Government Performance and Accountability
Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined Gao ID: GAO-05-690 September 23, 2005Numerous federal programs, policies, and activities are supported through the tax code. As described in statute, tax expenditures are reductions in tax liabilities that result from preferential provisions, such as tax exclusions, credits, and deductions. They result in revenue forgone. This report, done under the Comptroller General's authority, is part of an effort to assist Congress in reexamining and transforming the government to meet the many challenges and opportunities that we face in the 21st century. This report describes (1) how tax expenditures have changed over the past three decades in number, size, and in comparison to federal revenue, spending, and the economy, and (2) the amount of progress made since our 1994 recommendations to improve scrutiny of tax expenditures.
Whether gauged in numbers, revenues forgone, or compared to federal spending or the size of the economy, tax expenditures have represented a substantial federal commitment over the past three decades. Since 1974, the number of tax expenditures more than doubled and the sum of tax expenditure revenue loss estimates tripled in real terms to nearly $730 billion in 2004. The 14 largest tax expenditures, headed by the individual income tax exclusion for employer-provided health care, accounted for 75 percent of the aggregate revenue loss in fiscal year 2004. On an outlay-equivalent basis, the sum of tax expenditure estimates exceeded discretionary spending for most years in the last decade. For some budget functions, the sum of tax expenditure estimates was of the same magnitude as or larger than federal spending. As a share of the economy, the sum of tax expenditure outlay-equivalent estimates has been about 7.5 percent of gross domestic product since the last major tax reform legislation in 1986. All federal spending and tax policy tools, including tax expenditures, should be reexamined to ensure that they are achieving their intended purposes and designed in the most efficient and effective manner. The nation's current and projected fiscal imbalance serves to reinforce the importance of engaging in such a review and reassessment. Although data and methodological challenges exist, periodic reviews of tax expenditures could establish whether they are relevant to today's needs; if so, how well they have worked to achieve their objectives; and whether the benefits from specific tax expenditures are greater than their costs. Over the past decade, however, the Executive Branch made little progress in integrating tax expenditures into the budget presentation, in developing a structure for evaluating tax expenditure outcomes or in incorporating them under review processes that apply to spending programs, as we recommended in 1994. More recently, the Administration has not used its Program Assessment Rating Tool process to systematically review tax expenditures or promote joint reviews of tax and spending programs sharing common goals.
RecommendationsOur 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.
Director: Team: Phone:GAO-05-690, Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined
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Report to Agency Officials:
September 2005:
Government Performance and Accountability:
Tax Expenditures Represent a Substantial Federal Commitment and Need to
Be Reexamined:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-690]:
GAO Highlights:
Highlights of GAO-05-690, a report to agency officials:
Why GAO Did This Study:
Numerous federal programs, policies, and activities are supported
through the tax code. As described in statute, tax expenditures are
reductions in tax liabilities that result from preferential provisions,
such as tax exclusions, credits, and deductions. They result in revenue
forgone. This report, done under the Comptroller General‘s authority,
is part of an effort to assist Congress in reexamining and transforming
the government to meet the many challenges and opportunities that we
face in the 21st century. This report describes (1) how tax
expenditures have changed over the past three decades in number, size,
and in comparison to federal revenue, spending, and the economy, and
(2) the amount of progress made since our 1994 recommendations to
improve scrutiny of tax expenditures.
What GAO Found:
Whether gauged in numbers, revenues forgone, or compared to federal
spending or the size of the economy, tax expenditures have represented
a substantial federal commitment over the past three decades. Since
1974, the number of tax expenditures more than doubled and the sum of
tax expenditure revenue loss estimates tripled in real terms to nearly
$730 billion in 2004. The 14 largest tax expenditures, headed by the
individual income tax exclusion for employer-provided health care,
accounted for 75 percent of the aggregate revenue loss in fiscal year
2004. On an outlay-equivalent basis, the sum of tax expenditure
estimates exceeded discretionary spending for most years in the last
decade. For some budget functions, the sum of tax expenditure estimates
was of the same magnitude as or larger than federal spending. As a
share of the economy, the sum of tax expenditure outlay-equivalent
estimates has been about 7.5 percent of gross domestic product since
the last major tax reform legislation in 1986.
All federal spending and tax policy tools, including tax expenditures,
should be reexamined to ensure that they are achieving their intended
purposes and designed in the most efficient and effective manner. The
nation‘s current and projected fiscal imbalance serves to reinforce the
importance of engaging in such a review and reassessment. Although data
and methodological challenges exist, periodic reviews of tax
expenditures could establish whether they are relevant to today‘s
needs; if so, how well they have worked to achieve their objectives;
and whether the benefits from specific tax expenditures are greater
than their costs. Over the past decade, however, the Executive Branch
made little progress in integrating tax expenditures into the budget
presentation, in developing a structure for evaluating tax expenditure
outcomes or in incorporating them under review processes that apply to
spending programs, as we recommended in 1994. More recently, the
Administration has not used its Program Assessment Rating Tool process
to systematically review tax expenditures or promote joint reviews of
tax and spending programs sharing common goals.
Sum of Tax Expenditure Estimates Compared with Total Federal Outlays,
1981-2004:
[See PDF for image]
Note: Summing tax expenditure estimates does not take into account
interactions between individual provisions.
[End of figure]
What GAO Recommends:
GAO recommends the Office of Management and Budget (OMB), consulting
with the U.S. Department of the Treasury, take several steps to ensure
greater transparency of and accountability for tax expenditures by
reporting better information on tax expenditure performance and more
fully incorporating tax expenditures into federal performance
management and budget review processes. Citing methodological and
conceptual issues, OMB disagreed with the recommendations. GAO still
believes the recommendations are valid.
www.gao.gov/cgi-bin/getrpt?GAO-05-690.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek, (202)
512-9110, brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Tax Expenditures Have Represented a Substantial Federal Commitment over
Time:
Systematic Review of Tax Expenditures Is Integral to Reexamining the
Federal Base, but Little Progress Has Been Made Since 1994 to Increase
Scrutiny:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Office of Management and Budget:
Appendix III: How Tax Expenditures Are Measured and Reported:
Appendix IV: Compilation of Tax Expenditures Reported by Treasury (1974
to 2004):
Appendix V: Glossary:
Appendix VI: GAO Contact and Acknowledgments:
Selected Bibliography:
Related GAO Products:
Tables:
Table 1: Examples of Types of Tax Expenditures Available to Taxpayer
Groups:
Table 2: Revenue Loss Estimates for the Largest Tax Expenditures
Reported for Fiscal Year 2004, with Taxpayer Group and Budget Function:
Table 3: Comparison of Tax Expenditure Reporting by JCT and Treasury:
Table 4: List of Tax Expenditures Reported by the U.S. Department of
the Treasury and the Joint Committee on Taxation for Fiscal Year 2004:
Table 5: Sum of Revenue Loss Estimates for Tax Expenditures by Budget
Function Reported by the U.S. Department of the Treasury and Joint
Committee on Taxation, Fiscal Year 2004:
Table 6: Tax Expenditures Reported by the U.S. Department of the
Treasury (1974 to 2004):
Figures:
Figure 1: Examples of How Each Type of Tax Expenditure Relates to the
U.S. Individual Income Tax Return (Form 1040):
Figure 2: Number of Tax Expenditures Reported by Treasury, 1974-2004:
Figure 3: Duration of Tax Expenditures Reported by Treasury, 1974-2004:
Figure 4: Sum of Tax Expenditure Revenue Loss Estimates, 1974-2004:
Figure 5: Sum of Tax Expenditure Revenue Loss Estimates with Outlays
for Refundable Tax Credits, 1974-2004:
Figure 6: Tax Legislation Enacted From 1974-2004 That May Have
Influenced the Sum of Revenue Loss Estimates for Tax Expenditures:
Figure 7: Sum of Revenue Loss Estimates by Taxpayer Group, 1974-2004:
Figure 8: Sum of Tax Expenditure Outlay-equivalent Estimates Compared
with Total Mandatory and Total Discretionary Outlays, 1981-2004:
Figure 9: Sum of Tax Expenditure Outlay-Equivalent Estimates Compared
to Total Mandatory and Discretionary Outlays and Receipts as a
Percentage of GDP, 1981-2004:
Figure 10: Size of Tax Expenditure Outlay-Equivalent Estimates by
Budget Function, 1981-2004:
Figure 11: Tax Expenditure Outlay-equivalent Estimates Compared with
Federal Outlays by Budget Function, Fiscal Year 2004:
Figure 12: Composition of Spending as a Share of GDP under Baseline
Extended:
Figure 13: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP after 2005 and All Expiring Tax
Provisions Are Extended:
Figure 14: Treasury's Supplemental Reporting for Comprehensive Income
and Consumption Tax Baselines:
Figure 15: Supplemental Estimates Developed by Treasury and JCT:
Figure 16: Sum of Revenue Loss Estimates Reported by the Joint
Committee on Taxation and the U.S. Department of the Treasury (1987-
2004):
Letter September 23, 2005:
The Honorable Joshua Bolten:
Director:
Office of Management and Budget:
The Honorable John W. Snow:
The Secretary of the Treasury:
Over the last decade, a culture of performance has taken root in the
federal government. This culture has placed a greater premium on the
importance of accountability for the effective use of public resources
and authorities. Periodic reexamination of existing federal policies
and operations offers the prospect of weeding out ineffective or
outdated programs, policies, functions, or activities while
strengthening and updating those that are retained. While inefficient
and ineffective programs and policies are never appropriate, the
nation's long-term fiscal imbalance provides an additional impetus for
reexamining all major spending programs and tax provisions.[Footnote 1]
This includes tax incentives and subsidies intended to promote various
social and economic objectives. Tax preferences--which are legally
known as tax expenditures--result in forgone revenue for the federal
government due to preferential provisions in the tax code, such as
exemptions and exclusions from taxation, deductions, credits, deferral
of tax liability, and preferential tax rates. These tax expenditures
are often aimed at policy goals similar to those of federal spending
programs; existing tax expenditures, for example, are intended to
encourage economic development in disadvantaged areas, finance
postsecondary education, and stimulate research and development. Tax
expenditures have a significant effect on overall tax rates--in that,
for any given level of revenue, overall tax rates must be higher to
offset the revenue forgone through tax expenditures--as well as the
budget and fiscal flexibility. They also contribute to the growing
complexity of the federal tax system. Regardless of the level of
revenue deemed appropriate, tax expenditures--like other federal
programs or activities--should be reviewed to determine their
effectiveness and continued relevance. Yet, tax expenditures and their
relative contributions toward achieving federal missions and goals are
often less visible than spending programs which are subject to more
systematic review.
