Taxing Nudges

Governments are increasingly turning to behavioral economics to inform policy design in areas like health care, the environment, and financial decision-making. Research shows that small behavioral interventions, referred to as “nudges,” often produce significant responses at a low cost. The theory behind nudges is that, rather than mandating certain behaviors or providing costly economic subsidies, modest initiatives may “nudge” individuals to choose desirable outcomes by appealing to their behavioral preferences. For example, automatically enrolling workers into savings plans as a default, rather than requiring them to actively sign up, has dramatically increased enrollment in such plans. Similarly, allowing individuals to earn “wellness points” from attendance at a gym, redeemable at various retail establishments, may improve exercise habits.

A successful nudge should make a desired choice as simple and painless as possible. Yet one source of friction may counteract an otherwise well-designed nudge: taxation. Under current tax laws, certain incentives designed to nudge behavior are treated as taxable income. At best, people are ignorant of taxes on nudges, an outcome that is not good for the tax system. At worst, taxes on nudges may actively deter people from participating in programs with worthy policy goals. To date, policymakers have generally failed to account for this potential obstacle in designing nudges.

This Article sheds light on the tax treatment of nudges and the policy implications of taxing them. It describes the emergence of a disjointed tax regime that exempts private party nudges, but taxes identical incentives that come from the government. What is more, an incentive structured as a government grant may be taxable while an economically identical tax credit is not. The Article then proposes reforms that would unify the tax treatment of nudges and enhance their effectiveness. Specifically, lawmakers should reverse the default rule that all government transfers are taxable, and instead exclude government transfers from income unless otherwise provided by the Tax Code.


Imagine that every ten years, a flood decimates the banks of a river, destroying homes and other buildings in its wake. Each time, the flood causes millions of dollars of damage and leaves some people homeless or jobless. The local government incurs enormous costs in the aftermath to clean up damage and provide subsidies to victims.

Now imagine that experts determine that a measure can be taken to “flood proof” homes and other buildings. The measure costs several thousand dollars per building, but this pales in comparison to the cost of cleaning up flood damage. Naturally, policymakers would be eager to encourage residents along the riverbank to undertake the improvements. But people tend to be present-biased and discount future harms, and the residents are unmotivated to make the improvements.1.See infra Subsection I.B.6.Show More What can policymakers do?

One option would be to mandate flood proofing and penalize those who do not do it. But this would be politically unpopular and entail enforcement costs. Another option would be simply to pay for the flood proofing for each resident; but this may be cost prohibitive.

There may be a third option, however. Suppose that lawmakers decide to offer a small carrot—a “nudge”—to encourage people to flood proof their homes. They might, for example, offer a modest cash reward—say $300—for doing so. Or they might offer to provide a warranty for any flood damage incurred after the improvement is made. The small nudge may be enough to motivate people to flood proof their homes. If the nudge is effective, the government might succeed in protecting its residents’ homes at a fraction of the cost of using penalties or paying for the improvements outright.

Nudges are an increasingly popular policy tool in many contexts. Insights from behavioral economics reveal that people’s irrational tendencies may lead them to make suboptimal decisions, such as failing to flood proof their homes, opting not to save for retirement, or not applying to college. For example, people’s failure to save for retirement is often just due to sheer inaction—what researchers call “status quo bias,” 2.See infra note 15 and accompanying text.Show More rather than any rational decision about how to spend one’s money. Making retirement savings easier by defaulting people into savings plans is an example of a simple nudge that achieves a desired policy at a low cost.

The term “nudge” was famously coined by Professors Richard Thaler and Cass Sunstein to describe an intervention that “alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”3.Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness 6 (2d ed. 2009).Show More Nudges might make a desired choice easier or simpler for people, they might help people overcome bad habits like procrastination, or they may simply provide people with better information.4.Cass R. Sunstein, Misconceptions About Nudges, 2 J. Behav. Econ. for Pol’y 61, 61 (2018).Show More Governments around the world have increasingly used nudges to enact cost-effective policies to improve the welfare of their citizens.

Nudges come in many forms: shifting defaults, like in the case of savings plans; sending people text message reminders to apply for college financial aid; or simplifying instructions on forms. Other nudges provide small incentives, like cash rewards or “wellness points” one might earn for achieving health goals. Regardless of the form of a particular nudge, it should make a desired choice as simple and painless as possible.

Yet one source of friction may counteract an otherwise well-designed nudge: taxation.

Under current tax laws, certain incentives aimed at nudging behavior are treated as taxable income. While nudges like defaults or text message reminders do not have tax consequences, nudges that provide an economic benefit to the recipient may be taxable. This is true regardless of whether the benefit comes in the form of cash, property, or services. For example, if a local government offers its citizens a $300 reward for flood proofing their homes, that grant would be subject to federal income taxation.

At best, people are ignorant of taxes on nudges, an outcome that is not good for the tax system. It may be particularly counterintuitive to people that government grants would be subject to tax. At worst, taxes on nudges may actively deter people from participating in programs with worthy policy goals. For example, homeowners may decide to forego a cash reward for flood proofing their home because they do not want to deal with the hassle of reporting it or because they do not want to attract scrutiny from the IRS. To date, policymakers have generally failed to account for this potential obstacle in designing nudges.

This Article sheds light on the tax treatment of nudges and the policy implications of taxing them. It first describes the emergence of a disjointed tax regime that often exempts nudges that come from private parties, but taxes identical incentives that come from the government. As a default, the tax law generally treats all economic benefits as taxable income. However, broad exceptions exist for certain incentives provided by employers to their employees, which are often classified as nontaxable fringe benefits. Similarly, incentives paid by nonprofits to individuals are likely to be treated as nontaxable gifts. Nudges provided by businesses to paying customers are also exempt from tax under the judicially created “purchase price adjustment” doctrine.

When it comes to identical incentives provided by governments, however, none of the fringe benefit, gift, or purchase price adjustment exclusions apply. Furthermore, while many government transfers are exempt from tax under other exclusions—for example, welfare assistance, veterans’ benefits, Social Security, and Medicare—those rules do not cover most nudges. Without a special exclusion, incentive-based nudges provided by governments are generally subject to tax under current laws. This regime does not appear to be a product of design, but is more likely the result of a piecemeal system of tax exemptions that has developed over time. Perhaps even more confounding is that an incentive structured as a government grant may be taxable, while an economically identical tax credit is not.

After examining the tax treatment of the most common types of nudges, this Article proposes reforms that would unify the tax treatment of nudges and enhance their effectiveness. It argues that lawmakers should reverse the default rule that all government transfers are taxable, and instead provide a rule that government transfers are excluded from income unless otherwise provided by the Tax Code. This would ensure that nudges designed to promote worthy policy goals would be exempt from tax as a default matter, unless Congress specifically decides otherwise. As an alternative to this broad proposal, the Article also proposes legislation that would exempt specific nudges from tax in the areas of health and environmental protection. Under either approach, exempting nudges from tax will make them more effective and should not pose serious revenue consequences.

