NYU Tax Policy Colloquium, week 6: Katherine Pratt's "The Curious State of Tax Deductions for Fertility Treatment Costs"

As we reached the 42.9 percent point (6 weeks out of 14 now in the books), it was nice to have an abrupt topic shift - one of the things I like best about the colloquium - in this case, from international tax the prior two weeks, to Katherine Pratt's The Curious State of Tax Deductions for Fertility Costs.

Narrowly speaking, this paper responds to a phenomenon we will surely be growing increasingly familiar with in coming years: a pompous, confused, biased, ignorant, and gratingly self-satisfied opinion by a Trump judge, although this individual may have higher than average judicial qualifications among the lot. The opinion at issue is Morrissey v. United States, in which an Eleventh Circuit judge purported to offer a "primer on the science of human reproduction," sharing with lucky readers such insights as: "It is a biological fact that, unlike some lower organisms ... human beings reproduce sexually .... Critically here, within the human reproductive process, the male and female bodies have different roles and purposes."

The judge's motive for so generously sharing these insights with us is that "the circumstances of the case - and the parties' competing contentions" made it seem necessary to him. More specifically, he viewed the plaintiff's contention that an unmarried gay man could claim medical deductions for assisted reproductive technology (ART) expenses (such as for egg donation and fertilized egg surrogacy) as contrary to nature, at least when backed up by (of course) statutory "plain meaning."

Needless to say, the plain meaning is not so clear as our judge-lecturer thinks. Under Code section 213(d)(1), medical expenses include "amounts paid .. for the purpose of affecting any structure or function of the body." I would think it clearly affects a "function of the body" for the taxpayer's sperm to be successfully inseminated in a fertile egg that may may eventually grow into a child who is biologically his. Isn't it a "function" of the male body, in producing sperm, to make possible one's having biological children? That end result is certainly the evolutionarily selected function served by the male production of sperm (if we want to talk Nature).

This is not to say that "plain meaning" resolves the case in the taxpayer's favor. Rather, it shows that other interpretive methods are needed. For example, the fact that the taxpayer would not have needed to incur ART expenses in order to have a biological child, had he been heterosexual and with a fertile female partner - a point of central importance to the judge - clearly is relevant to the analysis. But now we are engaged in a more complex statutory interpretation exercise than he seems to realize is necessary, and one as to which his tediously trying-to-seem-bemused lectures about Nature are unilluminating. The judge's evident belief that section 213 shouldn't be available when people don't seek to produce children in what he thinks is the natural way - and, admittedly, thereby incur costs that could have been avoided had they used his preferred method - involves statutory interpretation via purposive analysis. That's fair enough, methodologically speaking, but it isn't "plain meaning."

Anyway, one reason Pratt wrote the article, in the aftermath of Morrissey, is that the 11th Circuit opinion carelessly (to put the best face on it) misstates actual IRS practice, insofar as one can glean it from limited evidence, with respect to different types of ART-related expenses incurred by differently situated taxpayers. So a bit of clean-up crew was needed in this area, on which she's been writing for a while, in addition to her wanting to address a set of very interesting issues around the tax and other treatment of ART expenses. With that said, let's turn to a few of those issues.

1) Infertility and dysfertility - Even after Morrissey, there are strong grounds supporting the conclusion that section 213 medical deductions are allowable for certain ART expenses, at least in the following scenario. Say that a heterosexual married couple establishes that one of them is infertile, and they therefore pay $$ for fertility treatments of the infertile party. That appears to be deductible. There is also an IRS letter ruling (admittedly, not constituting precedent) allowing various expenses incurred in connection with egg donation to be deducted under section 213 by a woman who was unable to conceive a child using her own eggs.

Morrissey does not contradict allowing ART deductions with respect to the taxpayer's own infertility (or that of "his spouse," as section 213 puts it). But the taxpayer's argument, which the court rejected, would add dysfertility to infertility as grounds for ART deductibility. As per Pratt's paper, dysfertility "refers to individuals who cannot bear children because they are single or in a same sex relationship."