A little over a decade ago, GAO examined the growth in tax expenditures
and opportunities to focus policymakers' attention on them.[Footnote 2]
Our review found that tax expenditures were not integrated into annual
federal budget review processes, and most were not subject to
reauthorization, even though revenues forgone through tax expenditures
were substantial. In turn, policymakers had few opportunities to make
explicit comparisons or trade-offs between tax expenditures and federal
spending programs. Therefore, we made several recommendations to the
Office of Management and Budget (OMB) intended to encourage more
informed policy debate about tax expenditures and to stimulate joint
reviews of related tax and spending programs. OMB agreed that our
recommendations were generally reasonable and reported that the
Executive Branch had initiated efforts to integrate tax expenditures in
the budget review process and develop performance measures for some tax
expenditures.
We have prepared this report under the Comptroller General's authority
as part of a continuing effort to assist Congress in reexamining the
base of federal programs, policies, and activities critical to
achieving fiscal discipline in the budget as a whole. This report
updates our 1994 work and specifically describes (1) how tax
expenditures have changed over the past three decades in number and
size and in comparison to federal revenue, spending, and the economy,
and (2) the amount of progress that has been made since 1994 in how the
Executive Branch scrutinizes tax expenditures.
This update draws on our previously issued work on tax expenditure
trends and individual tax provisions as well as results-oriented
management and performance reporting. We also reviewed relevant
literature related to tax expenditure measurement and reporting, and
trends in the use of tax expenditures over time. We interviewed
relevant agency officials and tax policy experts to obtain a greater
understanding of information gained through our literature review. To
gauge trends in the numbers and size of tax expenditures for fiscal
years 1974 to 2004, we relied on the Department of the Treasury's
(Treasury) annual list of tax expenditures and estimates for each tax
expenditure of the associated revenue loss--the amount of revenue that
the government forgoes--and the outlay-equivalent value--the amount of
outlays required to deliver the same after-tax income as provided
through the tax expenditure.[Footnote 3] We added the tax expenditure
revenue loss estimates for each fiscal year to approximate the total
revenue forgone through tax expenditure provisions. While sufficiently
reliable as a gauge of general magnitude, the sum of the individual
revenue loss estimates has important limitations in that any
interactions between tax expenditures will not be reflected in the sum.
In addition, tax expenditure revenue loss estimates for specific
provisions do not take into account potential behavioral responses to
changes in these provisions on the part of taxpayers, and, in turn, no
potential behavioral response would be reflected in the sum of the
estimates. Thus, the revenue loss from all or several tax expenditures
together might be greater or less than the sum of the estimated revenue
losses from the individual tax expenditures, and no measure of the size
or the magnitude of these potential interactions or behavioral
responses to all or several tax expenditures is available. Growth in
the sum of tax expenditure estimates across the three-decade period is
presented in inflation- adjusted 2004 dollars and measured relative to
the economy as a share of the gross domestic product (GDP). We compared
the sum of tax expenditure outlay-equivalent estimates to total federal
mandatory and discretionary spending and spending by budget function.
Finally, we used Treasury's estimates to examine trends in the size of
tax expenditures by taxpayer group and identify the largest tax
expenditures in 2004.
To examine progress over the last decade in how the federal government
scrutinizes tax expenditures, we examined actions taken by the
Executive Branch to implement our 1994 recommendations for (1)
presenting tax expenditures in the annual budget, (2) developing a
structure for conducting reviews of tax expenditures' performance, (3)
conducting case studies to assess performance review structure, and (4)
incorporating tax expenditures into the annual budgetary review
process. We reviewed efforts to include tax expenditures under the
Government Performance and Results Act's (GPRA) statutory framework for
strategic planning, performance measurement, and program reporting and
evaluation.[Footnote 4] We also considered any related activities to
include tax expenditures under OMB's Program Assessment Rating Tool
(PART)--its current framework for assessing the performance of federal
programs. (See app. I for details on our scope and methodology.)
Our work was conducted from August 2003 through July 2005, in
accordance with generally accepted government auditing standards. In
July 2005, we requested comments on a draft of this report from the
Director of the Office of Management and Budget, the Secretary of the
Department of the Treasury, and the Commissioner of the Internal
Revenue Service (IRS). We received comments from OMB's Associate
Director for Economic Policy in a letter dated September 2, 2005 (see
app. II). Treasury did not provide separate comments, instead deferring
to OMB. IRS staff provided a technical correction that we incorporated.
Results in Brief:
Whether gauged in absolute numbers and revenues forgone or in
comparison to federal spending or the size of the economy, tax
expenditures have represented a substantial commitment of federal
support over the past three decades. Between 1974 and 2004, tax
expenditures doubled in number from 67 to 146, and while some were
repealed or allowed to expire, considerably more were added to
Treasury's list. Based on our analysis of Treasury's estimates, the sum
of revenue loss estimates associated with tax expenditures, adjusted
for inflation, tripled from approximately $240 billion to nearly $730
billion over the period.[Footnote 5] The 14 largest tax expenditures,
headed by the largest single tax expenditure--the income tax exclusion
for employer-provided health care--accounted for 75 percent of the
aggregate revenue loss in fiscal year 2004. The sum of the revenue loss
estimates for tax expenditures that are used by individual taxpayers
increased in real terms from approximately $190 billion to nearly $650
billion. Since 1981 when outlay-equivalent estimates were first
available, the sum of the outlay-equivalent estimates for tax
expenditures has been similar in magnitude to discretionary spending,
and this sum exceeded total discretionary spending for most years
during the last decade. As a share of the U.S. economy, the sum of tax
expenditure outlay-equivalent estimates remained relatively stable at
about 7.5 percent of GDP since the last major tax reform legislation in
1986. Across budget functions, the size of tax expenditures varied, and
for some budget functional areas, such as housing and education, tax
expenditures were the same magnitude as, or larger than, federal
spending.
Although tax expenditures are substantial in size, little progress has
been made in the Executive Branch to increase the transparency of and
accountability for tax expenditures. The entire set of tools the
federal government can use to address national objectives--including
discretionary and mandatory spending, tax provisions, and loans and
loan guarantees--should be subject to periodic reviews and
reexamination to ensure they are achieving their intended purposes and
designed in the most efficient and effective manner. The nation's
current and projected fiscal imbalance serves to reinforce the
importance of engaging in such a review and reassessment. Tax
expenditures may not always be efficient, effective, or equitable and,
consequently, information on these attributes can help policymakers
make more informed decisions as they adapt current policies in light of
our fiscal challenges and other overarching trends. In addition, some
tax expenditures, at least as currently designed, may serve to
exacerbate other key private sector and public policy challenges, such
as controlling health care costs. Although data and methodological
challenges may impede studies of some tax expenditures, periodic
reviews of tax expenditures could help establish whether these programs
are relevant to today's needs; if so, how well tax expenditures have
worked to achieve their objectives; and whether the benefits from
particular tax expenditures are greater than their costs. Over the past
decade, however, the Executive Branch has made little progress in
integrating tax expenditures into the budget presentation, in
developing a structure for evaluating the performance of tax
expenditures, or in incorporating tax expenditures under review
processes that apply to spending programs, as we recommended in 1994.
Also, more recently, OMB has not used its PART process to
systematically review tax expenditures and promote joint and integrated
reviews of tax and spending programs sharing common, crosscutting
goals. One of the key impediments to moving forward in evaluating tax
expenditures' performance is the continuing lack of clarity about the
roles of OMB, Treasury, IRS, and departments or agencies with outlay
program responsibilities.
We are recommending that the Director of OMB, in consultation with the
Secretary of the Treasury, take several steps to ensure greater
transparency of and accountability for tax expenditures by reporting
better information on tax expenditures' performance and more fully
incorporating tax expenditures into federal performance management and
budget review processes.
In providing comments on a draft of this report, OMB's Associate
Director for Economic Policy disagreed with our recommendations, raised
concerns about our use of tax expenditure estimates developed by
Treasury and reported in the annual federal budget, and implied that
increasing the attention paid to tax expenditures due to the severity
of the nation's long-term fiscal imbalance would lead to tax increases.
Pursuant to the Congressional Budget Act of 1974, the term tax
expenditure, as our draft stated, has been used in the federal budget
for three decades, and the tax expenditure concept--while not precisely
defined--is a valid representation of one tool that the federal
government uses to allocate resources. In addition, OMB's implication
that focusing more attention on tax expenditures would automatically
lead to increased taxes is unfounded. Our report states that the
revenues forgone through tax expenditures reduce revenues available to
fund other federal activities or they require higher tax rates to
obtain a given amount of revenue. Thus, if the evaluations of tax
expenditures we call for lead to reducing or eliminating some tax
expenditures, the net change after rate adjustments could, depending on
overall congressional priorities and preferences, result in tax
reductions for many taxpayers. Furthermore, although specific tax
expenditures, such as the earned income tax credit (EITC) and Liberty
Zone tax benefits, have received varying degrees of scrutiny, efforts
to date have not provided the Congress and others with an integrated
perspective on the extent to which programs and tools--including tax
expenditures--contribute to national goals and position the government
to successfully meet 21st century demands. The lack of a requirement to
disclose tax expenditures in agencies' annual performance and
accountability reports may result in important performance and cost
related data not being fully considered with other federal resources
allocated to achieve similar objectives. Although challenges must be
overcome to provide systematic reviews of tax expenditures, these
challenges cannot be addressed absent effective leadership within the
Executive Branch. For these reasons, we believe our recommendations, if
fully implemented, will ensure that policymakers and the public have
the necessary information to make informed decisions and to improve the
progress toward greater scrutiny of tax expenditures.
