Just Taxes Blog by ITEP

McSally “Travel Tax Credit” Is an Invitation for Tax Avoidance

McSally “Travel Tax Credit” Is an Invitation for Tax Avoidance

June 23, 2020

Matthew Gardner
Matthew Gardner
Senior Fellow

Earlier this week, U.S. Sen. Martha McSally (R-AZ) introduced the “American TRIP Act,” a bill ostensibly designed to encourage Americans to boost the economy by traveling within the United States. The bill is certainly a trip in the colloquial sense of the word. It would create a dollar-for-dollar tax credit for up to $8,000 of travel-related spending by a married couple (with an additional $500 available for each child, meaning a $9,000 tax credit for a family of four).

Tax breaks are always an exercise in line drawing between eligible and ineligible activities, but McSally isn’t sweating the details on the definition of a “vacation.” As long as your “final destination” is more than 50 miles away from your home, anything you spend on food or beverages, transportation, lodging, or “live entertainment events” would be fully reimbursed by the federal government. Because the legislation doesn’t specify the need for an overnight stay, McSally’s intention is apparently to also subsidize day trips. And the senator is loose on the issue of timing: The tax credit would be retroactive to the end of 2019 and is available through 2021.

You don’t need to be Jeff Bezos to spot the tax avoidance opportunities here. Back in February, my family took a day hike in the Shenandoah mountains, 90 miles outside Washington, D.C. and stopped at a suburban brewpub for dinner afterward. Every dime we spent on that trip—from gassing up the car to a snack stop at 7-11—appears to be eligible for a tax credit under Sen. McSally’s proposal. The proposal would reimburse me for mileage too at the standard 57 cents per mile prescribed by the IRS for business travel. The lack of an overnight stay requirement means that any car owner with an ounce of creativity should be able to gin up an excuse for taking a tax credit for every tank of gas they’ve purchased in 2020.

But there’s a catch: low and most middle-income families will receive no or minimal benefit as you can’t claim the maximum credit until you’re pretty well off. The credit is nonrefundable, so a married couple can’t claim the full $8,000 credit unless their income tax liability before credits reaches that amount. For tax year 2019, married couples would need about $70,000 of taxable income, which in turn means adjusted gross income of more than $94,000.

McSally is worried about the cost of increasing unemployment benefits at the height of the pandemic, so she may be mortified to see the price tag on her own legislation.

Since McSally’s most recent TV ad, “Never Trust a Communist,” omits any discussion of her tax plan, it’s hard to gauge what she hopes to achieve through this plan—other than jacking up the federal deficit even more. But she and other lawmakers are looking for an effective strategy for helping Americans through the COVID-19 crisis, they could look at plans espoused by other lawmakers, including further extension of unemployment benefits and targeted low-income tax credits.

At a time when Republican leaders in Congress are unwilling to commit federal resources to help cash-strapped state and local governments, McSally’s apparent willingness to fritter away public dollars on travel expenses is astonishing. And at a time when the Internal Revenue Service already lacks the capacity to police the tax laws on the books, McSally’s proposal would amount to an invitation to tax avoidance.