This Article proceeds in four parts. Part I describes the concept of a nudge and categorizes the most common types of nudges. Part II provides an overview of the tax system and discusses the current tax treatment of nudges. Part III discusses policy implications of the current tax regime, including proposals to reform the tax treatment of nudges. Part IV concludes that the simplest, yet most effective, way to unify the tax treatment of nudges would be for Congress to provide a default of nontaxability for government transfers.

  1. * George R. Ward Term Professor of Law, University of North Carolina School of Law. I am grateful to Andrew Benton for excellent research assistance, and to helpful comments from Ellen Aprill, Peter Barnes, Fred Bloom, Michelle Drumbl, Heather Field, Brian Galle, Brant Hellwig, Andy Hessick, Carissa Hessick, Ed McCaffery, Pat Oglesby, Leigh Osofsky, Gregg Polsky, Katie Pratt, Rich Schmalbeck, Ted Seto, Jay Soled, Sloan Speck, Manoj Viswanathan, Larry Zelenak and workshop participants at University of Colorado Law School, Duke Law School, Loyola Law School, Washington & Lee University School of Law, and UC Hastings College of Law. For Tessie DeLaney.
  2. See infra Subsection I.B.6.
  3. See infra note 15 and accompanying text.
  4. Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness 6 (2d ed. 2009).
  5. Cass R. Sunstein, Misconceptions About Nudges, 2 J. Behav. Econ. for Pol’y 61, 61 (2018).
  6. See, e.g., George Loewenstein & Nick Chater, Putting Nudges in Perspective, 1 Behav. Pub. Pol’y. 26, 29 (2017) (“Traditional economic interventions include taxes, subsidies and mandatory disclosure of information . . . .”).
  7. See, e.g., David Halpern, Inside the Nudge Unit: How Small Changes Can Make a Big Difference 4 (2015).
  8. See, e.g., Bruno S. Frey, A Constitution for Knaves Crowds Out Civic Virtues, 107 Econ. J. 1043, 1044–45 (1997).
  9. Cass R. Sunstein, Nudging: A Very Short Guide, 37 J. Consumer Pol’y 583, 583 (2014) (Nudges “generally cost little and have the potential to promote economic and other goals . . . .”).
  10. Halpern, supra note 6, at 22.
  11. Brian Galle argues that, in some circumstances, nudges are the most efficient choice of instrument. See Brian Galle, The Problem of Intrapersonal Cost, 18 Yale J. Health Pol’y, L., & Ethics 1, 32–50 (2018).
  12. Sunstein, supra note 8, at 585. However, for a critique of savings defaults, see Ryan Bubb & Richard H. Pildes, How Behavioral Economics Trims Its Sails and Why, 127 Harv. L. Rev. 1593, 1607–37 (2014).
  13. Thaler & Sunstein, supra note 3, at 110–11.
  14. Id. at 111.
  15. See, e.g., id. at 111–13 (automatic enrollment increased employee participation in savings plans from 65% to 90%, and could notably increase per-capita contribution percentages); Loewenstein & Chater, supra note 5, at 27.
  16. Daniel Kahneman, Jack Knetsch & Richard Thaler, Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J. Econ. Persp. 193, 197–98 (1991).
  17. See About SBST, SBST, [] (last visited June 14, 2019).
  18. William J. Congdon & Maya Shankar, The White House Social & Behavioral Sciences Team: Lessons Learned from Year One, 1 Behav. Sci. & Pol’y 77, 83 (2015), [].
  19. Id.
  20.  See About Us, Behavioural Insights Team, [] (last visited Nov. 7, 2020) (“We have run more than 750 projects to date, including 400 randomised controlled trials in dozens of countries.”).
  21. See Christopher Larkin, Michael Sanders, Isabelle Andresen & Felicity Algate, Testing Local Descriptive Norms and Salience of Enforcement Action: A Field Experiment to Increase Tax Collection, 2 J. Behav. Pub. Admin. 1, 9–10 (2019); Dominic King et al., Redesigning the “Choice Architecture” of Hospital Prescription Charts: A Mixed Methods Study Incorporating In Situ Simulation Testing, 4 BMJ Open 1, 8–9 (2014); Peter John, Elizabeth MacDonald & Michael Sanders, Targeting Voter Registration with Incentives: A Randomized Controlled Trial of a Lottery in a London Borough, 40 Electoral Stud. 170, 175 (2015).
  22. See Zeina Afif, William Wade Islan, Oscar Calvo-Gonzalez & Abigail Goodnow Dalton, World Bank Group, Behavioral Science Around the World: Profiles of 10 Countries 6 (2019), [].
  23. See, e.g., Congdon & Shankar, supra note 17, at 84 (finding that letters sent to physicians comparing their prescribing rates with those of their peers had no measurable impact on prescription rates).
  24. See Afif et al., supra note 21, at 8–9.
  25. See, e.g., Thaler & Sunstein, supra note 3, at 12, 85.
  26. See, e.g., Johan Egebark & Mathias Ekström, Can Indifference Make the World Greener? 11–13 (Rsch. Inst. of Indus. Econ., IFN Working Paper No. 975, 2013).
  27. Eric J. Johnson & Daniel Goldstein, Do Defaults Save Lives? 302 Science 1338, 1338–39 (2003).
  28. See, e.g., Sunstein, supra note 8, at 585.
  29. Eric P. Bettinger, Bridget Terry Long, Philip Oreopoulos & Lisa Sanbonmatsu, The Role of Simplification and Information in College Decisions: Results from the H&R Block FAFSA Experiment 1 (Nat’l Bureau of Econ. Rsch., Working Paper No. 15361, 2009), [].
  30. Id. at 26–27.
  31. Cass R. Sunstein, Empirically Informed Regulation, 78 U. Chi. L. Rev. 1349, 1372–73 (2011).
  32. Id. at 1373.
  33. See, e.g., New Text Message Reminders for Summons Recipients Improves Attendance in Court and Dramatically Cuts Warrants, Ideas42, [] (last visited June. 17, 2019) (finding that text message reminders in New York City reduced “failure to appear” rates by 26%).
  34. See Congdon & Shankar, supra note 17, at 83.
  35. See, e.g., Raj Chetty, Adam Looney & Kory Kroft, Salience and Taxation: Theory and Evidence, 99 Am. Econ. Rev. 1145, 1165 (2009).
  36. Lisa L. Shu, Nina Mazar, Francesca Gino, Dan Ariely & Max H. Bazerman, Signing at the Beginning Makes Ethics Salient and Decreases Dishonest Self-Reports in Comparison to Signing at the End, 109 Proc. Nat’l Acad. Sci. 15197, 15197–98 (2012), []
  37. Id. at 15198.
  38. See, e.g., Sunstein, supra note 30, at 1381; Kate Phillips, Applying Behavioral Science Upstream in the Policy Design Process, Behav. Scientist (Sept. 17, 2018), [] (describing new laws implemented in Australia, requiring graphic images on cigarette labels, to reduce smoking rates).
  39. Michael Hallsworth, John A. List, Robert D. Metcalfe & Ivo Vlaev, The Behavioralist as Tax Collector: Using Natural Field Experiments to Enhance Tax Compliance 4 (Nat’l Bureau of Econ. Research, Working Paper No. 20007, 2014), [].
  40. Hunt Allcott, Social Norms and Energy Conservation, 95 J. Pub. Econ. 1082, 1082–83 (2011).
  41. Sunstein, supra note 4, at 61 (distinguishing between nudges, which “must preserve freedom of choice,” and subsidies or other interventions, which “impose[] significant material costs on choosers”).
  42. This is assuming economically rational decision making on behalf of the homeowner, without factoring in other (realistic) costs, such as hassle costs and present bias.
  43. Sunstein, supra note 4, at 61.
  44. See Robert Münscher, Max Vetter & Thomas Scheuerle, A Review and Taxonomy of Choice Architecture Techniques, 29 J. Behav. Decision Making 511, 518 (2016) (defining micro-incentives as “changes of the consequences of decision options that are insignificant from a rational choice perspective”).