Background:
To understand the trends in the size of tax expenditures, it is helpful
to understand how tax expenditures are defined and how the different
types affect taxpayer liability. For this report, we also provide an
overview of the broad purposes of tax expenditures--one method the
federal government can use to achieve national objectives--and a
discussion of how tax expenditures interact with the federal budget.
Tax Expenditures Defined:
Tax expenditures are revenue losses--the amount of revenue that the
government forgoes--resulting from federal tax provisions that grant
special tax relief for certain kinds of behavior by taxpayers or for
taxpayers in special circumstances. These provisions may, in effect, be
viewed as spending programs channeled through the tax system and are
classified in the U.S. budget by the same functional categories as
other spending, such as energy and health. Tax expenditures are
provisions that are exceptions to the "normal structure" of the
individual and corporate income tax necessary to collect government
revenues.[Footnote 6] Deciding whether an individual provision should
be characterized as a tax expenditure is a matter of judgment, and
disagreements about classification stem from different views about what
should be included in the income tax base.[Footnote 7] As a practical
matter, the term tax expenditure has been used in the federal budget
for three decades, and the tax expenditure concept--while not precisely
defined--is a valid representation of one tool that the federal
government uses to allocate resources.
Both the congressional Joint Committee on Taxation (JCT) and Treasury's
Office of Tax Analysis annually compile a list of tax expenditures and
estimates of their cost.[Footnote 8] (App. III provides additional
information on how tax expenditures are measured and reported and
perspective on differences among the lists of tax expenditures reported
by JCT and Treasury.) Treasury's tax expenditure estimates are included
as an informational supplement to the annual federal budget by the OMB.
The revenue loss is estimated for each tax expenditure separately by
comparing the revenue raised under current law with the revenue that
would have been raised if the single provision did not exist, assuming
all other parts of the tax code remain constant and taxpayer behavior
is unchanged. Revenue loss estimates are intended to provide
information about the value of tax expenditures. However, tax
expenditure estimates do not incorporate any behavioral responses and
thus do not necessarily represent the exact amount of revenue that
would be gained if a specific tax expenditure were repealed.[Footnote
9] For example, when the consumer interest deduction was phased out
gradually beginning in 1987, some taxpayers shifted to interest-
deductible home equity loans to finance consumption, thereby affecting
the revenue gain from eliminating the consumer interest deduction.
In addition to estimating revenue loss, Treasury also measures tax
expenditures on an outlay-equivalent basis. Outlay-equivalent estimates
represent the amount of budget outlays that would be required if the
government were to provide taxpayers with the same after-tax income
they receive through the tax expenditure. Outlay-equivalent estimates
are often higher than revenue loss estimates to reflect that a
comparable outlay program could result in additional taxable income to
recipients.[Footnote 10] Outlay-equivalent estimates are useful to
compare tax expenditures and other parts of the federal budget. For
example, the outlay-equivalent estimate for the tax exclusion for
housing and meal allowances for military personnel reflects the
additional pretax income that military personnel would have to be paid
to raise their income after federal taxes by the amount of the tax
expenditure. The outlay-equivalent estimate can be used to compare this
tax expenditure with other outlays for defense compensation on a more
consistent basis.
Types of Tax Expenditures:
The Congressional Budget and Impoundment Control Act of 1974[Footnote
11] lists six types of tax expenditures: exclusions, exemptions,
deductions, credits, preferential tax rates, and deferral of tax
liability. Some tax expenditures apply only to individual taxpayers,
such as deductions and exclusions for employer-provided contributions
for medical insurance, and some only to corporate taxpayers, such as a
tax credit for corporations doing business in U.S. possessions. Other
tax expenditures, such as accelerated depreciation, apply both to
corporations and to individual taxpayers with income from businesses
such as sole proprietorships or partnerships.[Footnote 12] Table 1
shows examples of each type of tax expenditure and the taxpayer group
that may claim a particular type.
Table 1: Examples of Types of Tax Expenditures Available to Taxpayer
Groups:
Types of tax expenditures[A]: Exclusion from taxable income;
Taxpayer groups: Individual taxpayers[B]: Exclusion of employer
contributions to medical insurance premiums and medical care;
Taxpayer groups: Corporate taxpayers: Extraterritorial income
exclusion;
Taxpayer groups: Both corporate and individual taxpayers: Exclusion of
interest on public purpose state and local bond.
Types of tax expenditures[A]: Exemption from taxable income;
Taxpayer groups: Individual taxpayers[B]: Parent personal exemption for
student age 19 and over;
Taxpayer groups: Corporate taxpayers: Exemption of credit union income;
Taxpayer groups: Both corporate and individual taxpayers: Special
employer stock ownership plan rules.
Types of tax expenditures[A]: Deduction from taxable income;
Taxpayer groups: Individual taxpayers[B]: Deductibility of mortgage
interest on owner-occupied homes;
Taxpayer groups: Corporate taxpayers: Special Blue Cross/Blue Shield
deduction;
Taxpayer groups: Both corporate and individual taxpayers: Deductibility
of charitable contributions.
Types of tax expenditures[A]: Credit subtracted from taxes ordinarily
computed;
Taxpayer groups: Individual taxpayers[B]: Child tax credit;
Taxpayer groups: Corporate taxpayers: Employer-provided child care
credit;
Taxpayer groups: Both corporate and individual taxpayers: Credit for
low-income housing investments.
Types of tax expenditures[A]: Preferential tax rate for all or part of
taxable income;
Taxpayer groups: Individual taxpayers[B]: Averaging previous period
taxable income for farmers;
Taxpayer groups: Corporate taxpayers: Graduated corporation income tax
rate;
Taxpayer groups: Both corporate and individual taxpayers: N/A.
Types of tax expenditures[A]: Deferral of tax liability;
Taxpayer groups: Individual taxpayers[B]: Carryover basis of capital
gains on gifts;
Taxpayer groups: Corporate taxpayers: Deferral of income from
controlled foreign corporations;
Taxpayer groups: Both corporate and individual taxpayers: Accelerated
depreciation of machinery and equipment.
Source: GAO.
[A] Types of tax expenditures that are identified in the U.S.
Congressional Budget and Impoundment Act of 1974.
[B] Individual tax expenditures include those available to non-
corporate forms of business such as sole proprietorships.
[End of table]
Figure 1 illustrates how tax expenditures appear on the U.S. Individual
Income Tax Return (Form 1040). Exclusions are those items of income
that would otherwise constitute a part of the taxpayer's gross income,
but are excluded under a specific provision of the tax code. Exclusions
generally do not appear on the Form 1040, and excluded income is not
reflected in total reported income. For example, the income tax
exclusion of employer contributions to medical insurance premiums and
medical care is not reported in a taxpayer's wages or salaries. An
exemption, such as the parent personal exemption for students over age
19 but under age 24, is a reduction in taxable income offered to
taxpayers because of their status or circumstances. Deductions are
adjustments from adjusted gross income.[Footnote 13] Deductions claimed
before the adjusted gross income line on the Form 1040, such as the
tuition and fees deduction (this appears on line 27 in fig. 1), are
sometimes called "above-the-line" deductions. Taxpayers may also claim
"below-the-line" deductions after the adjusted gross income line; to do
so, taxpayers must itemize their deductions.[Footnote 14]
Figure 1: Examples of How Each Type of Tax Expenditure Relates to the
U.S. Individual Income Tax Return (Form 1040):
[See PDF for image]
[End of figure]
Each type of tax expenditure creates tax savings in different ways and,
consequently, reduces federal revenues in different ways. The amount of
tax relief per dollar that a taxpayer receives using an exclusion,
exemption, or deduction depends on the taxpayer's marginal tax
rate.[Footnote 15] Generally, the higher the taxpayer's marginal tax
rate, the greater the tax savings from these tax expenditure
types.[Footnote 16] Tax credits reduce tax liability dollar-for-dollar,
so the value of a credit is the same regardless of the taxpayer's
marginal tax rate. A nonrefundable tax credit can be used to reduce
current year tax liability to zero, and a refundable credit in excess
of tax liability results in a cash refund. For preferential tax rates
which reduce the tax rate on some forms of income such as capital
gains, the tax savings depend on the difference between the
preferential rate and a taxpayer's marginal tax rate. By allowing
taxpayers to reduce current tax liability by delaying recognition of
some income or accelerating some deductions otherwise attributable to
future years, a tax deferral shifts the timing of tax payments and, in
effect, provides an interest-free "loan" to the taxpayer. The benefit
from a deferral is even greater if the taxpayer expects to face a lower
tax bracket in the future. A lower-income taxpayer--with no net annual
income or with no current tax liability after claiming the standard
deduction and any personal exemptions--would not directly benefit from
most tax expenditures other than refundable credits.
Some techniques have been used to limit the benefits that taxpayers may
receive from individual tax expenditures or groups of them. Congress
has controlled the amount of revenue forgone for some tax expenditures
by adopting provisions to restrict taxpayers' eligibility for benefits.
For example, the mortgage interest deduction is limited to interest on
debt up to $1 million to buy, build, or improve first and second homes
and up to $100,000 in home equity debt. Aggregate itemized deductions
are reduced by 3 percent of the amount of a taxpayer's adjusted gross
income that exceeds a certain threshold, eliminating 3 cents of
itemized deductions for each dollar of income above the threshold for
higher-income taxpayers.[Footnote 17] Some tax expenditures, such as
tax-exempt private-activity bonds issued by each state, are subject to
volume caps limiting the aggregate amount of benefits available. The
alternative minimum tax (AMT) also affects tax expenditures and the
amount of the revenue loss for the federal government.[Footnote 18] The
AMT is intended to ensure that taxpayers with income over certain
thresholds pay some income tax, no matter how much they claim in
certain deductions and credits. Under the AMT, taxpayers may have to
add back some tax expenditures that they could otherwise claim under
the regular tax system, such as deductions for state and local taxes
and home equity loan interest, and they may have to include as income
certain tax-exempt bond interest that is excluded under the regular tax
system.