Let's switch from statutory interpretation to policy - since, whether Morrissey is right or wrong as to the former, rejecting it as to the latter would call for legal change. I would argue that there is a compelling case for mandatory government-provided insurance coverage for ART for dysfertility, as well as infertility.

This obviously starts from mid-conversation, so far as government-provided health insurance coverage is concerned. I state it as generally as that to extend the sphere past income tax deductions for medical expenses to the realm of Medicare, Medicaid, single-payer, the mandated scope of universal health insurance coverage, etcetera.

I'd put the starting point for the argument as follows. From behind the veil regarding one's own particular identity within our society, one should recognize that it's very common to have a very strong desire for a biological child, or as close to it as possible, as a joint project with one's partner . One should further recognize that, again from behind the veil, one doesn't know whether one will be one of the people for whom this turns out to be relatively easy - i.e., a fertile heterosexual individual with a fertile heterosexual partner. From this perspective, both infertility and dysfertility are risks - partly converted by modern technology into financial risks, insofar as one can pay a lot of money for workarounds that did not always exist - against which it is rational to want to insure.

But why mandatory government insurance? This requires a market failure that the government can address better than private insurance firms. The most obviously relevant one here is adverse selection - widely recognized now as a key reason for favoring government provision in the healthcare arena, whether it be via the current ramshackle U.S. methods, single payer, or something else. It's very plausible that the government's superior ability to address adverse selection with respect to dysfertility - the risk of which gets affected by knowing one's own sexual orientation and partner preferences - creates a strong enough case to support the intervention.

The other classic issue in government vs. private insurance analyses is moral hazard. Here there is a difference as well. From the perspective of a private insurer, moral hazard is at work if people use ART coverage to do things that they wouldn't have done if forced to bear the full freight financially. But for the government this is not so clear. To a benign government, it's not just financial "waste" if motivated prospective parents get to have children with a particular desired relationship to themselves. (Yes, the fate of children in need of adoption is also part of the larger policy picture, but it's not clear that shutting off other routes to raising a child is part of the optimal response to that.)

2) Beyond dysfertility? - What about ART expenses incurred, say, by heterosexual couples that are neither infertile nor dysfertile? An administrative advantage of not requiring infertility or dysfertility is that one need not demand an inquiry into either when people incurred ART expenses. But this admittedly would come at a fiscal cost that would raise issues of moral hazard, insofar as one thinks these expenses might have been incurred out of a preference for neither going through pregnancy (even when feasible) nor adopting. But I'd be inclined to say the expenses should be covered even without either infertility or dysfertility. Going through pregnancy is a pretty huge thing, with significant potential health costs, impact on one's career and long-term earnings, etc. But I am leaving aside here questions of whether we are uneasy (e.g., for Handmaid's Tale-type reasons) about the extent to which surrogacy becomes a go-to. These are certainly beyond the scope of my expertise.

3) Why run ART expenses through section 213? - As a long literature discusses, income tax deductions for medical expenses are a bizarre way to increase overall government health insurance coverage, relative to what it would be if one simply repealed the provision without changing anything else in the legal and policy landscape. Medical deductions come with an adjusted gross-income related deductible, followed by a marginal tax rate-related co-pay, without its being obvious why this form of government insurance is being interacted with the income tax's general provision of ability insurance / under-diversified human capital insurance.

Even taking the use of section 213 as given, I suppose one might want to treat ART and adoption expenses in the same bucket, although to really do this right one might also want to throw in the marginal healthcare expenses that result from being pregnant, if these could be separately identified. And conceivably one would treat things in this bucket differently than other stuff, just as a well-designed health insurance schemes might vary the deductible, the co-pay, the cap if any on covered outlays, etc., based on the characteristics of particular areas.

4) The paper's proposed solution - Rather than discussing statutory changes that might directly address ART expenses, the paper proposes modifying section 213 in more general terms, so that it focuses on "inherently medical services" and on allowing taxpayers to "restore or approximate typical human functioning." This raises further interesting issues, although I won't explore them here, regarding, for example, the technology-driven rise of "inherently medical" procedures that might allow people to go way above the median (a la the use of human growth hormone by someone of average height who wants to become 6'5").