Domestic Human Trafficking Legislation in the 113th Congress

Summary: Legislation aimed at preventing trafficking in persons (TIP) is unambiguously part of the legislative agenda of the 113th Congress. TIP is believed to be one of the most prolific areas of contemporary criminal activity and is of significant interest to the United States as a serious human rights concern. TIP is both an international and domestic crime that involves violations of labor, public health, and human rights standards, as well as criminal law. The Trafficking Victims Protection Act (TVPA) is the primary law that addresses human trafficking. Domestically, anti-TIP efforts provided under the TVPA include protection for victims, the investigation and prosecution of trafficking offenses, and education of the public. Congress reauthorized the TVPA in March 2013 (Trafficking Victims Protection Reauthorization Act; Title XII of P.L. 113-4). While this report covers P.L. 113-4, a more complete treatment of that bill can be found in CRS Report RL34317, Trafficking in Persons: U.S. Policy and Issues for Congress. This report discusses TIP issues that have received legislative action or are of significant congressional interest in the 113th Congress.

Summary: The House and Senate have acted on other TIP-related bills in the 113th Congress. Since human trafficking issues intersect with many different policy areas (e.g., immigration, child welfare, the criminal justice system, missing and exploited youth), legislation to address human trafficking is varied. For example, the Fraudulent Overseas Recruitment and Trafficking Elimination Act (H.R. 3344) and Title III subsection F of the Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744), as passed by the Senate, would make changes to immigration policy altering how foreign labor contractors operate to help prevent trafficking of noncitizen workers. The Preventing Sex Trafficking and Improving Opportunities for Youth in Foster Care Act (H.R. 4058), as passed by the House, and the Supporting At-Risk Children Act (S. 1870), as reported by Senate Finance, would address trafficking prevention through the child welfare system. In addition to other provisions, the bills would require state child welfare agencies to develop and implement policies to identify, screen, and determine appropriate state actions and services for children believed to be victims of sex trafficking or at risk of being victims.

Summary: The Stop Exploitation Through Trafficking Act (H.R. 3610/S. 1733) and the SAVE (Stop Advertising Victims of Exploitation) Act of 2014 (H.R. 4225) would amend criminal justice policy in an attempt to obstruct human trafficking. H.R. 3610, as passed by the House, and S. 1733 would incentivize states to enact safe harbor legislation—legislation providing that children who were found in prostitution would be treated as victims rather than perpetrators—and increase restitution amounts for victims. H.R. 4225, as passed by the House, would additionally provide penalties for knowingly advertising or knowingly selling advertising that offers certain commercial sex acts. Other bills adopt a multi-prong approach to anti-TIP efforts. The Justice for Victims of Trafficking Act of 2013 (H.R. 3530, as passed by the House, and S. 1738) would create new grant programs for law enforcement and victims services, and would amend the criminal code (Title 18 of the U.S. Code) to create new crimes and enhance criminal penalties for certain trafficking-related activities. The International Megan's Law (H.R. 4573), as passed by the House, would create a new center in DHS that would be responsible for possibly notifying the destination country of international travel by child-sex offenders.

Summary: The report accompanies CRS Report RL34317, Trafficking in Persons: U.S. Policy and Issues for Congress, by [author name scrubbed] and Liana Rosen and CRS Report R41878, Sex Trafficking of Children in the United States: Overview and Issues for Congress, by [author name scrubbed], [author name scrubbed], and [author name scrubbed].

The 113 th Congress has made fighting trafficking in persons (TIP) within the United States a legislative priority. TIP is believed to be one of the most prolific areas of contemporary criminal activity and is of significant interest to the United States as a serious human rights concern. TIP is both an international and domestic crime that involves violations of labor, public health, and human rights standards, as well as criminal law.

The United States is a source, transit, and destination country for men, women, and children subject to trafficking in persons. In the United States, human trafficking occurs in every state, and it victimizes both U.S. citizens and noncitizens. As many as 17,500 people are believed to be trafficked into the United States each year, and some have estimated that 100,000 U.S. citizen (USC) children are victims of trafficking within the United States. The trafficking of individuals within U.S. borders is commonly referred to as domestic or "internal" human trafficking. Domestic human trafficking occurs primarily for labor and most commonly in domestic service, agriculture, manufacturing, janitorial services, hotel services, construction, health and elder care, hair and nail salons, and strip club dancing. However, more investigations and prosecutions have taken place for sex trafficking offenses than for labor trafficking offenses.

Noncitizens are more susceptible than U.S. citizens to labor trafficking, and more foreign victims are found in labor trafficking than in sex trafficking. Although labor trafficking can happen to U.S. citizens, significantly more U.S. citizens are found in sex trafficking than in labor trafficking. Research indicates that most of the victims of sex trafficking into and within the United States are women and children. In addition, migrant labor camps tend to be common settings for labor exploitation and domestic trafficking. Domestically, anti-TIP efforts include protection for victims, education of the public, and the investigation and prosecution of trafficking offenses. The Departments of Justice (DOJ), Health and Human Services (HHS), and Labor (DOL) have programs or administer grants to other entities to provide assistance specific to the needs of trafficking victims. This assistance includes temporary housing, independent living skills, cultural orientation, transportation, job training, mental health counseling, and legal assistance. Both HHS and the Department of Homeland Security (DHS) administer public awareness campaigns on recognizing human trafficking victims. In addition, at the federal level, the majority of the cases are investigated by agents in DOJ's Federal Bureau of Investigation (FBI) and DHS's U.S. Immigration and Customs Enforcement (ICE), who coordinate as appropriate; the cases are prosecuted by DOJ.

For more than a decade, Congress has been actively engaged in anti-human-trafficking efforts within the United States. Through the Trafficking Victims Protection Act of 2000 (TVPA, Division A of P.L. 106-386 ) and its four reauthorizations (TVPRAs), Congress has aimed to eliminate human trafficking within the United States by creating domestic grant programs for both victims and law enforcement, creating new criminal laws, and conducting oversight on the effectiveness and implications of U.S. anti-TIP policy. Most recently, in March 2013, the TVPA's grant programs were reauthorized through FY2017 in the Violence Against Women Reauthorization Act of 2013 (Title XII, P.L. 113-4 ).

This report discusses domestic human-trafficking-related issues that have received legislative action or are of significant congressional interest in the 113 th Congress. The most recent reauthorization of the TVPA is not reviewed in detail in this report. This report accompanies CRS Report RL34317, Trafficking in Persons: U.S. Policy and Issues for Congress , by [author name scrubbed] and Liana Rosen and CRS Report R41878, Sex Trafficking of Children in the United States: Overview and Issues for Congress , by [author name scrubbed], [author name scrubbed], and [author name scrubbed].

Federal statutes do not formally define human trafficking or trafficking in persons. Instead, the TVPA defines "severe forms of trafficking in persons" to mean,

sex trafficking in which a commercial sex act is induced by force, fraud, or coercion, or in which the person induced to perform such act has not attained 18 years of age; or the recruitment, harboring, transportation, provision, or obtaining of a person for labor or services, through the use of force, fraud, or coercion for the purpose of subjection to involuntary servitude, peonage, debt bondage, or slavery.

There appears to be a consensus that prostitution by minors fits the definition of "severe forms of human trafficking" as defined under the TVPA.

Select Anti-Trafficking Legislation in the 113th Congress

This report examines the trafficking-related provisions in legislation that has at least been reported out of committee in the 113 th Congress. Where applicable, it discusses companion legislation that may not have been considered in committee or other legislation that has received significant Congressional interest. The legislation includes the following:

The Trafficking Victims Protection Reauthorization Act of 2013 (Title XII of P.L. 113-4 ) enacted on March 7, 2013. This act was part of the larger The Violence Against Women Reauthorization Act of 2013. The E. Clay Shaw, Jr. Missing Children's Assistance Reauthorization Act ( P.L. 113-38 ), enacted on September 30, 2013. The Fraudulent Overseas Recruitment and Trafficking Elimination Act ( H.R. 3344 ). The Justice for Victims of Trafficking Act of 2013 ( H.R. 3530 ), passed by the House on May 20, 2014. The companion legislation ( S. 1738 ) has not been taken up in committee. The Stop Exploitation Through Trafficking Act of 2013 ( H.R. 3610 ), as passed by the House on May 20, 2014. The companion legislation ( S. 1733 ) has not been taken up in committee. The Preventing Sex Trafficking and Improving Opportunities for Youth in Foster Care Act ( H.R. 4058 ), as passed by the House on May 20, 2014. The SAVE Act of 2014 ( H.R. 4225 ), as passed by the House on May 20, 2014. International Megan's Law to Prevent Demand for Child Sex Trafficking ( H.R. 4573 ), as passed by the House on May 20, 2014. The Border Security, Economic Opportunity, and Immigration Modernization Act ( S. 744 ), as passed by the Senate on June 27, 2013. The Supporting At-Risk Children Act ( S. 1870 ), as ordered reported by the Senate Finance Committee on December 12, 2013.

