Action in Congress

July 1, 2004

Ending SBP Widow’s Tax

The House has approved a phaseout provision that would, by April 2008, eliminate the sharp drop in benefits that now occurs at age 62 for beneficiaries of the military’s Survivor Benefit Plan (SBP). If the Senate agrees, SBP payments to some 270,000 surviving spouses, age 62 and older, would begin to rise in October 2005.

Within four years, the full Social Security offset, which critics have dubbed the “widow’s tax,” would disappear. The provision is contained in the House’s 2005 defense authorization bill.

At age 62 most surviving spouses see SBP benefits fall from 55 percent of covered retired pay down to as low as 35 percent. The Air Force Association and other service groups have pushed SBP reform as a top priority this legislative year.

The House Armed Services Total Force Subcommittee, in early May, voted to start a phaseout but not until 2009. Days later, when the full committee marked up the bill, Rep. Jeff Miller (R-Fla.) announced a solution worked out with committee leaders to provide an earlier phaseout of the offset. Congress would use money previously earmarked to lease tanker aircraft for the Air Force. (See “Washington Watch: Rumsfeld Delays Tanker Decision,” p. 6.) The three-and-a-half year phaseout would start in October 2005.

The committee approved Miller’s amendment, and the full House passed the defense bill May 20 on a 391-34 vote. SBP reform advocates hope the enthusiasm spreads to the Senate. Senators had left “headroom” in their 2005 budget resolution to pay for phasing out the widow’s tax, but the Senate Armed Services Committee, chaired by Sen. John Warner (R-Va.), did not include SBP reform in the defense authorization bill.

Sen. Mary Landrieu (D-La.) planned to offer an amendment to phase out the offset when the Senate, in mid-June, resumes floor debate on the defense bill.

Rep. Duncan Hunter (R-Calif.), chairman of the House Armed Services Committee, said, “This year we will fix the inequity of the Survivor Benefit Plan.” His goal, he said, is “to get this on the President’s desk as soon as possible.”

In a formal statement on the House defense bill, Office of Management and Budget officials expressed concern over the cost of the SBP provision. They stopped short of recommending a Presidential veto, though.

OMB’s position was that the $5 billion being diverted to improve SBP is “needed to maintain and enhance the readiness of the armed forces.”

Congress Enhances Pay, Benefits

The House-passed version of the 2005 defense authorization bill would deliver pay and benefit gains for active duty and Guard and Reserve component forces. In the Senate, the armed services committee voted out its own defense bill, but the full Senate delayed final action until mid-June.

Following are the personnel initiatives found in both the House legislation and the Senate Armed Services Committee bill, which make them almost certain to become law later this year.

The basic pay increase, effective Jan. 1, 2005, would be 3.5 percent for all active duty, Guard, and Reserve members.

The basic allowance for housing would increase overall next January by $367 million to complete the last of a five-step plan to end service members’ out-of-pocket costs for off-base housing in Stateside areas.

Last year’s increases to the monthly family separation allowance (up $150) and imminent danger pay (up $75) would be made permanent. They are set to expire in December. Congress hasn’t accepted a Pentagon suggestion to roll back increases to these allowances in favor of a rise in hardship duty pay. The Administration believes hardship pay could be targeted more precisely to service members who serve in Iraq and Afghanistan.

Two temporary gains last year in reserve health care access would be made permanent. One opened Tricare to Guard and Reserve members 90 days before they are to report for active duty. Another provided reserve component personnel (and families) up to 180 days of Tricare coverage following separation of the member from active duty.

DOD would be required to award separate campaign medals for Operation Enduring Freedom and Operation Iraqi Freedom, rather than the one medal it currently authorized. (See “Aerospace World: The Battle Over Medals,” May, p. 19.)

The House bill differs from the Senate Armed Services Committee version in several areas. One key House initiative is a mandated, three-year increase of nearly 40,000 troops. The Army’s end strength would be increased by 10,000 per year and the Marine Corps by 3,000 per year. The Senate committee version would authorize—but not require—the Army to increase its active duty strength by 30,000 troops through 2009.

Pentagon leaders have maintained that no service, at this time, needs a permanent end strength increase.

The House supports the Pentagon request to raise the monthly ceiling on hardship pay from $300 to $750, leaving where and when to pay higher amounts up to defense officials and the services. The House also included a provision to repeal the meal subsistence charge for all hospitalized service members, not just those injured in combat. Another provision would enable military retirees and their dependents, age 70 and over, to obtain permanent ID cards, eliminating the hassle of periodic renewal.

The House bill includes several initiatives directed toward Guard and Reserve personnel. One would eliminate the inequity between reserve and active duty bonus and incentive authorities to provide the same incentives for reservists deployed alongside active duty troops of equal rank and job specialty.

Another provision would provide extra pay—from $50 to $3,000 a month—to replace monthly income losses of Guardsmen and Reservists mobilized involuntarily, if they meet certain length-of-service criteria. To be eligible, a reservist must have: 12 continuous months on active duty, 18 months of active duty during the previous 60 months, or a period of mobilization within six months of a previous active duty tour. House lawmakers expect the initiative to produce better management of reserve deployments in order to avoid having to provide the extra pay.