Objectives of Tax Expenditures:
In addition to raising revenue, the federal income tax has long been
used as a tool for accomplishing social and economic objectives. The
general objectives of tax expenditures are to encourage particular
types of activities (such as saving for retirement, promoting home
ownership, investing in certain sectors, or funding research and
development) and provide economic relief to selected groups of
taxpayers (such as the elderly, the blind, and those with children).
Another objective of tax expenditures may also be to adjust for
differences in individuals' ability to pay taxes. For example, if two
taxpayers have the same income, but one has a catastrophic illness and
costly medical bills (or large casualty and theft losses), the other
taxpayer is judged better able to pay income taxes. Some tax
expenditures may be enacted to compensate for other provisions of the
tax code. For example, advocates of reduced tax rates on capital gains
often explain the special treatment of capital gains income as
offsetting, in part, the assessment of taxes on the nominal, rather
than the real, value of capital gains. The rationale and reasons for a
particular tax expenditure may change over time. For example, according
to the Congressional Research Service (CRS), the income tax code
instituted in 1913 contained a deduction for all interest paid. No
distinction was made between business and personal interest expenses,
although most interest payments at that time represented business
expenses. The legislative history does not indicate that the
deductibility of mortgage interest was originally intended to encourage
home ownership or subsidize the housing industry. However, over time,
encouraging home ownership, stimulating residential construction and
maintenance, and encouraging families to save and invest in a major
financial asset have all been offered as justifications for the
mortgage interest deduction.[Footnote 19]
The tax expenditure tool may substitute for a federal spending program
in that the federal government "spends" some of its revenue on
subsidies by forgoing taxation on some income.[Footnote 20] Certain
activities may be cheaper and simpler to subsidize through the tax code
than by setting up a separate program using a different tool. For
example, the incremental administrative and compliance costs to deliver
the tax credit for child and dependent care expenses may be relatively
low compared to the costs of setting up a separate system for
processing child care applications and sending vouchers to those
eligible. The administrative infrastructure already exists for the
government to collect and remit money to over 131 million individual
tax filers and 6 million corporations via the tax system administered
by the IRS. In concept, the costs to implement an income-based benefit
program through the existing tax system could be lower than to set up
separate spending programs to deliver these benefits.
In some circumstances, tax expenditures may not be the best policy
choice to deliver timely benefits or reach intended populations. For
programs that seek to provide benefits within a given year, the annual
income measure relevant for income tax purposes may not be the best way
to target benefits. Relative to spending programs, tax expenditures are
limited in their ability to directly provide benefits to nontaxpayers.
For example, tax credits must be refundable to reach low-income
individuals who do not pay taxes and otherwise would not be required to
file tax returns. Tax expenditures generally do not deliver federal
resources directly to state and local governments and tax-exempt
nonprofit organizations. The charitable contribution deduction provides
an incentive for individual and corporate taxpayers to donate to
charitable, religious, educational, and health nonprofit organizations.
The deduction, in effect, is a federal grant to the donor that reduces
the out-of-pocket cost of giving. The itemized deduction for state and
local taxes directly increases an individual taxpayer's after-tax
income and thus reduces the after-tax price of state and local taxes.
State and local governments receive some of the benefit to the extent
that taxpayers may be more willing to pay state and local taxes.
Tax expenditures are not necessarily an either/or alternative to
federal spending and may be used in combination with federal spending
and strategies to achieve national objectives. For example, the HOPE
and Lifetime Learning tax credits are used with federal education
assistance, such as student loans, all of which help individuals fund
higher education. Many tax expenditures are comparable to entitlement
programs for which spending is determined by rules for eligibility,
benefit formulas, and other parameters rather than by Congress
appropriating specific dollar amounts each year.[Footnote 21] With some
exceptions, tax expenditures typically make funds (through reduced
taxes) available to all qualified claimants, regardless of how many
taxpayers claim the tax expenditures, how much they claim
collectively,or how much federal revenue is reduced by these claims.
Some tax expenditures resemble other policy tools, such as grants or
direct loans. A few tax expenditures are administered like grant
programs, allowing for some administrative discretion over who receives
funds. For the New Markets Tax Credit (NMTC), those seeking the credit
must apply to the Community Development Financial Institutions (CDFI)
Fund within Treasury and be chosen by a group of evaluators to receive
the tax credit. Like a grant program, the NMTC has a maximum amount
that can be allocated by CDFI.[Footnote 22] Tax expenditures in the
form of deferrals resemble loans, because they allow taxpayers to
postpone the time when income is recognized for tax purposes or to
accelerate the deduction of expenses, both of which effectively lower
the amount of income currently subject to tax. Deferrals can result in
higher taxes in later years when taxpayers recognize deferred income in
later tax years or have fewer deductions to claim than they otherwise
would have had; the amount of the deferral is, in effect, analogous to
a government loan.
Tax Expenditures and the Federal Budget:
Tax expenditures, by definition, reduce federal revenue and thus have
implications for income tax rates, federal spending, and the federal
budget. To obtain a given amount of revenue, tax expenditures require
overall statutory tax rates to be higher. Otherwise, revenues forgone
through tax expenditures reduce the revenue base available for funding
federal spending programs. From a budgetary perspective, most tax
expenditures are comparable to mandatory spending for entitlement
programs, in that no further action is required to provide resources
for tax expenditures. Tax expenditures do not compete overtly in the
annual budget process and, in effect, receive a higher funding priority
than discretionary spending subject to the annual appropriations
process. Revenues forgone through tax expenditures--unless offset by
increased taxes or lower spending--increase the unified budget deficit
and federal borrowing from the public (or reduce the unified budget
surplus available to reduce debt held by the public).
As noted previously, both the executive and legislative branches--by
Treasury and JCT, respectively--publish annual lists of tax
expenditures and the associated revenue loss, but budgetary decisions
generally are not based on these lists. Like any spending program,
newly proposed tax expenditures and those subject to expiration, to
some extent, are subject to scrutiny, but most tax expenditures are not
subject to reauthorization. Tax expenditures may be indirectly
controlled to the extent that the Congress aims to achieve any revenue
target. The tax committees consider tradeoffs between tax expenditures,
tax rates, and other parts of the tax code.
In concept, eliminating or limiting an existing tax expenditure--like
an existing spending program--would free up resources to reduce tax
rates, increase federal spending or other tax expenditures, reduce the
deficit, or produce some combination thereof. Conversely, adding a new
tax expenditure, expanding an existing tax expenditure, or extending an
expiring tax expenditure reduces the resources available to reduce tax
rates, fund federal spending and tax expenditures, or reduce the
deficit. The overall effect on the unified budget position would depend
on the extent to which any change in tax expenditures is offset by
adjustments to the tax code or other spending programs.
Tax Expenditures Have Represented a Substantial Federal Commitment over
Time:
Whether gauged in absolute numbers, by revenues forgone, or in
comparison to federal spending or the size of the economy, tax
expenditures have been substantial over the last three decades. Between
fiscal years 1974 and 2004, tax expenditures doubled in number, and the
sum of estimated revenue losses associated with tax expenditures
tripled, most of which was accounted for by tax expenditures that were
used by individual taxpayers. Since 1981 when outlay-equivalent
estimates were first available, the sum of the outlay-equivalent
estimates for tax expenditures has been similar in magnitude to
discretionary spending, and this sum exceeded total discretionary
spending for most years during the last decade. As a share of the U.S.
economy, the sum of tax expenditure outlay-equivalent estimates
remained relatively stable at about 7.5 percent of GDP since the last
major tax reform legislation.
Sums of Tax Expenditure Estimates Are Useful for Gauging Magnitude of
Tax Spending but Need to Be Interpreted Carefully:
Summing the individual tax expenditure estimates is useful for gauging
the general magnitude of the federal revenue involved, but it does not
take into account possible interactions between the individual tax code
provisions. Because of this limitation, sums of tax expenditure
estimates must be interpreted carefully. The JCT and Treasury estimate
the revenue loss from each tax expenditure separately, assuming that
the rest of the tax code remains unchanged. Neither JCT nor Treasury
adds tax expenditure estimates, because summing them does not take into
account possible interaction effects among the provisions. If two or
more tax expenditures were estimated simultaneously, the total change
in federal revenue could be smaller or larger than the sum of the
amounts shown for each item separately as a result of interactions
among the tax expenditure provisions. For example, the repeal of an
itemized deduction tax expenditure might cause more taxpayers to take
the standard deduction instead of itemizing. However, the revenue loss
estimate for any single tax expenditure among the itemized deductions
does not reflect this potentially sizeable interaction with the
standard deduction. Eliminating several itemized deductions at the same
time could cause significant numbers of taxpayers to take the standard
deduction, and thus, the decrease in revenue could be less than the sum
of the estimated revenue loss estimates for each itemized deduction. To
demonstrate the magnitude of possible interactions and the potential
implications for summing tax expenditures, Treasury's Office of Tax
Analysis illustrated for us the repeal of five itemized
deductions.[Footnote 23] Based on tax year 2002 data, the sum of the
five separate tax expenditure estimates, each calculated assuming the
rest of the tax code was unchanged, was over $175 billion.[Footnote 24]
Assuming the simultaneous repeal of all five provisions, Treasury
estimated the revenue loss after interaction totaled $131 billion--
about 25 percent less than the sum of the separate estimates. According
to Treasury, this example cannot be generalized given that some groups
of tax provisions have substantial interactions and others do not. For
all tax expenditures, the magnitude of the difference between the sum
of the estimates and an estimate for all tax expenditures
simultaneously is not known.
Additionally, tax expenditure estimates developed by Treasury and JCT
do not take into account possible behavioral responses by taxpayers if
a tax expenditure were repealed. For example, if the HOPE scholarship
tax credit--a tax credit for the first 2 years of post-secondary
education--were eliminated, taxpayers who would have used that tax
credit may instead opt for the Lifetime Learning tax credit or other
tax subsidies aimed at higher education. In contrast, certain kinds of
behavioral responses, such as changes in the timing of transactions,
income recognition, or shifts between sectors of the economy, are taken
into account when JCT and Treasury prepare revenue estimates for
proposed legislation. Potential macroeconomic effects, such as changes
to GDP, are not reflected in tax expenditure revenue loss estimates or
in revenue estimates for proposed legislation.