The following sections lay out issues raised in the bills. The issues are grouped under the following themes: (1) restoring victims through services and benefits, (2) unaccompanied minor trafficking victims, (3) protection of foreign national workers, (4) criminal justice, (5) improving data, (6) domestic sex trafficking of children, and (7) other issues that include inter-agency coordination and sex offender registry and notification.

Restoring Victims: Services and Benefits

In general, the trafficking business feeds on continuing demand and conditions of vulnerability, such as youth, gender, poverty, and social exclusion. Actors engaged in human trafficking range from amateur family-run organizations to sophisticated transnational organized crime syndicates. Trafficking victims are often subjected to mental and physical abuse in order to control them. Abuses may include debt bondage, social isolation, removal of identification cards and travel documents, violence, and fear of reprisals against them or their families.

A major aspect of U.S. anti-trafficking efforts is victim assistance: providing immediate services when victims are identified and helping the victims recover from the victimization and reclaim their lives. Pending legislation ( H.R. 3610 / S. 1733 and H.R. 3530 / S. 1738 ) seeks to improve victim services and provide greater access to resources for victims.

One issue surrounding U.S. policy to combat human trafficking involves whether the United States provides equal treatment of all victims—foreign nationals and U.S. citizens, as well as victims of labor trafficking and sex trafficking. Related to this is whether current services are adequate to combat sex trafficking of minors in the United States (i.e., the prostitution of children). There is confusion over whether U.S. citizens, as well as noncitizens, are eligible for services under all the anti-trafficking grant programs authorized by the TVPA and whether Congress has provided funding for programs that target U.S. citizen and lawful permanent resident (LPR) victims. Under the TVPA, the Departments of Justice (DOJ), Health and Human Services (HHS), and Labor (DOL) have programs or administer grants to other entities to provide services to trafficking victims. Only the DOJ and HHS programs receive specified funding for trafficking victims services.

A related issue is the overall amount of funding for victims services; especially as the focus on sex trafficking is broadening to include minor sex trafficking victims in the United States who are U.S. citizens. Between FY2002 and FY2013, Congress appropriated approximately $20 million each year for victim services, and the amount was increased to approximately $28 million in FY2014. Between FY2009 and FY2013, HHS used all of its appropriated money on services for trafficking victims before the end of the fiscal year—and all of the services were provided to noncitizen victims. Notably, the most recent Department of State's Trafficking in Persons Report (FY2012) recommends increasing funding for relevant agencies to provide victims services. In addition, there is no targeted federal funding to support state child welfare agencies' anti-trafficking efforts. Non-governmental organizations (NGOs) report a critical need for an increase in the overall funding for comprehensive services.

Recently, Congress has amended certain grant programs so that sex trafficking victims would be eligible for those programs. For example, the 2013 reauthorization of the Violence Against Women Act ( P.L. 113-4 ) clarifies that victims' services and legal assistance under VAWA include services and assistance to victims of domestic violence, dating violence, sexual assault, or stalking who are also victims of severe forms of trafficking in persons . In addition, P.L. 113-4 amended the purpose for grants to tribal governments to combat violence against women to include sex trafficking and creates a new purpose to provide services to address the needs of youth who are victims of several crimes including sex trafficking. The act also created a new tribal coalition grant program, administered by DOJ, which, among other purposes, seeks to enhance access to essential services for Indian women victimized by domestic and sexual violence, including sex trafficking; and to assist Indian tribes in developing and promoting state, local, and tribal law and policies that enhance best practices for responding to violent crimes against Indian women, including sex trafficking. P.L. 113-4 also amended the grant program for state and local law enforcement's anti-trafficking programs focusing on U.S. citizen victims, so these grants can be used for anti-trafficking programs for noncitizen victims as well.

In the same vein, pending legislation in the 113 th Congress would create new programs to enhance services to trafficking victims. The Stop Exploitation Through Trafficking Act of 2013 ( H.R. 3610 and S. 1733 ) would require, beginning in FY2017, that the Secretary of HHS make grants for a national communication system to help victims of severe forms of trafficking communicate with service providers.

The Justice for Victims of Trafficking Act of 2013 ( H.R. 3530 / S. 1738 ) would authorize the Attorney General to make grants to an eligible entity to develop, improve, or expand domestic child human trafficking deterrence programs designed to aid victims while investigating and prosecuting the trafficking offenses. An eligible entity is a state or unit of local government that meets specified criteria. The grants could be used to establish or enhance specialized training programs on the prevention of child trafficking for law enforcement, first responders, health care officials, child welfare officials, juvenile justice personnel, prosecutors, and judicial personnel; establish law enforcement and prosecution units dedicated to fighting trafficking of children; and establish or enhance court programs to assist child trafficking victims.

As discussed, the Department of State's TIP report recommends increasing funding for relevant agencies to provide victims services. S. 1738 would require courts to impose a $5,000 assessment on any person or entity convicted of certain criminal offenses, including trafficking, sexual abuse and exploitation of children, transportation of children for illegal sexual activity, and alien smuggling. The assessment would be paid after the person paid all court-ordered fines and orders of restitution arising from the criminal conviction on which the assessment was based. S. 1738 would put these assessments into a new "Domestic Trafficking Fund" at the federal treasury. The Attorney General and Secretary of HHS would be directed to use the new fund to award grants or enhance victims programs under the TVPA and its reauthorizations.

Alternatively, H.R. 3530 would steadily increase the cap on the existing Crime Victims Fund (CVF) over several years. The CVF, which collects a wide range of fees and assessments tied to federal crimes, was established in the mid-1980s to provide funding for state victim compensation and assistance programs. The CVF is administered by DOJ, and Congress establishes an annual obligation cap as part of the appropriations process.

Under the TVPA, noncitizen victims of trafficking are certified as victims by HHS and this makes them eligible for services. U.S. citizen and LPR trafficking victims are not required to be certified by HHS, and indeed would not meet the criteria to be certified because certification applies only to foreign nationals who need an immigration status (e.g., T status or continued presence) to remain in the United States. Thus, an issue that has arisen is whether U.S. citizen and LPR victims are eligible for certain victims services (e.g., those funded by HHS and DOL) since they do not need to undergo certification.

S. 1738 would amend the TVPA to create a process by which the Secretary of HHS would determine that a U.S. citizen or LPR is a victim of severe forms of trafficking. This amendment would be made to the current TVPA section requiring that the Secretary of HHS and the Attorney General establish a program to assist U.S. citizen and LPR victims of severe forms of trafficking.

Job Corps is an employment and job training program for 16-to-24 year olds that is administered by the Department of Labor. H.R. 3610 / S. 1733 would amend the Workforce Investment Act of 1998 to specify that victims of a severe form of trafficking (as defined in the TVPA) do not need to meet the income requirement to be eligible for the Job Corps program.

Victims of human trafficking often suffer injuries that can affect them for the rest of their lives. Medical care, psychological treatment, job training, and more may be necessary to assist victims in recovering. Current law allows a victim of peonage, slavery, or trafficking in persons to bring a civil action against his/her perpetrator and obtain civil remedies. S. 1733 would, among other things, triple the amount that such a victim would be eligible to recover. H.R. 3610 and S. 1733 would also require the Attorney General to collect and tabulate data on mandatory restitution orders (the TVPA requires the court to order restitution—paid by the defendant to the victim—for any crime of peonage, slavery, or trafficking in persons). Also with respect to restitution for trafficking victims, S. 1738 would, among other things, increase restitution for human trafficking victims.

Unaccompanied Minor Trafficking Victims42

Congress has expressed concern that unaccompanied minors attempting to enter into the United States may be victims of trafficking or may be at heightened risk of becoming trafficking victims. Unaccompanied minors are aliens who are in the United States without a parent or guardian. The 2013 TVPA reauthorization ( P.L. 113-4 ) contains provisions related to the custody and care of unaccompanied minor trafficking victims. P.L. 113-4 requires that the DHS Secretary create a pilot program to provide independent child advocates at immigration detention sites for child trafficking victims and other vulnerable unaccompanied alien children. In addition, P.L. 113-4 specifies that children in the custody of HHS who receive U status (for crime victims) are eligible for programs and services to the same extent as refugees, and the federal government will reimburse states for foster care provided to these children.

