Tax Relief for These Feds Dies Along With Senate Bill

How much money would it take to influence your actions or decisions as a government employee? Federal judges sometimes face this problem and wanted a tax break to avoid the problem.

Some employees of the federal government were hoping to get substantial tax relief as part of a bill that would have cut estate taxes and raised the minimum wage for American workers.

The bill was defeated in the Senate but may reappear again in the Fall. For most federal employees, whose salaries averaged about $71,000 in 2005, the tax break would not have any impact in any event.

Some federal judges say they have a big financial problem. The salary of federal judges ranges between $265,200 to $212,100. Clerking for a federal judge can lead to a lucrative position in big law firms and some former law clerks end up with higher salaries than the judges for whom they worked after leaving government employment.

But there is another problem for judges as well. According to the Wall Street Journal, some judges have an incentive to put their personal financial portfolio at the top of a crowded court calendar.

To avoid conflict of interest problems, a federal judge may have to choose between selling a stock or be disqualified to hear a case before the court. Some complex cases take years and appointing a new judge to learn about the case is time-consuming.

The proposed change to the tax bill would have allowed federal judges to sell their stock and avoid capital-gains taxes to avoid this conflict of interest problem. The capital gains tax is currently 15% of the gain. To take advantage of the tax break, the proceeds from the sale would have to be reinvested in government securities or mutual funds within 60 days.

This same provision already applies to some in the executive branch. The Journal reports that the recently appointed Treasury Secretary, Henry Paulson, Jr., sold stock with a value of hundreds of millions and avoided the capital gain tax hit. 15 percent of a profit of a few million dollars is obviously a lot of money and a big enough nest egg to influence the actions of most people.

Federal judges would like the same benefit. At the district court level, the problem is not as serious as a judge can recuse himself early in the case. The problem is more acute at the Supreme Court level as the nine members cannot be replaced to hear a specific case. The highest court also has numerous business-related cases come before it and some of the Supreme Court members are wealthy and have substantial tax holdings.

But, for now at least, the tax break is apparently off the table.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47