To some extent, the same kinds of challenges in interpreting tax
expenditure estimates also exist in projecting the costs of spending
programs. Budget line items generally do not reflect the actual budget
savings to be gained by abolishing specific programs or groups of
programs. For instance, eliminating all veterans' benefits would reduce
the federal budget by less than the amount currently spent on those
programs because spending likely would increase in food stamps,
Medicaid, and other entitlement programs. Although interaction effects
also occur for spending programs, Treasury officials responsible for
developing tax expenditure estimates told us that the bias in summing
tax expenditure revenue loss estimates likely is greater than the bias
for outlay projections. Whereas historical data are reported for
federal budget receipts and outlays, the last available values for tax
expenditures remain estimates. Treasury's last reported re-estimates
for past fiscal years reflect legislation enacted, prevailing economic
conditions, and the latest taxpayer data available at the time of
estimation.[Footnote 25] Projections of the future costs of tax
expenditures are more uncertain than projections for future tax
receipts or outlays because it is not known with certainty, even after
the fact, how much was spent for any given tax expenditure.
Despite the limitations in summing separate tax expenditure revenue
loss and outlay-equivalent estimates, these are the best available data
to measure the value of tax expenditures and make comparisons to other
spending programs. Summing the estimates provides perspective on the
use of tax expenditures as a policy tool and represents a useful gauge
of the general magnitude of government subsidies carried out through
the tax code. The estimates also can be used to compare tax
expenditures to federal spending overall and by budget function. Other
researchers also have summed tax expenditure estimates to help gain
perspective on the use of this policy tool and examine trends in the
aggregate growth of tax expenditure estimates over time.[Footnote 26]
Tax Expenditures Have More Than Doubled in Number and Tripled in Size:
Between 1974 and 2004, tax expenditures reported by Treasury more than
doubled in overall number from 67 to 146, and while some were dropped,
considerably more were added. For 1974, Treasury listed 67 separate
exclusions, exemptions, deductions, credits, preferential tax rates,
and deferral of tax liability as tax expenditures.[Footnote 27] In
1986, Treasury reported 115 tax expenditures, and by 2004 Treasury's
list grew to 146 tax expenditures. Figure 2 shows the rise of the
overall number of tax expenditures over the last three decades. (App.
IV contains a compilation of all tax expenditures reported by Treasury
between 1974 and 2004.)
Figure 2: Number of Tax Expenditures Reported by Treasury, 1974-2004:
[See PDF for image]
Note: The number of tax expenditures reflects all provisions reported
by Treasury, including those enacted but effective for future fiscal
years. For example, Treasury's last available list included eight new
tax expenditures enacted in 2004 that will be effective in fiscal year
2005 and later. In addition, fluctuations in the trend lines from year-
to-year may reflect changes in OMB's methodology. For example, the
exclusion of scholarship and fellowship income and several other tax
expenditures were excluded for fiscal year 1982, but included in prior
and post years, because of changes in Treasury's income tax baseline
that defines a tax expenditure.
[End of figure]
Of the 146 tax expenditures listed by Treasury in the President's
fiscal year 2006 budget, 32 percent were on the first list in 1974, 23
percent were added between 1975 and 1986, and 45 percent were added
since 1986. Figure 3 shows the duration of tax expenditures listed by
Treasury. Of the 67 tax expenditures listed in 1974, 21 had been
dropped over the period, leaving 46 remaining on the list in 2004.
Since 1974, 143 tax expenditures were added to Treasury's list,
although 43 of them have since dropped from the list over the period.
Of the 100 added since 1974 and still reported in fiscal year 2004, 66
were first reported for 1986 or later.
Figure 3: Duration of Tax Expenditures Reported by Treasury, 1974-2004:
[See PDF for image]
Note: The number of tax expenditures reflects all provisions reported
by Treasury, including those enacted but effective for future fiscal
years. For example, Treasury's last available list included eight new
tax expenditures enacted in 2004 that will be effective in fiscal year
2005 and later. Fluctuations in the trend lines from year-to-year may
reflect changes in OMB's methodology. For example, the exclusion of
scholarship and fellowship income and several other tax expenditures
were excluded for fiscal year 1982, but included in prior and post
years, because of changes in Treasury's income tax baseline that
defines a tax expenditure.
[End of figure]
The number of tax expenditures reported by Treasury has changed over
time for several reasons. Some provisions expired or were repealed;
others were merged with another tax expenditure. For example, until
expiration on December 31, 1984, state and local governments were
allowed to issue tax-exempt obligations to finance the purchase of mass-
commuting vehicles for lease to government transit agencies; the Tax
Reform Act of 1986[Footnote 28] repealed the investment tax credit; and
the tax expenditure that provided 5-year amortization for pollution
control was merged into the investment tax credit by the Tax Reform Act
of 1976.[Footnote 29] Legislation also added new tax expenditures over
time, such as the child tax credit created by the Taxpayer Relief Act
of 1997.[Footnote 30] Some tax expenditures split into additional
listings to reflect legislation expanding existing tax expenditures.
For example, Treasury began listing the net exclusion of pension
contributions and earnings with separate estimates for employer-
sponsored defined-benefit and 401(k) pension plans following 2001
legislation increasing the contribution limits for 401(k) accounts.
Finally, changes in the baseline used by Treasury to identify tax
expenditures may have caused some tax expenditures to drop off its
list, while adding new tax expenditure listings.[Footnote 31] For
example, Treasury briefly dropped the exclusion of scholarship and
fellowship income from its fiscal year 1982 list because it was not
considered a tax expenditure under the baseline that Treasury used that
year.
As the overall number reported by Treasury doubled, the sum of the
estimated revenue loss due to tax expenditures, adjusted for inflation,
tripled from approximately $243 billion for 1974 to $728 billion for
2004.[Footnote 32] Figure 4 shows the sum of Treasury's revenue loss
estimates over the past three decades. From 1974 to 1986, revenue
losses increased by nearly two and one-half times from approximately
$243 billion for 1974 to $598 billion for 1986 (in 2004 dollars). Over
the next 2 years, the sum of the revenue losses decreased by about 28
percent to approximately $433 billion for 1988. From 1989 through 1997,
however, revenue losses increased by approximately 16 percent to
approximately $547 billion. From 1998 to 2002, the sum of the estimated
revenue loss increased by an average of about $41 billion per year,
peaking at about $783 billion for 2002. The sum of the revenue loss
estimates declined to approximately $728 billion in 2004.
Figure 4: Sum of Tax Expenditure Revenue Loss Estimates, 1974-2004:
[See PDF for image]
Note: Summing the revenue loss estimates does not take into account
possible interaction effects among the tax expenditures that we
mentioned earlier in the report. Changes in economic conditions and
estimation techniques can affect revenue loss estimates for tax
expenditures, making them differ from year to year. Changes to the
number of tax expenditures reported by Treasury would also affect the
amount of revenue loss reported if some tax expenditures were
eliminated or added. Finally, revenue loss estimates include the effect
of certain tax credits on receipts only and not the effect of the
credits on outlays.
[End of figure]
The revenue loss estimates do not reflect the outlays for the
refundable portion for certain tax credits.[Footnote 33] Summing these
outlays along with the sum of the revenue loss estimates provides a
more complete picture of the aggregate cost of tax expenditures
throughout the period, as shown in figure 5. The sum of the estimated
revenue losses and outlays associated with tax expenditures totaled
about $770 billion for fiscal year 2004.
Figure 5: Sum of Tax Expenditure Revenue Loss Estimates with Outlays
for Refundable Tax Credits, 1974-2004:
[See PDF for image]
Note: Reflects refundable amounts for the EITC from 1976 to 2004, the
child tax credit for 1997 to 2004, the child insurance medical premium
credit for 1992 to1993, and the tax credit for health insurance
purchased by certain displaced and retired individuals for 2004.
Summing the revenue loss estimates does not take into account possible
interaction effects among the tax expenditures that we mentioned
earlier in the report. Changes in economic conditions and estimation
techniques can affect revenue loss estimates for tax expenditures,
making them differ from year to year. Changes to the number of tax
expenditures reported by Treasury would also affect the amount of
revenue loss reported if some tax expenditures were eliminated or
added. Finally, revenue loss estimates include the effect of certain
tax credits on receipts only and not the effect of the credits on
outlays.
[End of figure]
Trends in the sum of tax expenditures are due, at least in part, to
legislation affecting the number or scope of tax expenditures or
modifying tax rates or other basic structural features of the tax code.
During this period, tax legislation directly influenced the sum of tax
expenditure estimates by repealing or limiting some tax expenditures,
enacting new ones, and extending the life of expiring tax expenditures.
Even without changes to tax expenditures, legislation affecting tax
rates or the tax structure affects the sum of the tax expenditure
estimates. When a taxpayer uses a tax expenditure, his or her effective
tax rate[Footnote 34] is reduced, because some part of his or her
income remains untaxed or is taxed at a lower rate. When statutory
rates increase, a taxpayer's ability to avoid tax on a portion of
income is worth more; consequently, tax expenditures are worth more.
Likewise, when rates decrease, tax expenditures are worth relatively
less.
Figure 6 highlights tax legislation enacted since 1974 that likely
influenced the aggregate revenue losses due to tax expenditures. The
sum of estimated revenue losses declined following the Tax Reform Act
of 1986,[Footnote 35] primarily because of individual and corporate
marginal tax rate reductions which indirectly scaled back the value of
all but a few tax credits. The 1986 act, which created the last major
tax reform, also eliminated or limited the scope of various tax
expenditures directly, for example, by repealing the investment tax
credit, phasing out the interest deduction for consumer credit over 5
years, and limiting the expensing of the intangible drilling costs for
oil and gas to successful, domestic wells. While materially reducing
the number and scope of tax expenditures broadened the tax base, the
act resulted in no net change in federal revenue because of the lower
tax rates. In contrast, the sum of estimated revenue losses increased
following the Omnibus Budget Reconciliation Act of 1993,[Footnote 36]
which directly increased several tax expenditures--for example,
extending the EITC to single workers with no children earning $9,000 or
less--and indirectly increased the value of other tax expenditures by
increasing the top individual income tax rates and adding a third rate.