Beyond these newly enacted protections, S. 744 contains additional provisions that seek to protect unaccompanied alien children from becoming victims of human trafficking. The bill would transfer, from HHS to DOJ, the responsibility for ensuring, to the greatest extent possible, that unaccompanied alien children in DHS custody have counsel to represent them and access to child advocates. It would require that the Secretary of DHS, in consultation with child welfare experts, create mandatory training for DHS Customs and Border Protection (CBP) personnel and other personnel who come in contact with unaccompanied alien children. In addition, the bill would direct HHS to hire child welfare professionals to provide assistance in no fewer than seven of the CBP offices or stations with the largest number of unaccompanied minors. Such professionals would be required to have trauma-centered and developmentally appropriate interviewing expertise and, among other duties, would be responsible for screening unaccompanied alien children to ensure that they are not trafficking victims, among other items.

Some Members of Congress have argued that migrant workers and other foreign workers are especially vulnerable to exploitation at the hands of foreign labor contractors, smugglers, and human traffickers. Contractors often play a critical role in the labor migration process by matching willing workers with willing employers. Yet because many prospective migrants depend on such "middle men" to help them enter the United States (legally or otherwise) and to connect them with employers, contractors may take advantage of migrant workers to extract unfair payments or other such concessions.

Current law has outlined some protections for foreign workers. The 2013 TVPA reauthorization ( P.L. 113-4 ), requires that a video be shown in consular waiting rooms to provide information on the rights and responsibilities of employees under U.S. immigration, labor, and employment law. Further, P.L. 113-4 made it a criminal offense to knowingly destroy, or for a period of more than 48 hours, conceal, remove, confiscate, or possess another person's passport, or immigration or personal identification documents in the course of committing or attempting to commit the offense of fraud in foreign labor contracting, alien smuggling, or in order to unlawfully maintain, prevent, or restrict the labor or services of the individual.

S. 744 , as passed by the Senate, and H.R. 3344 would establish new requirements to regulate foreign labor contractors and to combat human trafficking. The bill would require foreign labor contractors to provide workers with written information (in English and the worker's native language) about the terms and conditions of employment, including information about the worker's visa, among other items. Employers and contractors would be prohibited from discriminating against workers on the basis of race, sex, national origin, religion, age, disability, or other similar factors; and could not charge workers a fee for contracting activity.

To facilitate enforcement of these provisions, contractors would be required to register with the Department of Labor (DOL) every two years, to provide annual reports on their activities, and to post a bond ensuring their ability to fulfill their responsibilities. The Secretary of Labor would maintain a list of registered contractors, and the Secretary of State would provide relevant information to certain nonimmigrant visa applicants. DOL would establish procedures to investigate complaints and impose civil fines against noncompliant contractors or employers; and individuals also could sue contractors for civil damages. Employers would be required to use registered contractors.

While the United States has a number of statutes that can and have been used to combat human trafficking, law enforcement and policy makers have been interested in ways to enhance investigations and prosecutions of individuals who commit trafficking offenses. In general, federal law enforcement has targeted criminal networks that may involve individuals operating in a number of capacities.

In an effort to help law enforcement combat the advertising side of commercial sexual exploitation, H.R. 4225 aims to permit the prosecution of entities (including websites) that "knowingly" advertise a person, knowing, or in reckless disregard of the fact, that force or fraud has been used to cause the person to engage in a commercial sex act or that the victim is a minor. For entities that have not advertised, but "benefit" from participating in a venture which has engaged in such advertising, reckless disregard of the fact that force or fraud has been used or that a minor was involved would not be enough; they would have to know either fact exists. In addition, in order to enhance law enforcement targeting of criminal enterprises engaged in human trafficking, S. 1738 would, among other things, set forth provisions prohibiting "aggravated human trafficking racketeering." S. 1738 would also expand state and local prosecutors' ability to obtain wiretap orders from state courts for certain investigations by including human trafficking, child sexual exploitation, and child pornography production as allowable investigations. In addition to expanding law enforcement's "toolbox" for investigating sex trafficking, S. 1738 would enhance penalties for certain crimes involving human trafficking, child exploitation, and repeat sex offenders. The bills would also revise the statutes related to travel for purposes of engaging in illicit sexual conduct. Such provisions are intended to help law enforcement combat sex tourism.

Experts widely agree that any efforts to reduce the prevalence of trafficking should address not only the supply, but also the demand . While statutes exist to allow federal law enforcement to prosecute the buyers of commercial sex, federal legislation has focused more extensively on penalizing the traffickers and has placed less emphasis on the buyers. To increase focus on combating the demand for sex trafficking, H.R. 3530 and S. 1738 would, among other things, prohibit the patronizing or soliciting of commercial sex (or benefiting from these activities). These bills would also require the Attorney General to ensure that working groups and task forces within the Innocence Lost National Initiative work to enhance state and local law enforcement investigative capabilities to detect, investigate, and prosecute individuals who patronize or solicit children for sex. The Innocence Lost National Initiative is a partnership between the FBI, DOJ's Child Exploitation and Obscenity Section and the National Center for Missing and Exploited Children (NCMEC), that develops task forces and working groups to recover children who are prostituted and prosecutes perpetrators of child sex trafficking.

Due to the nature of human trafficking, it is difficult to estimate the number of trafficking victims in the United States. Despite mandates in the TVPA, data on trafficking crimes or number of victims is not uniformly collected by federal, state, and local law enforcement agencies. In 2012, the FBI began developing software to capture all human trafficking cases and to ensure uniform reporting at the federal and state levels.

S. 744 , as passed by the Senate, would create new reporting requirements for human trafficking offenses in the FBI's Uniform Crime Reports, and would make human trafficking a Part I crime for purposes of calculating funding under the Edward Byrne Memorial Justice Assistance Grant Program.

Domestic sex trafficking of children is trafficking within the United States involving a commercial sex act in which the person induced to perform such act has not attained 18 years of age. Regardless of whether a child is believed to have consented to sex or whether the child represents himself/herself as an adult, the child is considered a trafficking victim under federal law. The exact number of child victims of sex trafficking in the United States is unknown because of challenges in defining the population and varying methodologies used to arrive at estimates. Most of the victims are U.S. citizens and LPRs.

Commercial sexual exploitation of children appears to be fueled by a variety of individual (e.g., homelessness or history of child abuse), relationship (e.g., family conflict or dysfunction), community (e.g., peer pressure or gang involvement), and societal (e.g., sexualization of children) variables. These factors may interact in ways that can increase the risk of exploitation. As part of its 2013 report on child sex trafficking, the National Academy of Sciences recommended that multiple stakeholders—such as the federal government, state and local governments, academic and research institutions, foundations and nongovernmental organizations, and the commercial sector—collaborate to address this issue.

The 113 th Congress has taken up legislation to address sex trafficking of children. The legislation touches on a variety of policy areas (e.g., the child welfare system, juvenile justice, runaway and homeless youth). Congress passed H.R. 3092 (enacted as P.L. 113-38 ), which requires the federal Missing and Exploited Children's program to provide assistance to law enforcement on child sex trafficking. Other legislation ( H.R. 3530 and S. 1738 ) would direct funds to provide support to child victims of pornography and human trafficking, and require reporting of children missing from foster care. In addition, two bills under consideration ( S. 1870 and H.R. 4058 ) would require state child welfare agencies and HHS to respond to sex trafficking of children, including those who may or may not be in foster care. Further, another bill ( S. 1733 and its companion, H.R. 3610 ) would, in different ways, incentivize states to enact "safe harbor laws" that would discourage charging minors for prostitution or sex trafficking offenses, and encourage the diversion of these minors to child protective services.

The Missing and Exploited Children's (MEC) program is administered by the Department of Justice, and authorizes supports for children who are missing and/or sexually exploited. This assistance is provided primarily to the National Center for Missing and Exploited Children (NCMEC), a non-profit organization that operates the national clearinghouse on missing and sexually exploited children.

The E. Clay Shaw, Jr. Missing Children's Assistance Reauthorization Act ( P.L. 113-38 ) reauthorized the MEC program. The law adds a new requirement for NCMEC that pertains to child sex trafficking. Specifically, the law directs NCMEC to provide technical assistance to law enforcement agencies and first responders in identifying, locating, and recovering victims of, and children at risk for, child sex trafficking. Although this responsibility was not specified in the law as it existed before P.L. 113-38 was enacted, generally such activities have been carried out by NCMEC in recent years.

Subtitle A of the Victims of Child Abuse Act supports the expansion and improvement of Children's Advocacy Centers (CACs). CACs are intended to coordinate a multi-disciplinary response to child abuse (e.g., law enforcement, child protection/social service, medical, mental health) in a manner that ensures child abuse victims (and any non-offending family members) receive the support services they need and do not experience the investigation of child abuse as an added trauma. CACs are located in all 50 states and the District of Columbia. The law also requires the establishment and support of four regional children's advocacy centers to increase the number of communities with CACs, help improve their practice, and support development of state chapter organizations for CACs. The law funds training and technical assistance to attorneys and others involved in criminal prosecution of child abuse.

