History of the Combat Zone Tax Exclusion

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History of the Combat Zone Tax Exclusion

B. R. Gould / S. A. Horowitz

Exclusion of military pay from federal income taxes has been a long- standing element of U.S. policy on war finance, combat compensation, and revenue collection in combat zones. This paper describes its evolution over time. The Combat Zone Tax Exclusion (CZTE) was originally established to alleviate the burden of war finance from those who fought in the nation's conflicts. During World War (WW)II, combat tax benefits were separated from war finance policy and became an entrenched component of combat compensation. Over time, administrative inefficiency and changes to the tax code have further eroded the tax exclusion's traditional purpose, while generating an unintended inequitable distribution of benefits. At present, the CZTE neither serves its original purpose of exempting service members from the burden of war finance nor its later historical role of selectively rewarding those who face a high level of combat risk.