Under present tax law, the designation of an area as a "combat zone" confers tax benefits only to military personnel serving in the combat area. No comparable provision under present tax law provides tax relief for civilian or contract employees of the government. However, certain income tax exclusions exist for U.S. citizens who work overseas. 1974 and S. 1166 , the Federal Employee Combat Zone Tax Parity Act) and government contractors. This report provides information about the tax treatment of both the earned income of members of the Armed Forces serving in combat zones and the earned income of U.S. citizens abroad; a brief synopsis of the current legislative proposal to expand income tax incentives to federal civilian employees; and an analysis of the relevant policy issues. 878 to extend the combat zone exclusion benefits to DOD civilians working in a combat zone. Policy Arguments

Current legislation proposes extending the combat zone income tax exclusion to civilian DOD personnel, but other proposals have been made in the past that would also extend the exclusion to civilian contractors. In the case of extending an exclusion to federal civilian employees or civilian contract employees serving in a combat zone, the primary issues revolve around the purpose of the extension, which has not been stated by proponents. The purpose could be to provide additional compensation for certain individuals serving in combat and thus facilitate recruitment for such work. Alternatively, the purpose could be one of equity, to make civilian employee benefits equal to those of the armed forces. Efficiency: Additional Compensation to Individuals Serving in Combat

If the intent of the exclusion is to provide additional compensation to individuals serving in combat, then a question of efficiency arises as to whether a tax subsidy is more appropriate than a direct payment. Equity: Among Individuals Serving in Combat

If the intent of extending the combat zone exclusion to civilians is to make civilian benefits equal to those of the Armed Forces, then the distinctions between military service and civilian employment become important in the analysis of the policy. In that context, it has been observed that military personnel cannot resign when facing danger; they cannot refuse assignment; they are considered to be on duty 24 hours a day, every day; and they may be required to work until the job is done with no specific relationship to compensation. Whereas military personnel must perform those duties, civilian employees may or may not, depending on for whom they work, or the contracts they have negotiated, and those contracts could include monetary and other incentives for working in combat zones not available to military personnel.
Legislative proposals have been made to extend the combat zone income tax exclusion to civilian employees who are on active service in a combat zone. Under present tax law, the designation of an area as a "combat zone" confers tax benefits only to military personnel serving in the combat area. No comparable provision under present tax law provides tax relief for civilian or contract employees serving in combat. However, certain income tax exclusions exist for U.S. citizens who work overseas. As an example, the proposed combat zone exclusions in the Federal Employee Combat Zone Tax Parity Act (H.R. 1974 and S. 1166) would grant added tax relief to federal civilians who are not eligible for existing exclusions.
In the case of extending an exclusion to federal civilian employees or civilian contract employees serving in a "combat-type" zone, the primary issues revolve around the purpose of the extension, which has not been stated by proponents. The purpose could be to provide additional compensation for certain individuals serving in combat and thus facilitate recruitment for such work. Alternatively, the purpose could be one of equity, to make civilian employee benefits equal to those of the Armed Forces.
If the purpose of the extension is to provide additional compensation to individuals serving in combat, than a question of efficiency arises as to whether a tax subsidy is more appropriate than a direct payment. Direct spending programs are often more successful at fulfilling policy objectives than indirect subsidies made through the tax system.
If the purpose of extending the combat zone exclusion to civilians is to make civilian benefits equal to those of the Armed Forces, then the distinctions between military service and civilian employment become important in the analysis of the policy. In that context, it has been observed that military personnel cannot resign when facing danger; they cannot refuse assignment; they are considered to be on duty 24 hours a day, every day; and they may be required to work until the job is done with no specific relationship to compensation. Whereas military personnel must perform those duties, civilian employees may or may not, depending on for whom they work or the contracts they have negotiated, and those contracts could include monetary and other incentives for working in combat zones not available to military personnel. Also, there are distinctions between civilian DOD employees and civilian contractors that complicate the issue of equalization.
This report provides information about the tax treatment of both the earned income of members of the Armed Forces serving in combat zones and the earned income of U.S. citizens working overseas. A brief discussion of the possible expansion of income tax exclusion to government civilian employees in a combat zone and an analysis of the relevant policy issues is also included.
This report will be updated as warranted by legislative events.