H.R. 3530 and S. 1738 would amend Subtitle A of the Victims of Child Abuse Act by expanding the definition of "child abuse" used by CACs—meaning physical or sexual abuse or neglect of a child—to include the production of child pornography and human trafficking. The bills would enable DOJ to make grants for the development and implementation of specialized programs to identify and provide direct services to victims of child pornography. In addition, H.R. 3530 would direct grantees receiving funding for CACs or training and technical assistance to meet certain oversight and accountability requirements, and to disclose other sources of federal funding. H.R. 3530 would also reauthorize funding for CACs, the regional children's advocacy centers, and training and technical assistance through FY2019.

State and local child welfare agencies are responsible for carrying out child welfare policies that are intended to promote the safety, well-being, and permanency of all children. Child victims of sex trafficking may come to the attention of the child welfare agency if they are reported to the agency's child protective services (CPS) hotline. In addition, children in foster care—who are placed out of their homes typically due to abuse or neglect by their parents or caregivers—may be vulnerable to trafficking. Youth who run away from foster care are perceived to be especially susceptible to this type of victimization. The capacity for state and local child welfare agencies to respond to the needs of sex trafficking victims is believed to be limited. This may be due, in part, to inadequate training, insufficient resources, high caseloads, and the perception that victims should be handled in the juvenile justice system. In addition, states may not have mechanisms in place to "screen in" cases involving children who are sex trafficked because the perpetrator involved is not the child's parent or caregiver as these terms are defined under state law.

Both S. 1870 and H.R. 4058 , would specify a role for state child welfare agencies to respond to child sex trafficking. The bills refer to the definition of "sex trafficking" under Section 103(10) of the TVPA, and the definition of "severe forms of trafficking in persons" as it relates to victims of sex trafficking under Section 103(9)(A). The bills also include other amendments to child welfare provisions that do not touch on sex trafficking.

S. 1870 and H.R. 4058 would amend Title IV-E of the Social Security Act, which authorizes partial federal reimbursement to states for the cost of providing foster care maintenance payments to eligible children in foster care. To be eligible for Title IV-E support, a state, territory, or tribe must have a Title IV-E plan that is approved by HHS. The plan must provide that the state, tribal, or territorial child welfare agency that operates the Title IV-E program adhere to all federal requirements related to providing direct financial assistance to all eligible children, including those related to ensuring the safety, permanence, and well-being of children receiving Title IV-E assistance.

The bills would require state child welfare agencies to develop and implement policies and procedures to identify, screen, and determine appropriate state actions and services for any child believed to be a victim of sex trafficking or at risk of being a sex trafficking victim. Under S. 1870 , policies and procedures must apply to any child (individuals up to age 18) regardless of their current or past foster care status and any youth in foster care up to age 19, 20, or 21 (if the state elects to provide Title IV-E foster care up to that age). Under H.R. 4058 , the policies would need to apply to any child under the supervision of the state child welfare agency (including a child in foster care, a child who has an open case file but has not been removed from the home, and a youth who is receiving services under the Title IV-E Chafee Foster Care Independence Program for youth who have aged out of foster care or are likely to do so). In either bill, a state could choose to apply these policies to any youth up to age 26, regardless of whether they are or were in foster care.

S. 1870 and H.R. 4058 would separately add new Title IV-E requirements pertaining to child victims of sex trafficking. First, the bills would direct state child welfare agencies to identify and document in agency records each child identified as a victim of sex trafficking who is in foster care or otherwise under the supervision of the state. Second, S. 1870 and H.R. 4058 would direct each state child welfare agency to report and regularly update description of the specific measures it takes to protect and provide services to children who are victims of sex trafficking, including efforts to coordinate with law enforcement, juvenile justice agencies, and social service agencies, such as runaway and homeless youth shelters. Third, H.R. 4058 would require state welfare agencies to "immediately" report to law enforcement information on children identified as being victims of sex trafficking after having received such information.

Under the Social Security Act, HHS was required to establish a data collection system that provides for comprehensive national information with respect to children in foster care and those who are adopted. In response, HHS developed the Adoption and Foster Care Analysis and Reporting System (AFCARS). HHS must annually submit to Congress a report on the performance of each state with regard to achieving specific child welfare outcomes (e.g. ensuring placement stability for children in foster care, finding children adoptive homes as appropriate) and other information. This outcome data must be developed, to the maximum extent practicable, from AFCARS. The annual report is known as Child Welfare Outcomes . Both S. 1870 and H.R. 4058 would seek to revise the AFCARS data collection and reporting requirements to incorporate information on sex trafficking, either within the Child Welfare Outcomes report ( S. 1870 ) or in a separate report to Congress ( H.R. 4058 ).

Recommendations to Congress for Expanding Housing for Youth Victims of Trafficking

Shelters specifically for child sex trafficking victims/survivors are available on a very limited basis. Other facilities, such as runaway and homeless youth shelters as well as foster care homes, do not appear to be adequate for meeting the needs of sex trafficking victims or keeping them secure from pimps/traffickers and other abusers. S. 1870 would require that within one year of enactment, five agencies—the Departments of Defense, HHS, Housing and Urban Development, Homeland Security, and Justice—submit a report to Congress that contains recommendations for administrative or legislative changes necessary to use programs, properties, or other resources owned, operated, or funded by the federal government to provide safe housing for youth who are victims of trafficking and to provide support to entities that provide housing or other assistance to such victims.

Runaways are particularly vulnerable to becoming victims of sex trafficking, because they may be perceived as easy targets for pimps/traffickers since they often cannot go home and have few resources. For example, the Dallas Police Department found a strong correlation between sex trafficking and runaway status: the more times a child runs away, the greater the likelihood that he or she will be victimized.

S. 1870 and H.R. 4058 would amend Title IV-E to require that state child welfare agencies "immediately" report information on missing or abducted children to law enforcement authorities for entry into the National Crime Information Center (NCIC) and to the National Center for Missing and Exploited Children (NCMEC). H.R. 3530 and S. 1738 would require that law enforcement agencies notify NCMEC of each report involving a child missing from foster care.

H.R. 4058 would further amend Title IV-E to require state child welfare agencies to develop and implement protocols related to children who run away from foster care. The bill specifies certain conditions that must be addressed including determining what happened to the child while absent from care, including screening the child to determine whether he or she may be a victim of sex trafficking. The protocols would need to be implemented within one year of the bill's enactment. Within two years of the bill's enactment, HHS would be required to submit a report to Congress that summarizes information on children who run from care and their risk of becoming victims of sex trafficking.

National Advisory Committee on the Nation's Response to Domestic Sex Trafficking of Minors

Although there are several established entities responsible for coordinating and overseeing the country's response to human trafficking generally, there is not a specific entity statutorily responsible for coordinating efforts on sex trafficking of minors. S. 1870 would require HHS to establish the National Advisory Committee on Domestic Sex Trafficking and to appoint all members of the committee (in consultation with the Attorney General) within 180 days after the bill's enactment. The legislation would require the committee to be composed of up to 21 members "whose diverse experience and background enable them to provide balanced points of view with regard to carrying out the duties of the committee." The committee would be charged with

advising the HHS Secretary and the Attorney General on policies concerning improvements to the nation's response to domestic sex trafficking of minors from the child welfare system; advising the HHS Secretary and the Attorney General on policies concerning the cooperation of several entities—various levels of government, child welfare agencies, social service providers, state or local courts with oversight of children and family matters, law enforcement juvenile detention centers, and others—on responding to domestic sex trafficking of minors; and developing recommended best practices for states to follow in combating the domestic sex trafficking of minors.

Grant Programs for Domestic Minor Victims of Sex Trafficking

One overriding issue concerning minor victims of sex trafficking is the extent to which federal agencies can and do provide services to U.S. citizen and lawful permanent resident (LPR) minor sex trafficking victims. P.L. 113-4 created a discretionary new grant program for child sex trafficking victims. The new grant program authorizes DOJ, in consultation with HHS, to award one-year grants to six grantees to combat sex trafficking of children in the United States. Of the grant amounts, at least 67% must be allocated to non-governmental organizations (NGOs) to provide counseling, legal services, shelter, clothing, and other social services to victims, while not less than 10% has to be allocated to provide services to victims or training for service providers on sex trafficking of children.

Under the TVPA, the federal government treats individuals under the age of 18 who are involved in commercial sexual activity as victims rather than perpetrators, and victims are eligible for specialized services. The same is not always true at the state level; at times, minors involved in commercial sexual activity may be labeled as child prostitutes or juvenile delinquents and treated as criminals rather than being labeled and treated as victims.

The 2013 TVPA reauthorization ( P.L. 113-4 ) specifies that the model state anti-trafficking laws created by the Attorney General should include safe harbor provisions that treat an individual under 18 years of age who has been arrested for prostitution as a victim of a severe form of trafficking, prohibit the prosecution of such a person, and refer them to the service providers who provide assistance to victims of commercial sexual exploitation.

