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Military homeowners currently enjoy double tax benefits: tax-free housing allowances and deduction of mortgage interest and real estate taxes from income taxes. A recent Internal Revenue Service ruling (Revenue Ruling 83-3) disallowed similar double tax benefits to members of the clergy. This study, prepared at the request of the Senate Armed Services Committee, examines the budgetary and distributional effects of extending the ruling to cover military homeowners.

Subsequent to the completion of this study, the House passed a tax reform bill, H.R. 3838, that includes a provision nullifying Revenue Ruling 83-3. Tax reform currently awaits action by the Senate, which could review the effects of applying the ruling to military personnel. In accordance with CBO's mandate to provide objective and impartial analysis, this study offers no recommendations.

Marvin M. Smith of CBO's National Security Division prepared the study under the general supervision of Robert F. Hale and Neil M. Singer. The author gratefully acknowledges the special assistance of Jonathan Woodbury (formerly of CBO) and Elizabeth S. Sterman, both of the National Security Division. Kathleen O'Connell, Larry Ozanne, and Rosemarie Nielsen of CBO's Tax Analysis Division provided valuable cost estimates. The report also benefited from the technical support provided by David Cathcart, Jane Crotser, Michael Dove, Magge Lazanoff, Douglas McCormick, John Perigo, and David Pomeroy of the Department of Defense. (Outside assistance implies no responsibilities for the final product, which rests solely with CBO.) Patricia H. Johnston edited the manuscript, which Dorothy Pompei prepared for publication.
 

Rudolph G. Penner
Director
March 1986
 
 

SUMMARY

CHAPTER I - THE CURRENT TAX TREATMENT OF MILITARY HOUSING ALLOWANCES, HOMEOWNERSHIP, AND POSSIBLE CHANGES

• Recent Treasury Tax Ruling
• Principal Issues

CHAPTER II - ALTERNATIVE APPROACHES TO THE CURRENT TAX TREATMENT OF MILITARY HOMEOWNERS

• Analytic Method and Key Assumptions
• Effects of the Military Homeowners Tax Plan
• Offsetting Career Losses

APPENDIX A - ESTIMATION OF MORTGAGE INTEREST PAYMENTS AND REAL ESTATE TAXES FOR MILITARY HOMEOWNERS

APPENDIX B - ESTIMATED CHANGES IN TAXES FOR MILITARY HOMEOWNERS

APPENDIX C - DESCRIPTION OF ACOL MODEL AND ITS APPLICATION IN THIS STUDY
 

TABLES
TABLE 1.	PERCENT OF MILITARY PERSONNEL WHO OWN HOMES, BY SELECTED AREA AND PAY GRADE
TABLE 2.	REPRESENTATIVE HOMEOWNER TAX INCREASES IN FISCAL YEAR 1986 UNDER MILITARY HOMEOWNERS TAX PLAN, BY SELECTED AREA AND PAY GRADE
TABLE 3.	LONG-RUN EFFECTS OF MILITARY HOMEOWNERS TAX PLAN ON CAREER FORCE
TABLE 4.	ALTERNATIVE PAY RAISES TO OFFSET SOME OR ALL OF THE LONG-RUN EFFECTS OF MILITARY HOMEOWNERS TAX PLAN (MHTP) ON CAREER FORCE
TABLE 5.	BUDGETARY EFFECTS IN FISCAL YEAR 1986 OF ALTERNATIVE APPROACHES TO MILITARY HOMEOWNERS TAX PLAN (MHTP)
FIGURES
FIGURE 1.	PERCENTAGE OF OFFICERS WHO OWN HOMES, BY PAY GRADE
FIGURE 2.	PERCENTAGE OF ENLISTED PERSONNEL WHO OWN HOMES, BY PAY GRADE

 

As part of their compensation, military personnel receive either free government housing or tax-free housing allowances to assist them in obtaining private housing. Under present tax treatment, military homeowners also are allowed to deduct the full amount of their mortgage interest and real estate taxes from their adjusted gross incomes in computing their income taxes, regardless of whether their tax-free housing allowances partially or fully cover such expenses. As a result of a recent Internal Revenue Service (IRS) ruling on similar benefits, attention has been drawn to these "double" tax benefits. In light of the possible loss of these benefits, senior military and civilian officials of the Department of Defense (DoD) have exerted efforts to retain them. At issue are the cost to the government of continuing the double tax benefits and the effect on service personnel of eliminating them.

The Treasury Department is considering--but has not yet proposed--an extension of Revenue Ruling 83-3 to military homeowners. This ruling disallows double tax benefits to members of the clergy who both own homes and receive tax-free housing allowances. Under such a change, which is referred to in this study as the "military homeowners tax plan" (MHTP), military personnel who own their homes would be allowed to deduct only the amount of mortgage interest and real estate taxes that exceeds the sum of their Basic Allowance for Quarters (BAQ) and Variable Housing Allowance (VHA), both of which are tax exempt elements of total military compensation. The decision on whether to extend the ruling to military personnel has been delayed by the Treasury until January 1, 1987. Meanwhile, the House has adopted a tax reform bill (H.R. 3838) with a provision that would overrule IRS Revenue Ruling 83-3. Tax reform will next be considered in the Senate which could reexamine the effect of the application of a Revenue Ruling similar to 83-3 on military homeowners.

CBO estimates that elimination of the double tax breaks would generate about $290 million in net savings to the federal government in fiscal year 1986. Similar savings would be realized in future years. These and other findings in this study assume that, except for changes in the double tax benefits, current tax laws are continued.

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