The sum of estimated revenue losses accelerated following the Taxpayer
Relief Act of 1997, which expanded several tax expenditures--for
example, increasing eligibility for traditional individual retirement
accounts--and created an assortment of new tax expenditures, including
the child tax credit and postsecondary education tax incentives. The
Economic Growth and Tax Relief Reconciliation Act of 2001[Footnote 37]
reduced tax rates again and also increased the individual AMT
exemption. The influence on the aggregate trend is less apparent for
legislation expanding or adding tax expenditures while also reducing
tax rates.
Figure 6: Tax Legislation Enacted From 1974-2004 That May Have
Influenced the Sum of Revenue Loss Estimates for Tax Expenditures:
[See PDF for image]
Note: The effects of legislative changes on tax expenditure estimates
might not have occurred within the same year that the legislation was
enacted. Summing the revenue loss estimates does not take into account
possible interaction effects among the tax expenditures that we
mentioned earlier in the report. Changes in economic conditions and
estimation techniques, can affect revenue loss estimates for tax
expenditures, making them differ from year to year. Changes to the
number of tax expenditures reported by Treasury would also affect the
amount of revenue loss reported if some tax expenditures were
eliminated or added. Finally, revenue loss estimates include the effect
of certain tax credits on receipts only and not the effect of the
credits on outlays.
[End of figure]
Changes in economic conditions and in the baseline tax system can also
affect revenue loss estimates for tax expenditures, making them differ
from year to year. For example, rising housing prices may cause the
estimated cost of the mortgage interest deduction to increase as
homeowners finance larger mortgages or take out equity with home equity
loans. In addition, changes in tax expenditure baselines could also
cause estimates to differ from year to year. For example, for fiscal
years 2003 and 2004, Treasury redefined accelerated depreciation tax
expenditures so that they are calculated relative to a replacement cost
basis baseline rather than the historic cost basis previously used.
This redefinition had the effect of reducing the estimated size of the
accelerated depreciation tax expenditures.[Footnote 38]
Tax Expenditures for Individual Taxpayers Accounted for Most of the Sum
of Tax Expenditure Revenue Losses:
The sum of estimated revenue losses due to tax expenditures for
individual income taxpayers accounted for substantially more of the
revenue loss between 1974 and 2004 than corporate tax expenditures, as
shown in figure 7. The sum of revenue loss estimates for tax
expenditures that arise under the individual income tax increased from
approximately $187 billion for 1974 to $487 billion for 1987 (in 2004
dollars). After decreasing to approximately $363 billion for 1988, the
sum gradually increased to a high of approximately $688 billion for
2002 and then declined in 2003 and 2004. On average over the entire
period, revenue loss estimates for individual income taxpayers
accounted for about 83 percent of the sum of revenue loss estimates per
year. While estimated revenue losses for all tax expenditures tripled,
the sum of revenue loss estimates for corporate tax expenditures
increased from approximately $57 billion for fiscal year 1974 to a high
of about $116 billion in 1984 (in 2004 dollars). After 1984, the sum
dropped back to approximately $57 billion in 1992 and increased
slightly over the rest of the period, with some fluctuation between
years. In 2004, revenue loss estimates for tax expenditures that arise
under the corporate income tax accounted for 11 percent of the sum of
revenue losses due to all tax expenditures. At about 10 percent of
total federal receipts, corporate income taxes also accounted for a
smaller share than individual income taxes.
Figure 7: Sum of Revenue Loss Estimates by Taxpayer Group, 1974-2004:
[See PDF for image]
Note: Treasury did not report separate estimates for the individual and
corporate income tax expenditures for fiscal years 1981 and 1982. Total
revenue loss estimates for fiscal years 1981 and 1982 were
approximately $410 and $448 billion (in 2004 dollars). The location of
tax expenditure estimates under the individual and corporate tax
expenditure headings does not imply that these categories of filers
benefit from the special tax provisions in proportion to the respective
tax expenditure amounts shown. For instance, the ultimate beneficiaries
of corporate tax expenditures could be shareholders, employees,
customers, or other providers of capital, depending on economic forces.
In addition, summing the revenue loss estimates does not take into
account possible interaction effects among the tax expenditures that we
mentioned earlier in the report. Changes in economic conditions and
estimation techniques, can affect revenue loss estimates for tax
expenditures, making them differ from year to year. Changes to the
number of tax expenditures reported by Treasury would also affect the
amount of revenue loss reported if some tax expenditures were
eliminated or added. Finally, revenue loss estimates include the effect
of certain tax credits on receipts only and not the effect of the
credits on outlays.
[End of figure]
The sum of revenue loss estimates due to individual income tax
expenditures is primarily attributable to a small number of large tax
expenditures. The fourteen tax expenditures listed in table 2--each
with an annual revenue loss estimated at $20 billion or more--accounted
for about 75 percent of the sum of revenue losses for fiscal year 2004.
Ten of the 14 largest tax expenditures focused entirely on individual
taxpayers, and the other 4 were available for individuals and
corporations. Most of the largest tax expenditures are long-standing
ones, and only 2 of the 14 were added to the tax code since
1986.[Footnote 39] The child tax credit, enacted in 1997, is among the
largest tax expenditures based on its estimated revenue losses alone,
not counting associated outlays of $8.9 billion in fiscal year 2004.
With revenue losses estimated at $4.9 billion, the EITC does not appear
on this list; if $33.1 billion in associated outlays were included,
this refundable credit ranks among the largest tax expenditures.
Table 2: Revenue Loss Estimates for the Largest Tax Expenditures
Reported for Fiscal Year 2004, with Taxpayer Group and Budget Function:
Tax expenditure: Income tax exclusion of employer contributions to
medical insurance premiums and medical care[A];
Revenue loss estimate (Billions): $102.3;
Revenue loss estimate as a percentage of sum: 14.0%;
Taxpayer group: Individual;
Budget function: Health.
Tax expenditure: Deductibility of mortgage interest on owner occupied
homes[A];
Revenue loss estimate (Billions): $61.5;
Revenue loss estimate as a percentage of sum: 8.4%;
Taxpayer group: Individual;
Budget function: Commerce and housing credit.
Tax expenditure: Net exclusion of pension contributions and earnings:
401(k);
Revenue loss estimate (Billions): $47.7;
Revenue loss estimate as a percentage of sum: 6.6%;
Taxpayer group: Individual;
Budget function: Income security.
Tax expenditure: Net exclusion of pension contributions and earnings:
employer plans[A];
Revenue loss estimate (Billions): $47.0;
Revenue loss estimate as a percentage of sum: 6.5%;
Taxpayer group: Individual;
Budget function: Income security.
Tax expenditure: Deductibility of nonbusiness state and local taxes
(other than on owner-occupied homes)[A];
Revenue loss estimate (Billions): $45.3;
Revenue loss estimate as a percentage of sum: 6.2%;
Taxpayer group: Individual;
Budget function: General purpose fiscal assistance.
Tax expenditure: Accelerated depreciation of machinery and equipment;
Revenue loss estimate (Billions): $44.7;
Revenue loss estimate as a percentage of sum: 6.1%;
Taxpayer group: Corporate and Individual;
Budget function: Commerce and housing credit.
Tax expenditure: Capital gains exclusion on home sales;
Revenue loss estimate (Billions): $29.7;
Revenue loss estimate as a percentage of sum: 4.1%;
Taxpayer group: Individual;
Budget function: Commerce and housing credit.
Tax expenditure: Deductibility of charitable contributions other than
education and health[A];
Revenue loss estimate (Billions): $27.4;
Revenue loss estimate as a percentage of sum: 3.8%;
Taxpayer group: Corporate and Individual;
Budget function: Education, training, employment, social services.
Tax expenditure: Exclusion of interest on public purpose state and
local bonds[A];
Revenue loss estimate (Billions): $26.2;
Revenue loss estimate as a percentage of sum: 3.6%;
Taxpayer group: Corporate and Individual;
Budget function: General purpose fiscal assistance.
Tax expenditure: Capital gains (other than agriculture, timber, iron
ore, and coal)[A];
Revenue loss estimate (Billions): $25.2;
Revenue loss estimate as a percentage of sum: 3.5%;
Taxpayer group: Individual;
Budget function: Commerce and housing credit.
Tax expenditure: Exclusion of net imputed rental income on owner-
occupied homes;
Revenue loss estimate (Billions): $24.6;
Revenue loss estimate as a percentage of sum: 3.4%;
Taxpayer group: Individual;
Budget function: Commerce and housing credit.
Tax expenditure: Step-up basis of capital gains at death;
Revenue loss estimate (Billions): $24.2;
Revenue loss estimate as a percentage of sum: 3.3%;
Taxpayer group: Individual;
Budget function: Commerce and housing credit.
Tax expenditure: Child credit (effect on receipts only);
Revenue loss estimate (Billions): $22.4;
Revenue loss estimate as a percentage of sum: 3.1%;
Taxpayer group: Individual;
Budget function: Education, training, employment, and social services.
Tax expenditure: Exclusion of interest on life insurance savings[A];
Revenue loss estimate (Billions): $20.1;
Revenue loss estimate as a percentage of sum: 2.98%;
Taxpayer group: Corporate and Individual;
Budget function: Commerce and housing credit.
Source: GAO analysis of OMB budget report on tax expenditures, fiscal
year 2006.
[A] Denotes tax expenditures that have been reported by Treasury since
1974.
Note: Some tax expenditures split into additional listings to reflect
legislation expanding existing tax expenditures. For example, Treasury
began listing the net exclusion of pension contributions and earnings
with separate estimates for employer-defined benefits and 401(k)
pension plans following 2001 legislation increasing the contribution
limits for 401(k) accounts. From year to year, revenue loss estimates
may change because Treasury updates their estimates for each new budget
to reflect legislation enacted, prevailing economic conditions, and the
latest taxpayer data available. Although there are substantial revenues
forgone for these 14 large tax expenditures, the estimated amount of
federal spending that would be required to provide equivalent
assistance is frequently larger than the revenue forgone because this
spending could be subject to income tax. For example, the outlay-
equivalent estimate for the income tax exclusion of employer
contributions for medical insurance premiums and medical care is $126.7
billion for fiscal year 2004. Outlay-equivalent estimates for tax
expenditures are discussed in more detail in app. III.