In addition, S. 1733 and H.R. 3610 would incentivize states to enact "safe harbor laws" that would (1) treat each minor involved in commercial sexual activity as a victim of a severe form of trafficking in persons, (2) discourage the charging and prosecution of these minors for prostitution or sex trafficking offenses, and (3) encourage the diversion of these minors to child protection services. The Senate version of this bill would also link states' compliance with the proposed safe harbor mandate to the receipt of Edward Byrne Memorial Justice Assistance Grant (JAG) funds; the bills would authorize the Attorney General to withhold a specified proportion of JAG funding for noncompliance. Instead of linking states' JAG funds to the adoption of safe harbor laws, the House version would allow the Department of Justice to give community policing grants preference to applicants from states that had adopted safe harbor laws.

There have been concerns about possible duplication of efforts and a lack of coordination among the agencies that conduct anti-trafficking activities, and whether the fact that so many agencies are involved with anti-trafficking policy leads to duplication or funds not being used in the most efficient manner. The TVPA established the Senior Policy Operating Group (SPOG) in part to facilitate coordination on anti-trafficking policy across U.S. government agencies to ensure that there is not a duplication of efforts.

However, the federal government does not currently have a national strategy broadly directed at combating human trafficking. S. 1733 would direct the Attorney General to implement and maintain a National Strategy for Combating Human Trafficking. This strategy would be required to include, among other things, (1) integrated efforts (at the federal, state, local, and tribal levels) to investigate and prosecute human trafficking; (2) internal Department of Justice case coordination; (3) federal interagency coordination on the prevention, investigation, and apprehension of persons who target and exploit others for trafficking; and (4) measurable objectives and quantifiable goals for combating human trafficking.

In addition, S. 1733 would require the Attorney General, as part of the annual report to Congress on U.S. government trafficking activities, to report the number of human trafficking investigations opened by FBI, DHS, DOL or the Human Smuggling and Trafficking Center; and the number of such investigations that were reported to the U.S. attorneys, the DOJ Human Trafficking and Prosecution Division, or the DOJ Child Exploitation and Obscenity Section.

The Sex Offender Registration and Notification Act (SORNA) provides a set of minimum standards for sex offender registration and notification in the United States. SORNA defines sex offenders according to three tiers, Tier III being the highest classification and includes those individuals convicted of the most egregious crimes (predicate offenses for sex offender registration and notification). The SORNA requirements involve Tier III offenders being subject to the strictest registration and notification requirements.

Tier I: Predicate offenses include whatever offenses do not support a higher classification, such as misdemeanor registration offenses and child pornography possession.

Tier II: Predicate offenses include most felonious sexual abuse or sexual exploitation crimes involving victims who are minors, including distribution and production of child pornography.

Tier III: Predicate offenses generally encompass sexual assaults involving sexual acts regardless of victim age, sexual contact offenses against children below the age of 13, nonparental kidnapping of minors, and attempts or conspiracies to commit such offenses.

Currently, a Tier II sex offender means, among other things, a sex offender whose offenses are "comparable to or more severe than" offenses including sex trafficking when committed against a minor. S. 1733 would, among other things, amend SORNA so that a Tier II sex offender no longer includes sex trafficking, and would instead amend the definition of a Tier III sex offender to mean, among other things, a sex offender whose offenses are "comparable to or more severe than" offenses including sex trafficking when committed against a minor, or an attempt or conspiracy to commit such an offense against a minor.

In addition, H.R. 4573 , as passed by the House, would direct the Secretary of DHS to establish a center in ICE, to be known as the "Angel Watch Center." The Angel Watch Center would receive information on travel by child-sex offenders, and would establish procedures for notifying or making the decision not to notify a destination country of current or impending travel by a child-sex offender. H.R. 4573 would also express a sense of Congress that the President should negotiate bilateral agreements with foreign governments to transmit and receive information on international travel by child-sex offenders, including U.S. citizens who are arrested or convicted for child-sex offenses in a foreign country.

Appendix. Table of Pending Bills that Have Received Congressional Action or Are of Significant Congressional Interest

Question: To what extent is legislation regarding TIP a Congressional priority?

Answer: Legislation aimed at preventing trafficking in persons (TIP) is unambiguously part of the legislative agenda of the 113th Congress.

Question: Why is TIP an area of concern?

Answer: TIP is believed to be one of the most prolific areas of contemporary criminal activity and is of significant interest to the United States as a serious human rights concern. TIP is both an international and domestic crime that involves violations of labor, public health, and human rights standards, as well as criminal law.

Question: What legislation addressed human trafficking?

Answer: The Trafficking Victims Protection Act (TVPA) is the primary law that addresses human trafficking. Congress reauthorized the TVPA in March 2013 (Trafficking Victims Protection Reauthorization Act; Title XII of P.L. 113-4).

Question: What anti-TIP efforts did the TVPA establish?

Answer: Domestically, anti-TIP efforts provided under the TVPA include protection for victims, the investigation and prosecution of trafficking offenses, and education of the public.

Question: What does this report cover?

Answer: This report discusses TIP issues that have received legislative action or are of significant congressional interest in the 113th Congress.

Question: Where is more information about such issues available?

Answer: While this report covers P.L. 113-4, a more complete treatment of that bill can be found in CRS Report RL34317, Trafficking in Persons: U.S. Policy and Issues for Congress.

Question: What has characterized other TIP-related bills in the 133th Congress?

Answer: The House and Senate have acted on other TIP-related bills in the 113th Congress. Since human trafficking issues intersect with many different policy areas (e.g., immigration, child welfare, the criminal justice system, missing and exploited youth), legislation to address human trafficking is varied.

Question: How did H.R. 3344 and S. 744 affect human trafficking?

Answer: For example, the Fraudulent Overseas Recruitment and Trafficking Elimination Act (H.R. 3344) and Title III subsection F of the Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744), as passed by the Senate, would make changes to immigration policy altering how foreign labor contractors operate to help prevent trafficking of noncitizen workers.

Question: How did H.R. 4058 and S. 1870 affect trafficking prevention?

Answer: The Preventing Sex Trafficking and Improving Opportunities for Youth in Foster Care Act (H.R. 4058), as passed by the House, and the Supporting At-Risk Children Act (S. 1870), as reported by Senate Finance, would address trafficking prevention through the child welfare system.

Question: What preventative measures did these bills require?

Answer: In addition to other provisions, the bills would require state child welfare agencies to develop and implement policies to identify, screen, and determine appropriate state actions and services for children believed to be victims of sex trafficking or at risk of being victims.

Select Anti-Trafficking Legislation in the 113th Congress

Domestic Sex Trafficking of Children
Response by the Child Welfare System
Identifying and Serving Victims


Federal Tax Treatment of Health Insurance Expenditures by the Self-Employed: Current Law and Issues for Congress

Summary: Federal tax law allows self-employed individuals to deduct from their gross income the entire amount they spend on health insurance for themselves and their spouses and dependents.

Summary: This report explains how these expenditures are treated under the federal tax code, reviews the legislative history of the deduction, assesses its effectiveness as a policy tool for expanding access to health care for the self-employed, describes proposals in the 111th Congress to modify the deduction, and discusses the implications of leading health care reform proposals in Congress for health insurance coverage among the self-employed.

Summary: Under Section 162(l) of the Internal Revenue Code (IRC), qualified self-employed individuals may deduct the entire amount of their payments for health insurance for themselves and immediate family members. Use of the deduction is governed by several rules. First, it may not exceed an eligible taxpayer's net earned income from the trade or business in which the health plan was established, less the deductions for 50% of the self-employment tax and contributions to certain pension plans. Second, the deduction may not be claimed for any period when a qualified individual is eligible to participate in a health plan offered by an employer or by a spouse's employer. Third, the expenditures used to claim the deduction cannot be included in the medical expenses eligible for the itemized deduction under IRC Section 213. Finally, health insurance expenditures by self-employed individuals are subject to the self-employment tax.

Summary: The tax deduction for health insurance expenditures by the self-employed has advantages and disadvantages. On the one hand, it is relatively easy for the IRS to administer and for self-employed taxpayers to claim, and the deduction comes close to establishing parity between the tax treatment of health insurance for the self-employed and the taxation of employer contributions to employee health plans. On the other hand, the deduction delivers the largest tax benefit for the same insurance policy to those who arguably need it the least: self-employed individuals in the highest tax bracket. It also is uncapped, thus encouraging the purchase of generous plans.