The House also wants to extend by three years, at 10 sites, a test to open Tricare to reservists who are unemployed or lack employer-sponsored healthcare. The test is to determine whether better access to care improves medical readiness, recruiting, and retention. The Senate Armed Services Committee would also extend the test, but by only two years, and would not limit it to just 10 sites or to any particular states or region.

The Senate committee’s bill contained several reserve provisions not found in the House legislation, including a provision to offer non-drilling reservists and their families a chance to participate in Tricare under a new option called Tricare Reserve Select.

Tricare Reserve Select would operate under a cost-sharing arrangement like that found in the Federal Employees Health Benefits Program, in which the government pays 72 percent of the cost and a federal civilian employee pays 28 percent. A reservist’s civilian employer would pay 72 percent of costs and the reservist 28 percent in either Tricare Standard, the fee-for-service option, or Tricare Extra, the preferred provider network option.

Another reserve health care initiative would make permanent two demonstration authorities to help reservists control health costs. One waives Tricare deductibles for reservists called to active duty for more than 30 days. The other authority protects reservists against balanced billing. That’s useful when a reservist has an existing relationship with a civilian provider who doesn’t accept Tricare fees as payment in full. Tricare will pick up an additional 15 percent that insured providers can’t claim.

Once the Senate committee bill passes the full Senate, differences between the two versions of the authorization legislation will be reconciled by House-Senate conference committee.

Combat Tax Penalty

Combat-zone tax exclusions for 5,000 to 10,000 service members who fought last year in Iraq and Afghanistan affected eligibility for more valuable tax breaks like the Earned Income Tax Credit (EITC) and therefore lowered some family incomes, say Congressional auditors and defense officials.

For some families, the net loss in tax benefits exceeded $4,000. The number of affected families could be even higher in the current tax year given longer combat tours being served in 2004, officials said.

A DOD proposal to address the problem failed to clear the White House’s Office of Management and Budget this spring, said Charles S. Abell, principal deputy undersecretary of defense for personnel and readiness.

The notion that combat-zone tax exclusions actually can lower overall tax breaks for low-income military families is “counterintuitive,” Abell said. So when complaints began to surface in January, he was skeptical, but no longer.

Victims of the net loss in tax benefits typically are lower grade enlisted personnel or junior officers who serve seven months or more in combat zones, are married with children, and have little or no other family income, either from spouses or investments, said the General Accounting Office in a May report to the Senate Finance Committee.

Even some service members with working spouses would see net declines in tax benefits. Those numbers are harder to estimate but likely didn’t exceed several thousand personnel in tax year 2003, GAO said.

Combat-zone tax exclusions continue to benefit most warfighters. Income earned in war zones—basic pay, bonuses, and special pays—is fully tax exempt for enlisted personnel. Officer combat tax exclusions are controlled by a cap, with no more than $5,958 of income excluded monthly in 2003.

However, GAO confirmed “unintended consequences” when combat-zone tax exclusions cross with other tax breaks like the Earned Income Tax Credit.

EITC lowers tax liabilities for 21 million working Americans. Some not only pay no income tax but receive refundable tax credits that put government cash in their pockets. The maximum credit in 2003 was $4,204 for a taxpayer with two or more qualifying children; $2,547 for a taxpayer with one child; and $382 for a taxpayer without a child. To qualify for EITC, a taxpayer must meet a certain level of earned and adjusted gross income, based on marital status and number of children.

Combat-zone tax exclusions affect eligibility for EITC by lowering the service member’s taxable income. Because low-income military families don’t pay income taxes anyway, the combat tax exclusion can block tax credits that otherwise would raise net income. Conversely, service members who usually earn too much to qualify for EITC can benefit from positive unintended consequences of combat tax exclusions. It lowers their taxable income so they qualify for refundable tax credits.

“This thing works in a perverse way,” said Abell, noting that combat tours can qualify even senior enlisted personnel and, in some cases, full colonels for EITC.

To end this “inversion,” DOD proposed draft legislation to ignore combat-zone tax exclusions for the purpose of calculating EITC or other special tax credits, so “colonels don’t qualify and my privates do,” said Abell.

OMB rejected the proposal after Treasury officials said it would reduce revenues.

“We will continue to work it and try again next year,” said Abell.

Variable Pricing Nixed

To the relief of its many opponents, including Rep. John M. McHugh (R-N.Y.), chairman of the House Armed Services Total Force Subcommittee which oversees military store operations, the concept of variable pricing in commissaries is dead.

Maj. Gen. Michael P. Wiedemer, director of the Defense Commissary Agency, announced this spring that an independent study on variable pricing recommended against adopting it for base grocery stores.

Defense officials had directed the agency to study varying commissary item prices between stores as a way to reduce taxpayer support for commissaries while providing shoppers with average savings of 30 percent.

Variable pricing in the commercial grocery industry allows retailers to set prices to maximize profit margins, based on factors such as local market conditions, competition, or how much customers expect to pay for items locally. Commissary prices are based on cost, not profit margins, however, which makes variable pricing impractical, the study confirmed.

McHugh had expressed doubts last year about the value of conducting the $500,000 study, but defense officials proceeded anyway.