[End of table]
Tax expenditure revenue loss estimates reflect federal income tax
revenue forgone and do not account for provisions that exclude certain
earnings from payroll taxes. For example, the income tax exclusion for
health care not only permits the value of health insurance premiums to
be excluded from the calculation of employees' taxable earnings for
income taxes but also excludes the value of the premiums from the
calculation of Social Security and Medicare payroll taxes for both
employees and employers.[Footnote 40] Some researchers have estimated
that these payroll tax revenue losses amount to more than half of the
income tax revenue losses.[Footnote 41] If payroll tax revenue losses
were 50 percent of the $102.3 billion in income tax revenue loss
estimated by Treasury, the combined revenue loss associated with the
exclusion of employer contributions for health insurance premiums would
be $153.5 billion in 2004.
While Tax Expenditures Have Exceeded Discretionary Spending in Some
Years, They Have Remained Relatively Stable as a Share of the U.S.
Economy:
The sum of tax expenditure outlay-equivalent estimates exceeded the
amount of discretionary spending for most years during the last decade,
as shown in figure 8.[Footnote 42] Outlay-equivalent estimates,
introduced by Treasury in 1981, allow the value of a tax expenditure to
be compared with a direct federal outlay. The sum of the outlay-
equivalent estimates reported by Treasury was approximately $853
billion in 2004.[Footnote 43] Until 1987, the sum of outlay-equivalent
estimates for tax expenditures was roughly the same magnitude as
discretionary spending. From 1988 through 1995, the sum of tax
expenditure outlay-equivalent estimates averaged about $104 billion (in
2004 dollars) less than annual discretionary spending. Beginning in
1996, the sum of tax expenditure outlay-equivalent estimates surpassed
discretionary spending and averaged about $114 billion (in 2004
dollars) more than annual discretionary spending through 2003. However,
in 2003, the sum of Treasury's tax expenditure estimates declined
markedly, and the sum of tax expenditure outlays fell below
discretionary spending in fiscal year 2004. This decline may be due, at
least in part, to changes in the way Treasury defined and measured
several tax expenditures in these years. Just as the sum of tax
expenditure outlay-equivalent estimates increased since the late 1990s,
discretionary spending also increased over this period. Between 1996
and 2002, the sum of tax expenditure estimates increased by an average
of approximately $46 billion annually, while discretionary spending
increased by an average of $21 billion annually (in 2004 dollars).
Mandatory spending--larger than the sum of tax expenditure estimates or
discretionary spending--consistently rose over the period shown by an
average of $43 billion annually (in 2004 dollars).
Figure 8: Sum of Tax Expenditure Outlay-equivalent Estimates Compared
with Total Mandatory and Total Discretionary Outlays, 1981-2004:
[See PDF for image]
Note: Mandatory spending includes net interest. Summing the outlay-
equivalent estimates does not take into account possible interaction
effects among the tax expenditures. In addition, tax expenditure
estimates developed in different years generally use different
economic, demographic, and other assumptions. Finally, changes to the
number of tax expenditures reported by Treasury would also affect the
amount of outlay-equivalent estimates reported if some tax expenditures
were eliminated or added.
[End of figure]
Figure 9 compares tax expenditures and federal outlays as a share of
GDP as a way to measure the amount of federal spending through the tax
code and other programs relative to the economy.[Footnote 44] As a
share of the U.S. economy, the sum of tax expenditure outlay-equivalent
estimates peaked at 10.9 percent of GDP in 1986. Since 1988, the sum of
tax expenditure outlays has remained relatively stable at about 7.5
percent of GDP. Over the period shown, mandatory spending also was
fairly constant as a share of the economy, at an average of 12.7
percent of GDP. As a share of the economy, discretionary spending
declined from 10.1 percent of GDP in 1981 to 6.3 percent in 1999 and
2000, with some fluctuation between the years. In recent years,
discretionary spending has grown faster than the economy, increasing to
7.8 percent of GDP in fiscal year 2004. Averaging about 18.0 percent of
GDP in the 1980s through the early 1990s, federal receipts steadily
rose to 20.9 percent of GDP in 2000 and since declined to 16.3 percent
of GDP in fiscal year 2004. With total federal outlays--including
mandatory and discretionary spending plus net interest--reaching 19.9
percent of GDP, the federal unified budget deficit amounted to 3.6
percent of GDP ($412 billion) in fiscal year 2004. The on-budget
deficit in fiscal year 2004 amounted to 4.9 percent of GDP ($567
billion).[Footnote 45]
Figure 9: Sum of Tax Expenditure Outlay-Equivalent Estimates Compared
to Total Mandatory and Discretionary Outlays and Receipts as a
Percentage of GDP, 1981-2004:
[See PDF for image]
Note: Mandatory spending includes net interest. Whereas the mandatory
and discretionary numbers represent actual money that was spent by the
federal government, tax expenditure figures are estimates. In addition,
summing the outlay-equivalent estimates does not take into account
possible interaction effects among the tax expenditures that we
mentioned earlier in the report. Tax expenditure estimates developed in
different years generally use different economic, demographic, and
other assumptions. Changes to the number of tax expenditures reported
by Treasury would also affect the amount of outlay-equivalent estimates
reported if some tax expenditures were eliminated or added.
[End of figure]
Tax expenditures span almost all federal mission areas, but their
relative size differs across budget functions. To gauge the relative
role of tax expenditures, the sum of tax expenditure outlay-equivalent
estimates and federal outlays can be compared to total spending by
budget function. For 2004, Treasury reported tax expenditures for 16 of
20 budget functions. Five of the functions accounted for 91 percent of
the sum of the tax expenditure outlay-equivalent estimated dollar
amounts in 2004--commerce and housing credit; education, training,
employment and social services; income security; health; and general
government, as shown in figure 10. (See app. III for a list of tax
expenditures reported for 2004 by budget function.) For the most part,
these same five budget functions accounted for the largest percentage
of total outlay-equivalent estimates over time, although the relative
size of the estimated outlay-equivalent dollar amounts for the five
budget functions varied somewhat over the period shown. For example,
the health and the education, training, employment and social services
budget functions more than doubled between 1986 and 2002 (in 2004
dollars).
Figure 10: Size of Tax Expenditure Outlay-Equivalent Estimates by
Budget Function, 1981-2004:
[See PDF for image]
Note: The other budget functions that Treasury lists tax expenditures
under are national defense; international affairs; general science,
space, and technology; energy; natural resources and environment;
agriculture; transportation; community and regional development; social
security; veterans' benefits and services; and net interest. The
general government budget function includes tax expenditures listed by
Treasury under the general purpose fiscal assistance budget
subfunction. For two budget functions--commerce and housing credit; and
education, training, employment, and social services--tax expenditures
are listed by subfunction. In addition, summing the outlay-equivalent
estimates by budget function does not take into account possible
interaction effects among the expenditures. Tax expenditure estimates
developed in different years generally use different economic,
demographic, and other assumptions. Changes to the number of tax
expenditures reported by Treasury would also affect the amount of
outlay-equivalent estimates reported if some tax expenditures were
eliminated or added.
[End of figure]
The sum of the tax expenditure outlay-equivalent estimates was greater
than what the federal government spends in discretionary and mandatory
spending for some budget functions. As shown in figure 11, the sum of
the tax expenditure outlay-equivalent estimates exceeded federal
outlays for three budget functions: energy,[Footnote 46] commerce and
housing credit, and general government. Outlay-equivalent estimates for
tax expenditures in the commerce and housing credit budget function
totaled $300 billion for 2004, while budget outlays for that function
totaled $5 billion.[Footnote 47] Seven of the 14 largest tax
expenditures, listed in table 2 with revenue losses exceeding $20
billion in 2004, were reported under the commerce and housing credit
budget function. The mortgage interest deduction--the second largest
single tax expenditure in fiscal year 2004--had an outlay-equivalent
estimate of $61.5 billion, compared to $45 billion in outlays for the
Department of Housing and Urban Development, which is responsible for,
among other things, mortgage credit and housing assistance
programs.[Footnote 48] Various tax expenditures for accelerated
depreciation and capital gains listed under the commerce and housing
credit budget function also provide incentives for a wide range of
different investments that can affect other federal mission areas. The
general government budget function included two of the largest tax
expenditures--the deduction of state and local income and sales tax,
and the exclusion of interest on public purpose state and local bonds-
-which together accounted for about $71.5 billion in tax expenditures
outlays.[Footnote 49]
Figure 11: Tax Expenditure Outlay-equivalent Estimates Compared with
Federal Outlays by Budget Function, Fiscal Year 2004:
[See PDF for image]
Note: Federal outlays for the energy budget function were negative
because revenues for this function exceeded spending in 2004. Summing
the outlay-equivalent estimates by budget function does not take into
account possible interaction effects among the expenditures. Outlays
associated with the refundable child credit and EITC are shown in the
outlay bars.
[End of figure]
As figure 11 shows, the sum of outlay-equivalent estimates for tax
expenditures was nearly the same magnitude as outlays in two budget
functions: international affairs and education, training, employment,
and social services. Within the education, training, employment, and
social services budget function, the sum of outlay-equivalent estimates
of the tax expenditures represented 49 percent of the total federal
support.[Footnote 50] This budget function includes two of the largest
tax expenditures--the child tax credit and charitable contributions
other than for health. The sum of the outlay-equivalent estimates for
tax expenditures was substantially less than total outlays in the
health and income security budget functions.[Footnote 51] The income
tax exclusion for employer-provided health care--the largest single tax
expenditure--accounted for 12 percent of the sum of tax expenditure
outlay-equivalent estimates and represented about 27 percent of total
federal support in the health function, which includes Medicaid.