Summary: Several bills in the 111th Congress (H.R. 533, H.R. 1470, H.R. 1763, H.R. 3067, and S. 275) would eliminate the final remaining obstacle to achieving equal tax treatment for the health insurance purchased by the self-employed and the health benefits employees receive through their employers. The obstacle lies in the difference between the income base for the payroll taxes paid by wage earners and the self-employment taxes paid by the self-employed: health insurance expenditures by the self-employed are subject to the self-employment tax, whereas employer contributions to employee health plans are not subject to the payroll tax. Each bill would allow the self-employed to deduct these expenditures as an ordinary and necessary business expense, thereby removing them from the income base for the self-employment tax.

Summary: Some of the health care reform legislation being considered in the House and Senate could affect health insurance coverage for the self-employed. Though it remains unclear whether either chamber will pass such a bill in the current Congress—and if so, what tax provisions it might contain—enough is known about the key issues in the congressional debate to sketch their implications for the self-employed. Proposals that would expand private health insurance coverage or simultaneously expand public and private coverage options (e.g., H.R. 3200) could lead to greater coverage among the self-employed through income-based tax subsidies for the purchase of insurance and an individual mandate.

Current federal tax law allows self-employed individuals to deduct the entire amount they spend on health insurance for themselves and their spouses and dependents. This treatment is similar to the tax exclusion for employer contributions to the health plans of wage earners, with one noteworthy exception: employer contributions are exempt from payroll taxes (e.g., Medicare and Social Security taxes), but health insurance expenditures by the self-employed are not deemed a deductible business expense and thus are subject to the self-employment payroll tax. Several bills in the 111 th Congress would enable self-employed taxpayers to exclude those expenditures from the income base for the tax.

This report examines the current tax treatment of these expenditures, the legislative history of the deduction, its effectiveness as a policy tool for improving access to health care for the self-employed, proposals in the 111 th Congress to alter the deduction, and the implications of the leading health care reform proposals in Congress for health insurance coverage among the self-employed.

Under Section 162(l) of the Internal Revenue Code (IRC), self-employed individuals are allowed to deduct the entire amount of their spending on health insurance for themselves and their immediate family members. In this case, a self-employed individual is defined as a sole proprietor, a working partner in a partnership, or an employee of a subchapter S corporation who owns over 2% of the firm's stock. The deduction is claimed above-the-line, which means it may be claimed even if a self-employed individual does not itemize deductions on his or her income tax return.

Some self-employed individuals hire employees to assist with their trade or business. Any self-employed individual who offers health benefits to employees may deduct the cost of those benefits as an ordinary and necessary business expense. But he or she may not also include the cost of employee health benefits in any deduction claimed under IRC Section 162(l).

Use of the deduction is subject to several limitations. First, the deduction may not exceed a self-employed taxpayer's net earned income from the trade or business in which the health plan was purchased, less the deductions for 50% of the self-employment tax and contributions to certain pension plans (e.g., Keogh plans or simplified employee pension plans for the self-employed). A self-employed taxpayer who earns income from more than one business or trade may not sum the profits and losses from those businesses to determine the net income ceiling for the deduction. Second, the deduction may not be claimed for any month when a self-employed individual is eligible to participate in a health plan offered by an employer or a spouse's employer. Third, the expenditures used to compute the deduction may not also be included in the medical expenses eligible for the itemized deduction under IRC Section 213—though health insurance expenditures that cannot be deducted under IRC Section 162(l) may be included in these medical expenses. Finally, health insurance spending by self-employed individuals is not deemed an ordinary and necessary business expense, which means those expenditures must be added to the income base for the self-employment tax of 15.3%.

In addition, self-employed individuals may add any payments they make for long-term care insurance to the health insurance expenditures eligible for the deduction. But the amount of long-term care insurance premiums that may be deducted is limited, and the limits, which are indexed for inflation, vary with the age of a self-employed taxpayer at the close of a tax year. In 2009, the deductible amounts range from $320 for those age 40 and under to $3,980 for those over age 70.

A self-employed individual has two other options for obtaining health insurance coverage that offer significant tax benefits.

He or she may open a health savings account (HSA), which serves as a tax-exempt vehicle for paying medical and dental expenses not covered by insurance or not otherwise reimbursable. An individual can open an HSA and make contributions to it only if he or she is covered by a qualified high-deductible health insurance plan and no other plan, including Medicare (with a few exceptions). In 2009, qualified plans must carry a deductible of at least $1,150 for individual coverage (with a cap of $5,800 on out-of-pocket expenses), and $2,300 for family coverage (with an out-of-pocket cap of $11,600). Total contributions to an HSA in 2009 are limited to the lesser of the deductible or $3,000 for individual plans, and the lesser of the deductible or $5,950 for family plans; the limits are $1,000 larger for individuals age 55 and older. Employer contributions are exempt from income and employment taxes, and account owners may claim a deduction for contributions they make. Self-employed individuals may not contribute to an HSA on a pre-tax basis (unlike employees who contribute to such an account through an employer's cafeteria plan), and they must include their contributions in the income base used to determine the self-employment tax. Withdrawals to pay for medical expenses are not subject to taxation. Unused balances may be carried over without limit to the following year with no tax penalty.

Self-employed individuals may also open Archer medical savings accounts (MSAs)—though the total number of such accounts nationwide is currently capped at 750,000. They are similar in design to HSAs but more restrictive in the rules for contributions. For example, annual contributions for individual coverage cannot exceed 65% of the deductible (not less than $2,000 but not greater than $3,000) for such coverage, and for family coverage the limit is 75% of the deductible (at least $4,000 but not greater than $6,050). Holders of MSAs are allowed to own HSAs and transfer their MSA balances to the new accounts. It is not known how many self-employed individuals are covered by MSAs and HSAs.

An estimated 14.0 million non-elderly individuals were self-employed in 2007, the most recent year for which reliable data on U.S. health insurance coverage by employment status are available. Of this total population, 9.7 million had private health insurance, 1.6 million received public health insurance (mainly Medicaid), and 3.7 million were uninsured. Over 71% of the self-employed with private health insurance (or 6.9 million) in 2007 were covered through plans offered by a current or former employer, or by a spouse's employer. The remaining 2.8 million (or 20% of the self-employed population) with private health insurance purchased it on their own.

According to the Internal Revenue Service (IRS), individual taxpayers filed 3.8 million returns claiming the deduction in 2006; the amount claimed totaled $20.3 billion (see Table 1 ). Individuals with adjusted gross incomes between $30,000 to under $500,000 accounted for 70% of the value of those claims and 67% of the volume.

The revenue cost of the deduction could total $4.8 billion in FY2009. This cost represents the tax revenue that would be collected that year under two assumptions: (1) there were no deduction, and (2) self-employed taxpayers instead were to include their health insurance expenditures in the spending eligible for the itemized deduction for medical expenses.

Legislative History of the Health Insurance Deduction for the Self-Employed

The tax deduction for health insurance purchased by self-employed individuals entered the federal tax code as a temporary provision of the Tax Reform Act of 1986 (TRA86, P.L. 99-514 ). Initially, it was limited to 25% of qualified expenditures and was scheduled to expire at the end of 1989. Although the act specified that Congress was to assess the deduction's effectiveness before it expired, no such study was completed.

Congress made several significant changes in the rules governing the deduction's use before it considered legislation to extend the deduction beyond 1989. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA, P.L. 100-647 ) added the limitation that the deduction cannot exceed a self-employed taxpayer's earned income from the trade or business in which the health insurance policy was established. TAMRA also added the requirement that the deduction be included in a self-employed taxpayer's income base for the computation of the self-employment tax.

A string of laws enacted in the early 1990s extended the deduction for brief periods. The Omnibus Budget Reconciliation Act of 1989 ( P.L. 101-239 ) extended the deduction through September 30, 1990 and made it available to certain subchapter S corporation shareholders; the Omnibus Budget Reconciliation Act of 1990 ( P.L. 101-508 ) extended the deduction through December 31, 1991; the Tax Extension Act of 1991 ( P.L. 102-227 ) extended it through June 30, 1992; and the Omnibus Budget Reconciliation Act of 1993 ( P.L. 103-66 ) extended the deduction through December 31, 1993.

For reasons that evidently had nothing to do with the effects of the deduction, Congress allowed it to expire at the end of 1993 and did not extend it in 1994. But a bill adopted in April 1995 ( P.L. 104-7 ) permanently extended the deduction, retroactive to January 1, 1994. It also increased the deductible share of health insurance expenditures by the self-employed to 30%, starting in 1995 and continuing thereafter.

The 104 th Congress turned its attention to the deduction again in 1996, when it passed the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-91 ). Among other things, the act established a timetable for raising the deductible share of health insurance expenditures from 30% in 1996 to 80% in 2006 and thereafter. HIPAA also permitted self-employed taxpayers to include in the spending eligible for the deduction any payments they make for qualified long-term care insurance as of January 1, 1997; imposed annual limits on the amount of long-term care insurance premiums that could be deducted; and indexed these limits for inflation.

The Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 ( P.L. 105-277 ) accelerated the timetable for removing one of the main differences between the tax treatment of employer-provided health insurance and the taxation of health insurance purchased by the self-employed by raising the deductible share of health insurance spending by the latter to 100%, beginning in 2003 and thereafter.

One gauge of the effectiveness of the deduction is the extent to which it has accomplished its intended purpose. It can be argued that Congress added the deduction to TRA86 for two reasons. One was to provide the self-employed with a tax benefit for health insurance comparable to the tax exclusion for employee health benefits. The other reason was to foster a substantial expansion of health insurance coverage among self-employed individuals. To what extent have these objectives been achieved?

The deduction reduces the after-tax cost of health insurance for a self-employed individual by a factor equal to his or her marginal income tax rate. For example, a self-employed individual in the 35% tax bracket realizes a 35% reduction in that cost by claiming the deduction.

All other things being equal, a reduction in the after-tax cost of this insurance can be expected to lead to an increase in the coverage rate among the self-employed. The extent of the increase would hinge on how sensitive the demand for health insurance is to changes in its cost. There is some dated evidence that the demand for health insurance among single self-employed individuals is responsive to declines in this cost.

Yet unlike a tax credit for the purchase of health insurance, which would be of equal value to everyone who claims it, the deduction is of lesser value to those with lower incomes and of greater value to those with higher incomes, for the same health insurance plan. This is because the tax benefit from a deduction depends on a taxpayer's marginal tax rate: for someone in the 35% bracket, a $100 deduction reduces his or her tax liability by $35; but for a taxpayer in the 10% bracket, the same deduction yields a reduction in tax liability of $10. To the extent that health insurance coverage among the self-employed rises with household income, the deduction reinforces this linkage.

Is there any evidence that the deduction has spurred an expansion in health insurance coverage among the self-employed? Such an effect seemed to materialize in the first few years after the deduction was enacted in 1986. In 1985, 69% of the self-employed were covered through private health plans (both plans they purchased on their own and plans offered by former employers); but in 1987, the first full year in which the deduction could be claimed, the share climbed to 76%. It seems likely that much of that rise was due to the advent of the deduction. Still, coverage has gradually fallen ever since: it was 69% in 2007, the most recent year for which data are available. In addition, the share of the self-employed population with individually purchased private health insurance was significantly lower in 2007 (20%) than in 1991 (29%).

These declines raise the possibility that whatever initial stimulus the deduction may have imparted to the demand for health insurance by the self-employed has been more than offset by certain other factors. A powerful countervailing force has been increases in the cost of health care, which is the main driver of trends in the cost of health insurance. In recent decades, the cost of health care has risen much faster than overall inflation. This is not to suggest that the deduction no longer influences a self-employed individual's decision to purchase or retain health insurance. In the absence of the deduction, the health insurance coverage rate among the self-employed arguably would be lower.

Tax Subsidies for Health Insurance for the Self-Employed and Wage Earners

Does the deduction create a level playing field between wage earners and the self-employed in the tax subsidies for the purchase of health insurance? Yes and no. On the one hand, the deduction has the same direct effect on the after-tax cost of health insurance as the exclusion for employer contributions to employee health plans: both lower that cost by a factor equal to an individual's marginal tax rate. On the other hand, the expenditures eligible for the deduction are subject to the self-employment tax, whereas employer contributions to employee health plans are exempt from payroll taxes. This difference means that the after-tax cost of a health plan is 15.3% higher for a self-employed individual than for a wage earner. A truly level playing field would permit self-employed individuals to exclude their payments for health insurance from the income base for the self-employment tax.

The self-employed are not the only taxpayers for whom the federal tax code denies equal treatment in access to health insurance with wage earners. There is no deduction or exclusion for health insurance bought by the unemployed or by individuals whose employers do not offer health benefits. As a result, their only option for lowering the after-tax cost of health insurance is to claim the itemized deduction for medical expenditures, provided they qualify.

At the same time, there is some evidence that the use of health care by the self-employed is not as tied to health insurance coverage as one might expect. A 2001 study by Craig Perry and Harvey Rosen, using data from the 1996 Medical Expenditures Panel Survey, found that the "self-employed had the same utilization rates for medical services in 1996 as wage-earners, despite the fact that they (the self-employed) were substantially less likely to be insured." More specifically, their findings indicated that there were no statistically significant differences between employees and the self-employed in hospital admissions, hospital stays, dental checkups, and optometrist visits, while the self-employed had higher utilization rates for alternative care and chiropractor visits. Nor was there any evidence that the medical spending of the self-employed reduced their capacity to purchase other goods and services. Perry and Rosen concluded that the self-employed were able to "finance access to health care from sources other than insurance," such as their own assets or loans. The study calls into question one of the main justifications for the deduction: that it is needed to increase the utilization of medical care among the self-employed. Rather, the findings suggest that access to medical care may have little to do with current tax subsidies for the purchase of health insurance.

Legislation in the 111th Congress That Could Affect Health Insurance Coverage for the Self-Employed

Numerous bills to create new tax subsidies for the purchase of health insurance have been introduced in the 111 th Congress. Some of the subsidies would be of greater benefit to the self-employed than the current deduction under IRC Section 162.

A case in point is a proposal ( H.R. 879 ) to establish a refundable tax credit for individuals who purchase health insurance on their own in the non-group market. Depending on its design, such a credit could lead to more extensive health insurance coverage among self-employed individuals, as well as the population at large. A key consideration is the effective rate of the credit. If it is large enough to lower the after-tax cost of health insurance more than the deduction does, then a self-employed individual would be better off claiming the credit. A simple example illustrates this point. Suppose a self-employed individual in the 15% tax bracket buys a health insurance policy for $3,000. Would he or she be better off with a 50% refundable tax credit for that purchase or a deduction of $3,000? With the credit, the after-tax cost of the policy would be $1,500, but with the deduction, the after-tax cost of the policy would come to $2,550. Because the credit is refundable, the individual would receive the credit even if he or she has no federal income tax liability.

At least five bills in the current Congress would modify the deduction to equalize the tax treatment of health insurance purchased by the self-employed and the tax treatment of health benefits obtained by wage earners through their employers. Under current law, health insurance expenditures by the self-employed are subject to the self-employment tax, whereas employer contributions to employee health plans are not subject to payroll taxes. But the same provision in H.R. 533 , H.R. 1470 , H.R. 1763 , H.R. 3067 , and S. 725 would exempt these expenditures from the self-employment tax by allowing the self-employed to treat them as a deductible business expense. If enacted as proposed in these bills, the exemption would reduce the after-tax cost of health insurance to the self-employed by 15.3%, the self-employment tax rate. A decline of that size may be sufficient to spur an increase in the health insurance coverage rate for the self-employed. It is not clear what the revenue cost of the proposed exemption would be. Depending on the amount, the estimated cost could influence future congressional deliberations over whether to adopt such an exemption.

Health insurance coverage among the self-employed could also be affected by any major health care reform legislation Congress passes. The 111 th Congress is considering a variety of proposals to expand health insurance coverage and curb the rate of growth in health care spending. In essence, they incorporate one or more of the following approaches: (1) replacing the current system of private health insurance with some kind of national health insurance plan; (2) expanding coverage under current public health insurance programs (such as Medicaid) by including certain groups of uninsured individuals; (3) expanding coverage under private health insurance plans; (4) encouraging reforms in state health insurance regulations to compel private insurers to offer insurance to all applicants, regardless of any pre-existing health problems they may have; and (5) expanding current public and private options for health insurance coverage.

A prominent example of the fifth approach is H.R. 3200 , which the three committees in the House with jurisdiction over health care have passed. As the bill now stands, H.R. 3200 would do more to expand coverage than to control future growth in per-capita health care spending. More specifically, it would make the following notable changes in the current health care system:

require all individuals to have health insurance or pay a penalty, create a health insurance exchange where individuals and smaller companies can purchase health insurance, provide subsidies for the purchase of health insurance for individuals and families with incomes at or below 400% of the federal poverty level, require employers to provide health insurance to all employees or pay into a health insurance exchange trust fund, offer exceptions to the employer mandate to certain small firms and provide a tax credit to small employers that do provide coverage, impose new regulations on health plans participating in the health insurance exchange and in the small-group health insurance market aimed at improving access to affordable health insurance, and expand Medicaid coverage to eligible households with incomes up to 133% of the federal poverty level.