  45. Id.
  46. The small size of the payment makes it particularly less likely to function as a true subsidy, although it could. For example, if paying for bus fare to a local clinic was the impediment to a person obtaining a free flu shot, the $5 may operate as an economic subsidy free of behavioral considerations. For further discussion of the distinction between nudges and subsidies, see Brian Galle, Tax, Command . . . or Nudge?: Evaluating the New Regulation, 92 Tex. L. Rev. 837, 854–56 (2014) (explaining that “surprising and asymmetric incentives” are one factor distinguishing nudges from subsidies, and using a five-cent tax on plastic bags as an example of a financial consequence that is most likely a nudge, given that alternatives are generally more costly than the bag tax).
  47. Bronwyn McGill, Blythe J. O’Hara, Anne C. Grunseit & Philayrath Phongsavan, Are Financial Incentives for Lifestyle Behavior Change Informed or Inspired by Behavioral Economics? A Mapping Review, 33 Am. J. Health Promotion 131, 131 (2019) (“Since the 1960s, financial incentives (FIs) have been used in behavior change interventions, targeting a broad spectrum of health issues such as blood donation, medication adherence, and health and wellness programs.”).
  48. Soeren Mattke et al., Workplace Wellness Programs Study: Final Report, at xiv (Rand Corp. ed. 2013); see also Laura A Linnan, Laurie Cluff, Jason E. Lang, Michael Penne & Maija S. Leff, Results of the Workplace Health in America Survey, 3 Am. J. Health Promotion 652, 655 (2019) (over 46% of worksites surveyed had wellness programs).
  49. See Ha T. Tu & Ralph C. Mayrell, Employer Wellness Initiatives Grow, But Effectiveness Varies Widely, Nat’l Inst. for Health Care Reform, July 2010, at 2 (concluding that employers offer wellness programs to contain medical costs, to improve productivity, and to “position themselves as ‘employers of choice’”).
  50. Id.
  51. Id. at 2–3.
  52. Id. at 3–4.
  53. Mattke et al., supra note 47, at xv.
  54. Tu & Mayrell, supra note 48, at 5; Bahaudin G. Mujtaba & Frank J. Cavico, Corporate Wellness Programs: Implementation Challenges in the Modern American Workplace, 1 Int’l J. Health Pol’y & Mgmt. 193, 194 (2013) (mentioning gym reimbursements as a part of corporate wellness programs).
  55. See, e.g., Mujtaba & Cavico, supra note 53, at 194 (listing seminars as a part of corporate wellness programs).
  56. These wellness program incentives are regulated by several laws. For example, the Health Insurance Portability and Accountability Act (“HIPAA”) imposes multiple nondiscrimination requirements. See Tu & Mayrell, supra note 48, at 6.
  57. Mattke et al., supra note 47, at 73 fig.5.3.
  58. Tu & Mayrell, supra note 48, at 5; see also Mujtaba & Cavico, supra note 53, at 196 (referencing “[h]ealth insurance discounts and reimbursements for employees who meet health standards and maintain a healthy lifestyle”).
  59. One report found that “[m]ost benefits consultants and wellness vendors believed that $100 is the ‘sweet spot’ for an incentive for a ‘single instance of behavior,’ such as HRA completion or participation in a specific wellness activity.” See Tu & Mayrell, supra note 48, at 5.
  60. John Cawley & Joshua A. Price, A Case Study of a Workplace Wellness Program That Offers Financial Incentives for Weight Loss, 32 J. Health Econ. 794, 795 (2013).
  61. Mattke et al., supra note 47, at xxi.
  62. But see Katherine Pratt, A Constructive Critique of Public Health Arguments for Anti-Obesity Soda Taxes and Food Taxes, 87 Tul. L. Rev. 73, 77–94 (2012) (discussing economic, externality-based justifications for anti-obesity taxes and subsidies).
  63. Present bias describes the tendency to value immediate rewards over future rewards, even if the future rewards are larger. See, e.g., Richard Thaler, Some Empirical Evidence on Dynamic Inconsistency, 8 Econ. Letters 201, 201 (1981). In the context of weight loss, it is hard for people to forego immediate benefits (a tasty meal, for example) in exchange for a future benefit (lower weight).
  64. See Cawley & Price, supra note 59, at 794 (“[P]eople may want to do what is in their long-run interest (lose weight), but consistently succumb to the temptation to eat and be sedentary.”).
  65. Id.
  66. Tu & Mayrell, supra note 48, at 5.
  67. Id.
  68. Sahil Gupta, Opinion, Earning Prizes for Fighting an Addiction, N.Y. Times (Mar. 12, 2019), [].
  69. Id.
  70. Id.
  71. Id.
  72. Scott D. Halpern et al., Randomized Trial of Four Financial-Incentive Programs for Smoking Cessation, 372 N. Eng. J. Med. 2108, 2108 (2015). Another intervention explored in the study was a deposit program in which participants would put up their own funds and earn them back if they successfully quit. Although the deposit was very effective for those who chose it, the cash incentive was more successful overall at reducing smoking, because significantly more participants opted for the cash intervention over the deposit. Id. at 2114.
  73. See, e.g., Kevin G. Volpp et al., A Randomized, Controlled Trial of Financial Incentives for Smoking Cessation, 360 New Eng. J. Med. 699, 707 (2009) (finding that a group who received financial incentives to refrain from smoking had “significantly higher” rates of “prolonged abstinence” than did a control group, who did not receive the same incentives).
  74. See, e.g., Jody Sindelar, Opinion, Should We Pay People to Stop Smoking?, CNN (Oct. 5, 2011), [].
  75. Thaler & Sunstein, supra note 3, at 236.
  76. Joshua Rhett Miller, North Carolina Program Pays Girls a Dollar a Day Not to Get Pregnant, Fox News (June 25, 2009), []. The payment was contingent on attending a ninety-minute lesson each week, where the women learned about abstinence and contraception use. Id.
  77. Id.
  78. Dyan Zaslowsky, Denver Program Curbs Teen-Agers’ Pregnancy, N.Y. Times, Jan. 16, 1989, at A8.
  79.  Economic Incentives, Environmental Protection Agency,‌environmental-economics/economic-incentives [] (last visited Dec. 21, 2020) (explaining that market-based incentives, like taxes and subsidies, are “becoming increasingly popular as tools for addressing a wide range of environmental issues”).
  80. Christian Schubert, Green Nudges: Do They Work? Are They Ethical?, 132 Ecological Econ. 329, 329 (2017).
  81. See Howard Kunreuther & Elke U. Weber, Aiding Decision Making to Reduce the Impacts of Climate Change, 37 J. Consumer Pol’y 397, 397–98 (2014).
  82. See, e.g., Schubert, supra note 79, at 330 (defining green nudges as “nudges that aim at promoting environmentally benign behavior”).
  83. Id.
  84.  See Hunt Allcott & Dmitry Taubinsky, Evaluating Behaviorally Motivated Policy: Experimental Evidence from the Lightbulb Market, 105 Am. Econ. Rev. 2501, 2501–02 (2015) (exploring the phenomenon and finding that moderate subsidies for energy-efficient lightbulbs may be effective in addressing this underinvestment).
  85. Free LED Program, Duke Energy, [] (last visited June 19, 2019); see also Commercial Retrofit, Puget Sound Energy, [] (last visited July 5, 2019) (providing coverage for up to 70% of the cost for energy efficient upgrades).
