hands are being tied.”

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The stalemate over the Gold Star tax glitch offers one of the starkest examples of Congress’ struggle to tackle even basic problems, including those of lawmakers’ own creation.

No one in Congress intended to increase taxes on families who’ve had a spouse or parent die while in uniform. No one, as far as anybody can tell, wants to preserve that burden. And yet, no one has been able to break a logjam that’s costing some families thousands of dollars a year.

Adding to the exasperation is the fact that the hang-up has nothing to do with the fix itself.

The House wants the Senate to take up its version, which was folded into a broader retirement bill. Some GOP senators want to add provisions – unrelated to the tax glitch – that Democrats don’t like. The Senate is pressing the House to take up its narrow version of the fix.

While advocates and some lawmakers remain hopeful that a breakthrough could come soon, it’s unclear how it will all play out.

“This is just another example of how the process in Washington, D.C., is broken,” said Rep. Van Taylor, a freshman Plano Republican and Marine veteran who has been working with a bipartisan group to figure out how to get one version or another passed into law.

Glitch part of tax overhaul

The Gold Star tax glitch dates back to the sweeping tax overhaul that Congress approved in 2017 with only GOP support.

One of the measure’s small-scale tweaks sought to prevent rich parents from putting money in their child’s name to shield it from taxation. The change, in and of itself, didn’t create much fuss. But its implications for military survivors’ benefits became clear come tax season.

When someone in the military dies a service-related death, their surviving spouse can get an untaxed benefit through the Veterans Affairs Department and then also a taxable benefit through the Defense Department. If the spouse gets both benefits, there must be a dollar-for-dollar offset.

That setup has been dubbed by critics as the “widow’s tax.”

Advocates are pushing lawmakers to also eliminate that penalty, which hits an estimated 65,000 individuals each year. In the meantime, some surviving spouses have been able to work around the problem by directing the Defense Department benefit to their children.

But then came the “kiddie tax,” as the tax overhaul’s unintended consequence is known.

Survivor payouts sent to children had previously been taxed at an average rate of 12% to 15%, according to Tragedy Assistance Program for Survivors, a group that’s been leading the effort to fix the tax glitch. That rate increased to as high as 37% under the new tax code.

Upwards of 10,000 families were affected – nearly all of them caught off-guard by the unexpected tax hike, according to TAPS.

“For some, they went from owing hundreds of dollars in taxes to thousands,” said Candace Wheeler, TAPS’ senior adviser for policy and legislation. “That could be a car payment. It could be rent or a house payment.”

Welch, the Wylie mother, was among those to see an increase, up to $2,200 in taxes on the benefit from about $400 in years past.

The 35-year-old said her family has so far been able to manage the financial burden. But she’s eyeing with trepidation the holiday season – and the expenses that often come with it – due to uncertainty over whether the tax glitch will still be around to ding her next tax season.

“Fingers crossed,” Welch said, who first alerted Taylor to the problem and who praised him and other Texas lawmakers for continuing to make it a priority.

It had initially appeared that Congress would move fast to OK a retroactive fix. The Senate passed its version of the Gold Star tax correction via unanimous consent. The House approved its iteration, folded into a broader bill on retirement savings, with an overwhelming 417-3 vote.

Partisan divide

But Republicans like Texas Sen. Ted Cruz objected to the House bill not including an unrelated provision to expand 529 savings accounts to cover things like homeschooling expenses.

Cruz has castigated Senate Democrats, saying they’ve obstructed efforts to debate his 529 measure and other elements of the broader retirement bill. The Texan said, in the meantime, there’s “no reason why the House can’t take up and pass” the Senate version of the tax glitch fix.

“It’s long past time for Congress to provide relief to the families who have made the ultimate sacrifice for our country,” said Cruz, who co-sponsored the Senate bill.

But some Democrats have accused the GOP of posturing, particularly since Republicans wrote the tax overhaul that created the Gold Star tax problem in the first place.

The Democratic Congressional Campaign Committee, for instance, has hammered Rep. Chip Roy, R-Austin, for being one of the three lawmakers to vote against the House bill, running digital ads that accuse him of voting for “higher taxes on the families of fallen veterans.”

Roy, who joined Congress last year, has explained that he voted against the House bill due to concerns with the broader retirement package, including the 529 objections voiced by Cruz. A Roy spokesman this week didn’t respond to a request for comment.

That sort of partisan wrangling has done little to clear the logjam. But some lawmakers are still pushing for a resolution.

“We must make sure these families get the benefits they are owed,” said Rep. Colin Allred, a Dallas Democrat who lamented the “hastily passed 2017 tax bill.” “Republicans and Democrats need to come together and resolve the issues with House and Senate bills this year.”

Taylor, the Plano Republican, has gone so far as to rally fellow veterans in Congress – both Republicans and Democrats – to reenergize the effort to approve a fix. He’s hopeful that it will soon get to the finish line, but he bemoaned a “dysfunctional legislative process.”

“I know there’s a lot of effort to blame one side or the other,” he said. “But you have a system where it’s relatively easy to block things and very hard to pass things.”

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© 2019 The Dallas Morning News