Such a measure could spark a significant rise in health insurance coverage among the self-employed. In 2007, the most recent year for which data are available, the self-employed accounted for 14% of the estimated U.S. non-elderly uninsured population, and 26% of all self-employed individuals under age 65 had no health insurance. The coverage rate that year for the self-employed was lower than that for non-elderly wage and salary workers: 74% compared to 83%. Though there are no publicly available data on the distribution of uninsured self-employed individuals by income class, a majority of the uninsured self-employed are likely to have relatively low incomes. This is because a major share of the uninsured have relatively low incomes. In 2007, for example, 63% of the uninsured population had family incomes of less than $40,000. So the enactment of a measure similar to H.R. 3200 —with its individual mandate, income-based subsidies for the purchase of health insurance through exchanges, and health insurance market reforms—would be likely to boost the coverage rate among the self-employed.

The tax deduction for health insurance expenditures by the self-employed has several advantages. It is relatively simple for the IRS to administer and for self-employed individuals to claim. In addition, the deduction seems to contribute to an expansion in health insurance coverage among the self-employed and their immediate families by lowering the after-tax cost of health insurance. Many economists regard a lack of health insurance as a market failure because of the negative externalities associated with being uninsured: the uninsured are more likely than the insured to spread communicable diseases, and the cost of uncompensated care received by the uninsured is passed on to taxpayers through higher taxes and to insured patients through higher prices for medical care. The deduction also establishes a substantial degree of parity between the tax treatment of health insurance purchased by the self-employed and the taxation of health benefits employees receive from their employers.

But the deduction also has some disadvantages, some of which have implications for the debate in the current Congress over expanding access to health care through the use of tax subsidies for health insurance.

First, the deduction fosters insurance outcomes that could be regarded as unfair or unjustified. This is because its value to self-employed individuals who take it depends critically on their marginal tax rates. Under the tax system's progressive rate structure, a deduction of $1 is of greater value to someone with a relatively high income (as much as $0.35) than to someone with a relatively low income (as little as nothing). Although disposable income plays a major role in decisions about whether to buy health insurance or how much coverage to buy, the deduction delivers the smallest marginal benefit to those who arguably are in greatest need of public assistance in order to be adequately insured. One policy option for avoiding such a result is to enact a refundable tax credit for the purchase of health insurance that phases out over some range of income above the federal poverty threshold. Such a credit would deliver the largest marginal benefit to those most in need of assistance, and the smallest (or no) marginal benefit to those least in need of assistance.

Second, the deduction cannot compensate for or replicate the significant advantages of receiving health insurance through an employer. Those advantages stem from certain critical differences between the group and non-group (or individual) health insurance markets. Generally, wage earners who receive health benefits from their employers participate in the group market, while self-employed individuals who purchase health insurance from private insurers participate in the non-group market. Group health plans typically cater to the health care needs of large groups of people who are drawn together for purposes other than obtaining insurance, such as employment. The plans are managed by sponsors (e.g., an employer) who negotiate the terms of coverage directly with insurers on behalf of the insured members. By contrast, individual health plans are tailored to the health care needs of the individuals seeking coverage on their own. Insurers set premiums and benefits in the group market mainly on the basis of key characteristics of the particular groups seeking coverage, especially their recent claims history, demographic composition, and geographic location; premiums tend to reflect an insurer's assessment of the expected cost of claims for medical services by the average member of a group (or risk pool). By contrast, insurers set premiums and benefits in the individual market mainly through a practice known as medical underwriting. Many applicants are required to have a thorough medical examination to assess their risk for developing a variety of costly health problems. Once the assessment is completed, an insurer then decides whether or not to offer a policy, what coverage to provide if it offers a policy, and the cost of that coverage, within the requirements imposed by state law.

The differences between the two markets result in more stable pricing, greater coverage, and lower premiums in the group market than in the non-group market. Premiums tend to be lower for comparable coverage in the group market for several reasons. Group insurance offers economies of scale in key administrative functions such as billing, marketing, and claims processing that cannot be duplicated in individual insurance. In addition, relatively large employers can use their employment size to negotiate deals with insurers that provide more generous benefits with lower cost-sharing requirements than individuals can obtain on their own.

There is no easy way to modify the deduction so that self-employed individuals could enjoy the advantages of employer-sponsored health plans. Such an outcome would require an overhaul of the U.S. health insurance market that would allow any adult not eligible for public health insurance (e.g., Medicare or Medicaid), regardless of his or her employment and health status, to join any group health plan organized through some kind of exchange.

Third, like the exclusion for employer contributions to employee health plans, the deduction has the potential to foster inefficient uses of medical care. Such an outcome is tied to a market failure peculiar to insurance markets known as moral hazard. In the case of health insurance, moral hazard refers to the impact of insurance on the demand for medical services. Health insurance gives covered individuals a powerful incentive to consume more health care than is needed because the insurance allows them to pay only a fraction of its cost through deductibles or co-payments. As a result, they are likely to use medical services until the marginal benefit of the care equals their out-of-pocket cost; for someone with comprehensive first-dollar coverage, that cost can be nothing. Widespread use of health care whose marginal benefit is less than its true marginal cost is likely to give rise to a significant social welfare loss.

Neither the exclusion nor the deduction are capped. As a result, wage earners and the self-employed are more likely to purchase generous health insurance coverage than they would if they were required to pay in after-tax dollars for coverage beyond the cost of a typical individual or family policy in the regions where they reside. Conventional economic theory predicts that offering substantial subsidies for health insurance coverage will result in the purchase of more insurance than individuals would choose without the subsidies. This extra coverage is more likely to summon the substantial costs of moral hazard than coverage that requires individuals to pay for most of the cost of routine medical procedures and fully insures only large medical expenses. Capping the deduction at an amount tied to average premiums in the non-group market for individual or family plans is sometimes proposed as a way to curtail any welfare loss arising from overly generous health insurance coverage for the self-employed.

Finally, the current deduction points to a fundamental inequity in the tax treatment of health insurance expenditures. Under current law, only the self-employed and wage earners whose employers provide health benefits receive a tax subsidy for their purchase of health insurance. No comparable subsidy is available for the unemployed and those workers whose employers provide no health benefits. Their only option for lowering the after-tax cost of health insurance is to claim the itemized deduction for medical expenses, but it is doubtful that many of them could do so. Only about one-third of individual taxpayers itemize on their tax returns rather than take the standard deduction, and someone who itemizes may deduct only qualified medical expenses that exceed 7.5% of his or her adjusted gross income. Some of the health care reform proposals being considered in the 111 th Congress would address the lack of tax subsidies for the purchase of health insurance by those who are not self-employed and have no access to employer-provided health benefits.

Question: What does Section 162(l) of the Internal Revenue Code allow?

Answer: Under Section 162(l) of the Internal Revenue Code (IRC), qualified self-employed individuals may deduct the entire amount of their payments for health insurance for themselves and immediate family members.

Question: How is this deduction controlled?

Answer: Use of the deduction is governed by several rules. First, it may not exceed an eligible taxpayer's net earned income from the trade or business in which the health plan was established, less the deductions for 50% of the self-employment tax and contributions to certain pension plans.

Question: What are the timeline regulations of the deduction?

Answer: Second, the deduction may not be claimed for any period when a qualified individual is eligible to participate in a health plan offered by an employer or by a spouse's employer.

Question: How are the expenditures governed?

Answer: Third, the expenditures used to claim the deduction cannot be included in the medical expenses eligible for the itemized deduction under IRC Section 213.

Question: How does this affect self-employed individuals?

Answer: Finally, health insurance expenditures by self-employed individuals are subject to the self-employment tax.

Question: What is the consensus regarding the health insurance tax deduction for the self-employed?

Answer: The tax deduction for health insurance expenditures by the self-employed has advantages and disadvantages.

Question: What are the advantages of the tax deduction for health insurance expenditures by the self-employed?

Answer: On the one hand, it is relatively easy for the IRS to administer and for self-employed taxpayers to claim, and the deduction comes close to establishing parity between the tax treatment of health insurance for the self-employed and the taxation of employer contributions to employee health plans.

Question: What are the disadvantages of this tax deduction?

Answer: On the other hand, the deduction delivers the largest tax benefit for the same insurance policy to those who arguably need it the least: self-employed individuals in the highest tax bracket. It also is uncapped, thus encouraging the purchase of generous plans.

Question: What effects could the health care reform legislation being considered in the House and Senate have?

Answer: Some of the health care reform legislation being considered in the House and Senate could affect health insurance coverage for the self-employed.

Question: To what extent are these predictions justified by current knowledge?

Answer: Though it remains unclear whether either chamber will pass such a bill in the current Congress—and if so, what tax provisions it might contain—enough is known about the key issues in the congressional debate to sketch their implications for the self-employed.

Question: How could the bill lead to greater coverage among the self-employed?

Answer: Proposals that would expand private health insurance coverage or simultaneously expand public and private coverage options (e.g., H.R. 3200) could lead to greater coverage among the self-employed through income-based tax subsidies for the purchase of insurance and an individual mandate.