  86. Smart $aver: Home Improvement Rebate Program, Duke Energy, [] (last visited June 19, 2019).
  87. HVAC Install, Duke Energy, [] (last visited June 19, 2019).
  88. Insulate & Seal, Duke Energy, [] (last visited June 19, 2019).
  89. Toshio Fujimi & Hirokazu Tatano, Promoting Seismic Retrofit Implementation Through “Nudge”: Using Warranty as a Driver, 33 Risk Analysis 1858, 1873 (2013).
  90. See id. at 1859–60.
  91. Id. at 1863.
  92. Id. at 1859.
  93. Id. at 1873.
  94. See supra note 62.
  95. See Kathleen DeLaney Thomas, The Modern Case for Withholding, 53 U.C. Davis L. Rev. 81, 124 (2019).
  96. See id. at 114.
  97. See Loewenstein & Chater, supra note 5, at 29–30.
  98. See Fujimi & Tatano, supra note 88, at 1872.
  99. Earthquake Brace + Bolt, [‌5WPS-7X73] (last visited June 20, 2019).
  100. See, e.g., Cesarini v. United States, 296 F. Supp. 3, 4 (N.D. Ohio 1969) (“The starting point in determining whether an item is to be included in gross income is, of course, Section 61(a) of Title 26 U.S.C.”).
  101. I.R.C. § 61(a). The statute goes on to provide a non-exclusive list of items of gross income, such as compensation for services, interest, rents, royalties, and dividends. Id.
  102. 348 U.S. 426, 431 (1955).
  103. See, e.g., Cesarini, 296 F. Supp. at 4 (holding that cash found in a used piano constituted taxable income under I.R.C. § 61(a)); Turner v. Comm’r, 13 T.C.M. 462, 463 (1954) (holding that cruise tickets received as a prize from a radio station constituted taxable income, with the only issue being valuation); see also Treas. Reg. § 1.61-14 (as amended in 1993) (expanding § 61(a) definition of gross income to include illegal gains and treasure troves, while clarifying that “[i]n addition to the items enumerated in section 61(a), there are many other kinds of gross income”).
  104. See I.R.C. § 74 (a).
  105.  See Topic No. 420 Bartering Income, IRS, [] (last visited June 20, 2019).
  106. The discussion omits other exclusions not relevant for this purpose, such as the non-taxation of imputed income under the Code, the realization requirement (§ 1001), and statutory exclusions like § 101 (life insurance proceeds) and § 103 (interest on state and local bonds).
  107. I.R.C. § 102.
  108. 363 U.S. 278, 285 (1960).
  109. Id.
  110. Id. at 280, 291–92 (The transfer was “at bottom a recompense for Duberstein’s past services, or an inducement for him to be of further service in the future.”).
  111. Specifically, Code section 139 and the general welfare doctrine, both of which are discussed below. Rev. Rul. 2003-12, 2003-1 C.B. 283–84.
  112. Rev. Rul. 2005-46, 2005-2 C.B. 120.
  113. See, e.g., Rev. Rul. 2003-12, supra note 110, at 283.
  114. The exception is that certain employee achievement awards are excludable under I.R.C§ 74(c) (2018).
  115. Rev. Rul. 2003-12, supra note 110, at 284–85.
  116. Id. at 283–84.
  117. Rev. Rul. 99-44, 1999-44 I.R.B. 549–50. The matching contributions were gifts even though the savings accounts were established pursuant to a federal government program, which was administered by the charitable organization.
  118. See I.R.S. Priv. Ltr. Rul. 200442023 (Oct. 15, 2004).
  119. I.R.S. Priv. Ltr. Rul. 200529004 (July 22, 2005). Although payments from charities to individuals are likely to receive gift treatment in most situations, the Duberstein standard must still be satisfied for the gift exclusion to apply. For example, the IRS has stated in informal guidance that if a charity makes a payment to a for-profit business, “[t]he IRS will evaluate whether . . . . the payment was made out of a moral or legal obligation, an anticipated economic benefit or in return for services . . . .” Internal Revenue Service, Disaster Relief20, []. Generally, payments made to individuals that are part of a “charitable class” (i.e., “large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance”) should qualify for gift treatment. Id. at 9. I am grateful to Ellen Aprill for bringing this limitation to my attention.
  120. See, e.g., I.R.C. § 132.
  121. See Jay A. Soled & Kathleen DeLaney Thomas, Revisiting the Taxation of Fringe Benefits, 91 Wash. L. Rev. 761, 770 (2016).
  122. See id. at 766–68.
  123. Id. at 769–70.
  124. I.R.C. § 132(d), (e).
  125. See Soled & Thomas, supra note 120, at 770.
  126. However, if an employee is a shareholder or owner of the employer, payments made to employees may be treated as dividends rather than as compensation. See, e.g., Andrew W. Stumpff, The Reasonable Compensation Rule, 19 Va. Tax. Rev. 371, 377 (1999).
  127. I.R.C. § 132(a)(4), (e).
  128. In a similar context but outside the employment setting, a court allowed for exclusion of an all-expenses-paid business trip to Germany because the payment was made for the convenience of the payer, rather than for the recipient’s benefit. United States v. Gotcher, 401 F.2d 118, 119, 122 (5th Cir. 1968). Neither courts nor the IRS have explicitly extended the line of reasoning in Gotcher to other settings, particularly to non-business settings. However, the line of reasoning in the case could arguably apply to exclude many nudges from income. The argument would be that payments made primarily for the payer’s benefit (e.g., a government grant program) are not taxable income to the payee. Thanks to Ted Seto for this observation.
  129. See, e.g., Pittsburgh Milk Co. v. Comm’r, 26 T.C. 707, 717 (1956); Freedom Newspapers, Inc. v. Comm’r, 36 T.C.M. (CCH) 1755, 1758–59 (1977); Rev. Rul. 76-96, 1976-1 C.B. 23.
  130. See Rev. Rul. 76-96, 1976-1 C.B. 23. The taxpayer must reduce his basis in the property purchased by the amount of the rebate, resulting in a basis of $19,000 in this example.
  131. Freedom Newspapers, 36 T.C.M. (CCH) at 1756–57. But see I.R.S. Priv. Ltr. Rul. 201004005 (Jan. 29, 2010) (ruling that grants paid by a third party were not excludable from income, even when the net effect was to reduce the buyer’s cost on a purchase transaction). In the private ruling, the IRS distinguished payments involving broker commissions, which are dependent upon the sales transactions, from third-party grants that are independent of the transaction. Id.
  132. The taxpayer received “Thank You Points” that were redeemable for airline miles. Shankar v. Comm’r, 143 T.C. 140, 148 (2014). The court also noted that the miles were not earned during business travel, which the IRS has singled out for non-enforcement in Announcement 2002-18, 2002-1 C.B. 621.
  133. Shankar, 143 T.C. at 148.
  134. See I.R.S. Priv. Ltr. Rul. 201027015, at 3 (July 9, 2010) (ruling that cash-back rebates are excluded from gross income as purchase price reductions).
  135. For taxpayers that are corporations, Code § 118 historically exempted “contributions to capital,” which covered many government grants to corporations. However, section 118 was amended in 2017 and currently does not exempt contributions to capital made by “any governmental entity.” I.R.C. § 118(b). Regardless, this Article is concerned with incentives provided to individual taxpayers, not corporations.

