Statement of the Hon. Christopher Cox, a Representative in Congress from the State of California

Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means

Hearing on Child Support and Fatherhood

June 28, 2001

Introduction

Thank you, Chairman Herger and Mr. Cardin, for holding this hearing today, and for graciously giving me the opportunity to testify on the merits of the Child Support Enforcement Act.

Today, we are here to consider what else may be done to improve the well-being of kids who are shortchanged when child support isn’t paid. A staggering 93 percent of child support is in arrears. We have to give delinquent parents a strong financial incentive to pay, and we have to give relief to the custodial parents who aren’t getting the help they need to raise their kids.

The Custodial Parent Should Get A ‘Bad Debt’ Deduction for Unpaid Child Support

Under current law, custodial parents receive no tax relief when the other parent fails to meet his or her legal and moral obligations to pay child support in full and on time.

Our current tax code permits individual tax filers to take a "bad debt" deduction when they are unable to collect a valid monetary obligation. But it does not allow a parent who has been unable to collect legally obligated child support payments to take the same "bad debt" deduction.

The Child Support Enforcement Act will give tax relief to custodial parents by extending the tax code’s existing treatment of unpaid debts to expressly include child support payments. Again, this is the same tax treatment already afforded to other bad debts under Section 166 in the Code. It is completely reasonable and logical that we extend the same tax treatment afforded for unpaid rent, for example, to our most precious resource, our children.

Under our current tax code, a parent who has unilaterally failed to fulfill his or her child support obligation is not required to include the defaulted amounts in income to reflect the windfall gain from nonpayment of the debt.

The "forgiveness of indebtedness" provisions of our current tax law require a debtor who receives an economic gain from not paying a debt to count the unpaid amount as taxable income. But it does not provide the same tax treatment if the unpaid debt is child support. A delinquent debtor who enriches himself by failing to make child support payments is not taxed on the money that he has wrongfully appropriated to himself.

The Child Support Enforcement Act will require a delinquent parent who has failed to pay child support to be taxed on that amount, just as a debtor would be taxed under Section 108 of the Code. Since the parent who fails to pay child support is simply "forgiving" his own debt, he should receive the same tax treatment already applied to any other "forgiven" debt that the borrower doesn’t pay.

Even though the Child Support Enforcement Act extends current tax law concerning bad debts to include child support, it in no way provides forgiveness of liability. The parent who owes child support continues to bear the full legal obligation to pay it. The Act simply provides a tax benefit for the custodial parent, and an additional financial incentive for swift payment of child support obligations by the delinquent parent.

A few revisions have been made to the Child Support Enforcement Act to address technical issues raised by the Committee following last year’s hearing:

First, the Child Support Enforcement Act does not require an amended return to the Internal Revenue Service if past-due child support is subsequently paid.

Second, there is an exceptionally simple reporting process that does not burden or even involve the IRS. Both the bad debt deduction for the custodial parent, and the recognition of income from forgiveness of indebtedness for the delinquent parent, would occur in the same taxable year. The custodial parent who is planning to take the bad debt deduction would file a form that already exists, the 1099-C "Cancellation of Debt" form, with the IRS. A copy would be sent to the delinquent debtor.

Third, there is no additional power granted to the IRS. In my view, that is not necessary. In fact, IRS involvement through the Child Support Enforcement Act would be far less than current IRS involvement with the 18-year old Federal Refund Tax Offset Program because the IRS is not required to distribute past-due child support to custodial parents. Taxpayers will simply report child support bad debt and claim the deduction on their returns (or take it into income), as they currently do for any other unpaid debt.

Because both the income from cancellation of indebtedness and the deduction for bad debt are mirror images, there is no negative revenue effect. Moreover, because statistically parents who owe child support are in higher tax brackets than the custodial parents, the Act produces a modest revenue gain.

The Child Support Enforcement Act complements state-level enforcement mechanisms currently in place, by creating tax equity where none exists. It also encourages the continued reporting and development of databases to better track child support obligations.

We should not allow delinquent parents to avoid their legal obligations--and we should not punish the custodial parents who are forced to make ends meet without the assistance of child support payments.

The Child Support Enforcement Act will help redress these injustices. I commend the Chairman, Ranking Member, and the Members of this Committee for their interest and support, and I look forward to working with you to produce legislation that can be signed into law this year.