Tax Policy

At a time when the federal government faces hard choices to reduce the deficit and use available resources wisely, no federal expenditure or subsidy should escape careful review. Tax expenditures, or revenues foregone through preferential provisions in the tax code--for example, deductions, exemptions, and credits--can be a useful part of federal policy, but they should be scrutinized more closely and more often to ensure that, when used, they are the most effective means to an end. This report assesses the growth of federal revenues foregone through income tax expenditures and presents three options for reviewing and controlling their growth: (1) strengthening and extending techniques now used by congressional tax-writing committees, (2) integrating tax expenditures further into the budget process, and (3) reviewing tax expenditures jointly with related federal outlay programs.

GAO found that: (1) substantial revenues are forgone through tax expenditures, but they do not overtly compete in the annual budget process and most are not subject to reauthorization; (2) policymakers have few opportunities to make explicit comparisons or trade-offs between tax expenditures and federal spending programs; (3) the revenues forgone through tax expenditures reduce the resources available to fund other programs or reduce the deficit and force tax rates to be higher to obtain a given amount of revenue; (4) greater scrutiny of tax expenditures could be achieved by strengthening techniques currently used to control tax expenditures; (5) Congress could further integrate tax expenditures into the budget process by deciding whether savings in tax expenditures are desirable and setting specific savings targets in annual budget resolutions; and (6) reviews of tax expenditures could be integrated with functionally related outlay programs, which could make the government's overall funding effort more efficient.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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