    There are other special exclusions applicable to businesses not discussed in detail here. For example, Code § 48(d)(3) excludes grants made to developers and producers of renewable energy, pursuant to the American Recovery and Reinvestment Act of 2009.

  136. Greisen v. United States, 831 F.2d 916, 918 (9th Cir. 1987). The Alaska Permanent Fund is funded by the state’s mineral royalties; it distributes earnings in the form of dividends to each resident of the state on an annual basis. Id. at 916–17; see also About Us, Alaska Department of Revenue: Permanent Fund Dividend Division, [] (last visited July 1, 2019) (explaining the Alaska Permanent Fund eligibility and dividend calculation functions).
  137. Greisen, 831 F.2d at 919–20 (“According to the statement of purpose, the 1980 Act was intended: (1) to allow equitable distribution of part of the state’s wealth to Alaskans; (2) to encourage people to remain Alaska residents; and (3) to encourage awareness and interest in the management of the fund.”).
  138. See, e.g., Graff v. Comm’r, 673 F.2d 784, 785 (5th Cir. 1982). For a comprehensive discussion of the doctrine, see Theodore P. Seto & Sande L. Buhai, Tax and Disability: Ability to Pay and the Taxation of Difference, 154 U. Pa. L. Rev. 1053, 1106–14 (2006); see generally Robert W. Wood & Richard C. Morris, The General Welfare Exception to Gross Income, 109 Tax Notes 203, 204–08 (2005) (describing the development of the General Welfare Exception and the prongs of the test determining whether a payment qualifies).
  139. Rev. Rul. 2005-46, 2005-2 C.B. 120; see also Rev. Rul. 74-205, 1974-1 C.B. 20 (ruling that housing payments to displaced families qualified under the general welfare exception, and were not includible in gross incomes of the recipients); Rev. Rul. 98-19, 1998-1 C.B. 840 (ruling that a relocation payment made to an individual moving from a flood-damaged residence qualified for the general welfare exception).
  140. I.R.S. Notice 99-3, 1999-1 C.B. 271, 272.
  141. Rev. Rul. 2005-46, supra note 138.
  142. Rev. Rul. 2003-12, 2003-1 C.B. 283; Rev. Rul. 76-144, 1976-1 C.B. 17. However, the IRS has ruled that payments to businesses do not qualify for the doctrine, because the need must be “individual or family” based. See Rev. Rul. 2005-46, supra note 138.
  143. Rev. Rul. 74-74, 1974-1 C.B. 18.
  144. Rev. Rul. 76-395, 1976-2 C.B. 16.
  145. 88 T.C. 1293, 1301 (1987), acq. 1989-2 C.B. 1. The court excluded the grant from income on other grounds, however, finding that the taxpayer “lacked complete dominion” over the funds, which were paid directly to the contractor who did the work.
  146. Id. (noting that the only requirements to receive the grant “were ownership of the property and compliance with the building code”).
  147. The exclusion applies to “qualified disaster[s],” which also includes events involving terrorism or common carrier accidents. See I.R.C. § 139(c). For a critique of limiting the exclusion to qualified disasters only, see Ellen P. Aprill & Richard Schmalbeck, Post-Disaster Tax Legislation: A Series of Unfortunate Events, 56 Duke L.J. 51, 95 (2006).
  148. I.R.C. § 139(g).
  149. I.R.C. § 401(k).
  150. I.R.C. § 61.
  151. I.R.C. § 132(e).
  152. I.R.C. § 106(a).
  153. Rev. Rul. 2002-3, 2002-1 C.B. 316 (“Under §106(a), an employee may exclude premiums for accident or health insurance coverage that are paid by an employer.”).
  154. I.R.C. § 105(b).
  155. See, e.g., Office of Chief Counsel Internal Revenue Service Memorandum 201622031, at 1 (Apr. 14, 2016) [hereinafter “IRS Memo 201622031”].
  156. I.R.C. § 61.
  157. Treas. Reg. § 1.132-6(c) (as amended in 1992).
  158. I.R.C. § 132(e).
  159. Treas. Reg. § 1.132-6(c) (as amended in 1992). The exception to this rule is cash for occasional overtime meals or transportation fare can be excluded as de minimis. See Treas. Reg. § 132-6(d)(2) (as amended in 1992).
  160. Treas. Reg. § 1.132-6(e)(1) (as amended in 1992) (“Benefits excludable from income”).
  161. IRS Memo 201622031 at 4.
  162. Id. at 4.
  163. See Treas. Reg. § 1.132-6(e)(1)–(2) (as amended in 1992).
  164. See supra notes 51–53 and accompanying text.
  165. See Treas. Reg. § 1.61-2(d)(1) (as amended in 2003).
  166. I.R.C. § 132(e)(1).
  167. Treas. Reg. § 1.132-6(e)(1)–(2) (as amended in 1992).
  168. See IRS Memo 201622031 at 2, 4–5. “Medical care” is defined in section 105(b) by reference to section 213(d) of the Code, which provides that medical care includes amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” I.R.C. § 213(d)(1)(A).
  169. See IRS Memo 201622031 at 2, 5.
  170. See id. For examples of medical care under section 213, including smoking cessation programs, see IRS Publication 502, Medical and Dental Expenses,‌pub/irs-pdf/p502.pdf [] (last visited Mar. 10, 2021).
  171. Medical expenses include payments for a weight-loss program “for a specific disease diagnosed by a physician,” so it is unlikely that a weight-loss program would qualify in the absence of a diagnosis. See IRS Publication 502, supra note 169.
  172. See Treas. Reg. § 1.132-6(e)(1) (as amended in 1992) (citing examples of “occasional” events, such as sports games or cocktail parties, as ones that qualify as de minimis).
  173. In an analogous context, it appears many service-type benefits offered by Silicon Valley companies, such as free dry cleaning, haircuts, or yoga classes, are likely not reported as taxable by those employers. See Soled & Thomas, supra note 120, at 779–86.
  174. Treas. Reg. § 1.132-6(e)(2) (as amended in 1992). However, onsite gyms operated by the employer qualify for exclusion. See I.R.C. § 132(j)(4).
  175. See IRS Memo 201622031 at 4–5.
  176. I.R.C. § 132(a)(2).
  177. I.R.C. § 132(c)(4).
  178. It follows that a private gym could offer discounted gym services to its own employees.
  179. See supra note 57 and accompanying text.
  180. See supra note 128 and accompanying text.
  181. See supra note 152.
  182. See IRS Memo 201622031 at 5.
  183. See id. at 2–5.
  184. See Rev. Rul. 2002-3, supra note 152.
  185. See supra note 73 and accompanying text.
  186. See supra notes 75–77 and accompanying text.
  187. See supra notes 67–70 and accompanying text; 75–77 and accompanying text.
  188. See supra note 140 and accompanying text.
  189. See supra notes 141–43 and accompanying text.
  190. See IRS Publication 502, supra note 169. However, the deduction is only available to itemizers (those who do not claim the standard deduction) and is limited to the excess of 10% of the individual’s adjusted gross income. I.R.C. § 213(a).
  191. I.R.C. § 105(b).
  192. I.R.C. § 104(a).
  193. Another exception, which would be irrelevant in this circumstance, is section 102, which would exclude from income medical care paid for by family members or friends. See I.R.C. § 102(a).
  194. See supra notes 84–87 and accompanying text.
  195. See, e.g., supra note 87.
  196. See supra note 129 and accompanying text.
  197. For example, in Freedom Newspapers v. Commissioner, 36 T.C.M. (CCH) 1755 (1977), the Tax Court held that even a payment received by a third party broker several years after the original purchase “was sufficiently tied to the purchase that its characterization must be made by reference to the original transaction.”
  198. I.R.C. § 139(g).
  199. See supra note 141 and accompanying text.
  200. See supra note 98 and accompanying text.
  201. I.R.S. Priv. Ltr. Rul. 201816004 (Jan. 11, 2018). See also I.R.S. Priv. Ltr. Rul. 201815005 (Jan. 11, 2018) (describing similar facts).

    One theory that the IRS did not appear to consider is the purchase price adjustment doctrine. See supra Subsection II.A.2. Arguably, a state grant paid to a state taxpayer could be considered a non-taxable adjustment to the amount of taxes owed to the state by the grant recipient. (This assumes the grant recipient earns enough income to owe state taxes in excess of the grant.) While it is hard to distinguish a state grant from a seller rebate on economic grounds, it appears neither courts nor the IRS have extended the purchase price adjustment doctrine to this context. I am grateful to Heather Field for this observation.

  202. I.R.S. Priv. Ltr. Rul. 201816004 (Jan 11. 2018).
  203. See Earthquake Mitigation Incentive and Tax Parity Act of 2017, H.R. 1691, 115th Cong. (2017); Earthquake Mitigation Incentive and Tax Parity Act of 2017, S. 2104, 115th Cong. (2017).
  204. See Henry C. Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy 50 (1938); Robert Murray Haig, The Concept of Income–Economic and Legal Aspects, in The Federal Income Tax 1, 7 (Robert Murray Haig ed., 1921). The definition is commonly referred to as the Haig-Simons definition of income. See, e.g., John R. Brooks, The Definitions of Income, 71 Tax L. Rev. 253, 262 (2018); Boris I. Bittker, A “Comprehensive Tax Base” as a Goal of Income Tax Reform, 80 Harv. L. Rev. 925, 932 (1967). For a comprehensive discussion of the difficulty of defining income and a description of several other approaches, see generally Brooks, supra; see also Victor Thuronyi, The Concept of Income, 46 Tax L. Rev. 45, 47 (1990) (describing the Haig-Simons definition vis-à-vis the general difficulty in defining income).
  205. See, e.g., Bittker, supra note 203, at 935; Jonathan Barry Forman, The Income Tax Treatment of Social Welfare Benefits, 26 U. Mich. J.L. Reform 785, 799 (1993).
  206. Bittker, supra note 203, at 935–37.
  207. The legal scholarship on this point is too voluminous to cite, but for some of the earliest work, see, e.g., id. at 932; R. A. Musgrave, In Defense of an Income Concept, 81 Harv. L. Rev. 44 (1967); Joseph A. Pechman, Comprehensive Income Taxation: A Comment, 81 Harv. L. Rev 63 (1967); Charles O. Galvin, More on Boris Bittker and the Comprehensive Tax Base: The Practicalities of Tax Reform and the ABA’s CSTR, 81 Harv. L. Rev. 1016 (1968). For a discussion of the debate over the use of a “comprehensive tax base,” see Brooks, supra note 203, at 270–74.
  208. See, e.g., Dep’t of Treasury, Office of Tax Analysis, Tax Expenditures (2017), [] [hereinafter “Tax Expenditures].
  209. Id. at 9, 18.
  210. Although the tax-free receipt of a gift by the donee is not labeled as an expenditure, the carryover basis provided by section 1015 for appreciated gifts is considered a tax expenditure. See J. Comm. on Tax’n, Estimates of Federal Tax Expenditures for Fiscal Years 2018–2022, 26 (Oct. 4, 2018), [] [hereinafter “JCT Tax Expenditures”].
  211. See Tax Expenditures, supra note 207, at 3 (“The normal tax baseline also excludes gifts between individuals from gross income.”).
  212. See, e.g., Richard Schmalbeck, Gifts and the Income Tax—An Enduring Puzzle, 73 Law & Contemp. Probs. 63, 65 (2010) (arguing that “although it is intuitively appealing to regard value received by gift as an element of the income of the individual receiving it, it is completely unappealing to regard value received by gift as an increment to income in the aggregate”).
  213. Id. This of course assumes that the donor and the donee have the same tax rate. In reality, donors likely have higher tax rates than donees, in which case the net effect would be revenue loss to the government. For example, if the donor had a 30% marginal tax rate and the donee had a 10% marginal tax rate, the donor’s deduction for a $100 gift would be worth $30 (30% of $100), while the donee’s tax liability would be $10 (10% of $100), resulting in a $20 revenue loss.
  214. For income tax purposes, the gift is a non-event and need not be reported. However, the gift may need to be valued and returns filed if the gift tax applies. Currently, transfers under $15,000 are exempt from the gift tax. See, e.g., Frequently Asked Questions on Gift Taxes, IRS, [] (last visited July 11, 2019).
  215. E.g., Schmalbeck, supra note 211, at 65.
  216. The counterargument is that the gift represents consumption purchased by the donor. For a discussion of this theory, see id. at 68–69.
  217. See supra Subsection II.A.2.
  218. For a similar argument, see Charlotte Crane, Government Transfer Payments and Assistance: A Challenge for the Design of Broad-Based Taxes, 59 SMU L. Rev. 589, 611–12 (2006) (pointing out that government transfers do not create new value).
  219. See, e.g., supra notes 134–135 and accompanying text.
  220. See supra note 154 and accompanying text.
  221. Either way, the payment is deductible under Code section 162.
  222. JCT Tax Expenditures, supra note 209, at 27. The characterization of an exclusion as an expenditure depends on how Congress defines the tax base, and this has changed over time. See, e.g., Julie Roin, Truth in Government: Beyond the Tax Expenditure Budget, 54 Hastings L.J. 603, 608–10 (2003) (providing an overview of the development of the federal tax expenditure budget).

    The characterization of scholarships depends particularly on varying definitions of the tax base, and Treasury has noted that:

    From an economic point of view, scholarships and fellowships are either gifts not conditioned on the performance of services, or they are rebates of educational costs. Thus, under the baseline tax system of the reference law method, this exclusion is not a tax expenditure . . . . The exclusion, however, is considered a tax expenditure under the normal tax method, which includes gift-like transfers of Government funds in gross income (many scholarships are derived directly or indirectly from Government funding).

    See Tax Expenditures, supra note 207 at 13.

  223. See, e.g., Joseph M. Dodge, Scholarships Under the Income Tax, 46 Tax Law. 697, 698–99 (1993) (examining arguments for excluding scholarships from the tax base and for making them a tax preference); Charlotte Crane, Scholarships and the Federal Income Tax Base, 28 Harv. J. on Legis. 63, 113 (1991) (same).
  224. The exclusion in section 117 only covers scholarships paid for tuition and related expenses. Although some scholarship funds are conditioned on the performance of services like teaching or research, those funds are explicitly excluded from section 117 and are taxable. I.R.C. § 117(c)(1).
  225. The value of the educational benefit likely exceeds the cost of tuition because higher educational institutions receive substantial funding from other sources besides tuition, including government subsidies. See, e.g., Crane, supra note 222, at 71.
  226. See generally sources cited at note 222 (observing the difficulty of assessing educational value as justification for exempting academic scholarships from taxable income under the federal tax code).
  227. See supra note 221; see also Dodge, supra note 222, at 701–02.
  228. See Dodge, supra note 222, at 711.
  229. See Freedom Newspapers v. Commissioner, 36 T.C.M. (CCH) 1755, 1758–59 (1977).
  230. JCT Tax Expenditures, supra note 207, at 27–28.
  231. Because retrofit grants and similar payments must be applied towards the specified property improvements, they are better viewed as the provision of property, rather than as a receipt of cash by the taxpayer. There is precedent for this approach, although it is not the approach the IRS has taken specifically with retrofit grants. For example, in Bailey v. Commissioner, the taxpayer wasn’t taxed on an urban renewal grant for his property because the grant went directly to the general contractor, and the court found the taxpayer never had sufficient control over the funds to warrant taxation. See 88 T.C. 1293, 1301 (1987), acq., 1989-2 C.B. 1.

    Arguably, any time an individual receives an incentive-based nudge or BBS in the form of cash that must be spent on specified property or services, the taxability of such funds should be based on the ultimate purchase, rather than on the temporary receipt of cash.

  232. For example, if a taxpayer owns an asset that appreciates in value (e.g., a stock or a house), she has a positive change in net wealth. However, the Code will not tax her until she “realize[s]” a gain, such as by making a sale. See I.R.C. § 1001.
  233. For a discussion of the legislative history behind the section 132 fringe benefit rules, see infra notes 261–67 and accompanying text.
  234. See Scott Greenberg, Reexamining the Tax Exemption of Municipal Bond Interest, Tax Found. Fiscal Fact No. 520 (July 2016),‌docs/TaxFoundation_FF520.pdf []. (observing that state and local bonds are justified as a basis for incentivizing investments in projects that benefit nonresidents, but concluding that “[a] tax exclusion is an unideal policy design for subsidizing state and local debt”).
  235. In that case, 20% or $250 would be tax, and $1,000 would remain.
  236. If the federal government increases a federal subsidy from $1,000 to $1,250 to account for federal income tax, it will pay $250 more for the subsidy and collect $250 in tax.
  237. See, e.g., Christopher C. Fennell & Lee Ann Fennell, Fear and Greed in Tax Policy: A Qualitative Research Agenda, 13 Wash. U. J.L. & Pol’y 75, 79 (2003) (“A functional definition of . . . tax aversion . . . is the amount by which one’s aversion to a tax exceeds the economic cost of the tax.”); Edward J. McCaffery & Jonathan Baron, Thinking About Tax, 12 Psych., Pub. Pol’y & Law 106, 117 (2006); Abigail B. Sussman & Christopher Y. Olivola, Axe the Tax: Taxes Are Disliked More than Equivalent Costs, 68 J. Mktg. Rsch. S91, S91 (2011).
  238. See, e.g., Sussman & Olivola, supra note 236, at S93 (describing experiments that found people change their behavior to avoid taxes, but not reacting in a similar manner to comparable non-tax costs).
  239. McCaffery & Baron, supra note 236, at 117–18 (recounting an experiment the authors conducted where individuals were confronted with a policy labeled as a tax or comparable economic policy not labeled as a tax, which “found that labels mattered”); David J. Hardisty, Eric J. Johnson & Elke U. Weber, A Dirty Word or a Dirty World? Attribute Framing, Political Affiliation, and Query Theory, 21 Psych. Sci. 86, 91 (2010) (finding in an experiment that “framing the cost increase as a tax differentially affected the structure and content of thoughts generated by Democrats and Republicans, leading to different preferences”).
  240. Sussman & Oliviola, supra note 236, at S94–96, S100.
  241. Id. at S95.
  242. Id.
  243. Id.
  244. Id.
  245. Id. at S95–96.
  246. Id. at S94.
  247. One source of variation appears to be political affiliation. Studies show that Republicans and Independents are sensitive to “tax” labels in decision making, but Democrats generally are not. See id. at S96–97; Hardisty et al., supra note 238, at 91 (finding “that the power of a framing manipulation can depend on participants’ preexisting individual differences”).
  248. Of course, tax aversion will not deter participants who are unaware of the tax, which may be the case when there is no information reporting required. For incentives subject to information reporting (discussed more below), participants will likely have to provide tax information at the outset (e.g., a Form W-9), and are more likely to be aware of tax consequences. Other programs may disclose tax consequences on their website or in related materials, as is the case with California’s Earthquake Mitigation program. See infra note 272.
  249. See generally Kay Blaufus & Axel Möhlmann, Security Returns and Tax Aversion Bias: Behavioral Responses to Tax Labels, 15 J. Behav. Fin. 56, 63–65 (2014) (finding that people have tax aversion bias toward infrequent, unfamiliar financial decisions).
  250. See I.R.C. § 6041(a).
  251. I.R.S. Priv. Ltr. Rul. 201816004 (Apr. 20, 2018); I.R.S. Priv. Ltr. Rul. 201815005 (Apr. 13, 2018).
  252. Marianne Bertrand, Sendhil Mullainathan, & Eldar Shafir, Behavioral Economics and Marketing in Aid of Decision Making Among the Poor, 25 J. Pub. Pol’y & Mktg. 8, 16 (2006).
  253. Id.
  254. Saurabh Bhargava & Dayanand Manoli, Psychological Frictions and the Incomplete Take-Up of Social Benefits: Evidence from an IRS Field Experiment, 105 Am. Econ. Rev. 3489, 3490 (2015).
  255. Id. at 3524.
  256. Id. at 3492.
  257. See Kathleen DeLaney Thomas, User-Friendly Taxpaying, 92 Ind. L.J. 1509, 1512 (2017).
  258. Tax withholding is required on payments of employee compensation, but not for other payments. See I.R.C. § 3402(a).
  259. See, e.g., Thomas, supra note 94, at 84.
  260. See supra note 249 and accompanying text.
  261. Penalties are up to $270 per information return (up to $550 in the case of intentional disregard) and may be assessed separately for both failure to issue to the payee and failure to file with the IRS. For a summary of these penalties, see Increase in Information Return Penalties, IRS,‌increase-in-information-return-penalties [] (last visited July 17, 2019).
  262. Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, 499 (codified as amended in scattered sections of 26 U.S.C.).
  263. See Staff of J. Comm. on Tax’n, 98th Cong., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 840 (Comm. Print 1984).
  264. Id.
  265. Id. at 841.
  266. Id.
  267. Id.
  268. Id. at 843.
  269. Equally important, but beyond this Article’s scope, are potential federalism and comity concerns that may arise when the federal government seeks to tax state programs, to the extent the tax hinders the state’s ability to implement the program.
  270. See Earthquake Mitigation Incentive and Tax Parity Act of 2017, H.R. 1691, 115th Cong. (2017); Earthquake Mitigation Incentive and Tax Parity Act of 2017, S. 2104, 115th Cong. (2017).
  271. Id.
  272. Press Release, Senator Dianne Feinstein, Feinstein and Harris Introduce Legislation to Protect Earthquake Loss Mitigation Incentive Ahead of Senate GOP Tax Bill Release (Nov. 9, 2017),‌id=78BD9E69-4090-4E62-AE1A-08A01870F3AB [].
  273. The Brace + Bolt program mentions potential consequences in an FAQ on its website, stating, “The homeowner of a retrofit House under the Program will receive an IRS Form 1099, if applicable, reporting the amount of incentive payments as taxable income to the homeowner for federal income tax purposes.” See Earthquake Brace+Bolt FAQs, [] (last visited July 24, 2019).
  274. Although state tax credits are generally not taxable, to the extent they reduce a taxpayer’s state tax liability, the refundable portion (if any) of a state tax credit is taxable. See, e.g., Ginsburg v. United States, 922 F.3d 1320, 1322 (Fed. Cir. 2019) (holding that the refundable portion of a New York State tax credit was includible in income for federal income tax purposes).
  275. See supra notes 134–35 and accompanying text.
  276. I.R.C. § 85. However, prior to the enactment of section 85, the IRS treated unemployment payments as excludable. See Rev. Rul. 70-280, 1970-1 C.B. 13.
  277. Failing to tax unemployment compensation also favors such compensation over wages, which may distort decisions to work.
  278. See I.R.C. § 86. Previously, the IRS treated all Social Security benefits as exempt from tax. See Rev. Rul. 70-217, 1970-1 C.B. 13.
  279. See, e.g., Forman, supra note 204, at 795. But see Brian Galle, How to Save Unemployment Insurance, 50 Ariz. St. L.J. 1009, 1062–64 (2018) (arguing for repeal of taxes on unemployment benefits).
  280. Professor Charlotte Crane has observed that this appears to have been the IRS’s historical approach prior to the evolution of the general welfare doctrine. Crane, supra note 217, at 594.
  281. Examples include current exclusions for educational grants, veterans’ benefits, and worker’s compensation payments. See, e.g., I.R.C. § 104(a)(1) (worker’s comp), I.R.C. § 117 (scholarships), 38 U.S.C. § 5301 (veterans’ benefits). Similarly, Medicare benefits, which are not specifically excluded by statute but are treated as such by the IRS, would continue to be excluded. See Rev. Rul. 70-341, 1970-2 C.B. 31–32.
  282. See supra note 167.
  283. See supra notes 261–67 and accompanying text.
  284. See supra note 172.
  285. See Soled & Thomas, supra note 120, at 763–64, 776.
  286. Id. at 814–15.
  287. While section 132 contains a list of specific exclusions in the statute, section 132(o) does delegate authority to Treasury to implement the statute and numerous regulations exist, such as those clarifying what types of benefits qualify as de minimis fringes. See Treas. Reg. § 1.132-6 (as amended in 1992).
  288. Cf. Crane, supra note 217, at 612–13 (discussing the exclusion of transfer payments that do not create new value, regardless of source).
  289. Withholding could be set at a default rate (e.g., 5%), or taxpayers could fill out a form that would determine their withholding rate. These possibilities are discussed in Thomas, supra note 94, at 131–34.
  290. See id. at 111.
  291. Id. at 128.