Outlays in the income security function include mandatory outlays
refunded under the EITC and child tax credit. No tax expenditures are
reported by Treasury for two budget functions: administration of
justice and Medicare.[Footnote 52]
Systematic Review of Tax Expenditures Is Integral to Reexamining the
Federal Base, but Little Progress Has Been Made Since 1994 to Increase
Scrutiny:
Although tax expenditures represent a substantial federal commitment of
resources, little progress has been made in the Executive Branch to
increase the transparency of and accountability for tax expenditures.
The entire set of tools the federal government can use to address
national objectives--including discretionary and mandatory spending,
tax provisions, loans and loan guarantees--should be subject to
periodic reviews and reexamination to ensure that they are achieving
their intended purposes and designed in the most efficient and
effective manner. The nation's current and projected fiscal imbalance
provides an additional impetus for engaging in such a review and
reassessment. Tax expenditures may not always be efficient, effective,
or equitable, and consequently, information on these attributes can
help policymakers make more informed decisions as they adapt current
policies in light of our fiscal challenges and other overarching
trends. In addition, some tax expenditures, at least as currently
designed, may serve to exacerbate other key private sector and public
policy challenges (e.g., controlling health care costs). To review tax
expenditures, information is needed to assess economic efficiency,
effectiveness, distributional equity, and administration and compliance
costs, although data and methodological challenges may impede studies
of some tax expenditures. Over the past decade, the Executive Branch
made little progress to integrate tax expenditures in the budget
presentation and review processes that apply to spending programs, as
we recommended in 1994.
Long-Term Fiscal Challenge Provides Additional Impetus to Reexamine
Federal Spending and Tax Policies, Including Tax Expenditures:
Simply put, our nation's fiscal policy is on an unsustainable course.
Long-term simulations by GAO, the Congressional Budget Office (CBO),
and others show that over the long term we face large, escalating, and
persistent deficits due primarily to known demographic trends and
rising health care costs.[Footnote 53] This unsustainable fiscal path
will gradually erode the nation's economy and increasingly constrain
the federal government's capacity to address emerging challenges and
opportunities. The long-term fiscal challenge is too big to be solved
by economic growth alone or by making modest changes to existing
spending and tax policies, including tax expenditures. In addition, the
long-term fiscal challenge makes it all the more important to ensure
all major federal spending and tax programs and policies--including tax
expenditures--are efficient, effective, and relevant. The revenues
forgone through tax expenditures either reduce resources available to
fund other federal activities or require higher tax rates to raise a
given amount of revenue.
Our long-term simulations illustrate the magnitude of fiscal challenges
we will face in the future.[Footnote 54] Figures 12 and 13 present
these simulations under two different sets of assumptions. In figure
12, we begin with CBO's August 2005 baseline--constructed according to
the statutory requirements for that baseline.[Footnote 55] Consistent
with these requirements, this simulation assumes that discretionary
spending grows with inflation for the first 10 years, and that tax cuts
which are currently scheduled to expire will expire. After 2015,
discretionary spending is assumed to grow with the economy, and revenue
is held constant as a share of GDP at the 2015 level. In figure 13,
only two assumptions are changed: (1) discretionary spending is assumed
to grow with the economy rather than merely with inflation for the
entire period (not just after 2015), and (2) all tax cuts which are
currently scheduled to expire are made permanent. For both simulations,
Social Security and Medicare spending is based on the 2005 Trustees'
intermediate projections, and we assume that benefits continue to be
paid in full after the trust funds are exhausted. Medicaid spending is
based on CBO's December 2003 long-term projections under mid-range
assumptions.
Figure 12: Composition of Spending as a Share of GDP under Baseline
Extended:
[See PDF for image]
Notes: In addition to the expiration of tax cuts, revenue as a share of
GDP increases through 2015 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the AMT, and (3) increased revenue from
tax-deferred retirement accounts. After 2015, revenue as a share of GDP
is held constant.
[End of figure]
Figure 13: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP after 2005 and All Expiring Tax
Provisions Are Extended:
[See PDF for image]
Notes: Although expiring tax provisions are extended, revenue as a
share of GDP increases through 2015 due to (1) real bracket creep, (2)
more taxpayers becoming subject to the AMT, and (3) increased revenue
from tax-deferred retirement accounts. After 2015, revenue as a share
of GDP is held constant.
[End of figure]
Both of these simulations illustrate that, absent policy changes on the
spending or revenue side of the budget, the growth in federal
retirement and health entitlements will encumber an escalating share of
the government's resources. Indeed, when we assume that recent tax
reductions are made permanent and discretionary spending keeps pace
with the economy, our long-term simulations suggest that by 2040
federal revenue may be adequate to pay little more than interest on the
federal debt. Neither slowing the growth in discretionary spending nor
allowing the tax provisions to expire--nor both combined--would
eliminate the imbalance. Although revenues will be part of the debate
about our fiscal future, making no changes to Social Security,
Medicare, Medicaid, and other drivers of the long-term fiscal gap would
require at least a doubling of federal taxes in the future and that
seems both unrealistic and inappropriate. Accordingly, substantive
reform of Social Security and the major health programs remains
critical to recapturing our fiscal flexibility.
While Social Security and Medicare dominate the long-term outlook, they
are not the only federal programs or activities that bind the future.
The federal government undertakes a wide range of programs,
responsibilities, and activities that may explicitly or implicitly
expose it to future spending. These "fiscal exposures" range from
explicit liabilities, such as environmental cleanup and disposal, to
the implicit promises embedded in current policy or public
expectations, such as assistance following a major disaster.[Footnote
56] Policymakers may benefit from a better understanding of the long-
term costs of decisions when they are made. For large and significant
spending programs and tax provisions, consideration of estimates of
present values for the long-term commitments implied could facilitate
analysis and decisionmaking.[Footnote 57] While the fiscal exposure
concept focuses only on items that may expose the government to future
spending, some new or existing tax expenditures may have uncertain or
accelerating future growth paths with long-term implications. These
would need to be considered concurrently with long-term spending
exposures in addressing long-term fiscal sustainability.
Confronting the nation's fiscal challenge will require a fundamental
reexamination and reprioritization of the entire set of tools the
federal government can use to address national objectives, including
major spending and tax policies and programs. To effectively respond to
social, economic, and security changes and challenges emerging in the
21st century, the federal government cannot accept what it does, how it
does it, who does it, and how it is financed as "givens." To assist
Congress in reexamining the base of government, we issued a report that
provides examples of the kinds of difficult choices the nation faces
with regard to discretionary spending; mandatory spending, including
entitlements; as well as tax policies and compliance
activities.[Footnote 58] The tax policies and programs financing the
federal budget can be reviewed with an eye toward the overall level of
revenue needed to fund federal operations and commitments, the mix of
taxes that should be used, and the extent to which the tax code is
being used to promote certain societal objectives.[Footnote 59]
Some Tax Expenditures May Not Be Efficient, Effective, or Equitable:
Some tax expenditures may not always be efficient, effective, or
equitable, and consequently, information on these attributes can help
policymakers make more informed decisions as they adapt current
policies in light of our fiscal challenges and other overarching
trends. Periodic reviews of tax expenditures could help to establish
whether these programs are relevant to today's needs; if so, how well
tax expenditures have worked to achieve their objectives; and whether
the benefits from particular tax expenditures are greater than their
costs. To measure benefits and costs, information is needed concerning
their effects on economic efficiency, effectiveness, distributional
equity, and administration and compliance costs. To the extent that
periodic reviews show that specific tax expenditures are not effective,
efficient, or equitable, those tax expenditures might be eliminated or
redesigned, perhaps at a lower cost in revenue forgone. Coordinated
reviews of tax expenditures with related federal spending programs
could assess the relationships and interactions of programs within
similar mission areas and identify which strategies are effective.
Policymakers could use such evaluations to reduce overlap and
inconsistencies and direct scarce resources to the most effective or
least costly methods to deliver federal support.
Tax expenditures, if well designed and effectively implemented, can be
an effective tool and appropriate to further some federal goals and
objectives. For those activities that merit a subsidy (where too little
of the activity would otherwise be undertaken), subsidies through the
tax code are one option. For example, a tax expenditure for medical
insurance would improve economic efficiency if, absent a subsidy, too
few workers would purchase insurance and the tax expenditure encouraged
workers to insure in a cost-effective manner. Because the benefits from
research may not fully accrue to the firms that bear the costs of
research, a tax expenditure aimed at spurring private-sector investment
in research and development may be an appropriate response assuming it
stimulates additional research whose benefits exceed the social costs
associated with the forgone revenues.
However, studies we and others have done raise concerns about the
efficiency, effectiveness, or equity of some tax expenditures and about
how tax expenditures relate to other federal activities aimed at the
same mission area.
* While tax expenditures may be intended to improve economic
efficiency, poor targeting or design may introduce additional economic
inefficiencies. For example, the income tax exclusion of employer-paid
health insurance premiums, by shifting a portion of the costs to all
taxpayers, reduces the after-tax cost of insurance for the
beneficiary.[Footnote 60] The income tax exclusion is credited with
increasing health care coverage for employees, and the risk pooling
under group health insurance generally allows employees to obtain
insurance at lower costs than in the individual insurance market.
However, this tax benefit also leads people to obtain more coverage
than they would otherwise and increases the demand for health care by
enabling those insured to obtain services at discounted prices. Some
researchers believe that the unlimited availability of the exclusion
for employer-provided health insurance has led to excessive use of
health care services, which, in turn, has helped to drive up health
care prices faster than the overall price level.[Footnote 61] Capping
the exclusion at the average premium cost has been suggested as one
option to improve the economic efficiency of this tax expenditure and
reduce the associated revenue loss; another option suggested is
replacing the tax exclusion with a tax credit to improve equity since
the tax savings per dollar of premium would be the same for all
taxpayers. In another example, the mortgage interest deduction
encourages home ownership by lowering the costs of borrowing for
taxpayers who itemize their deductions. However, by doing so, the
deduction encourages households to invest more in housing and less in
other assets that might contribute more to the nation's productivity
and economic capacity. According to CBO's Budget Options, limiting the
deductibility of interest to $500,000 of mortgage debt might still
provide taxpayers with a sizable incentive to become homeowners and
could boost investment in businesses and education.[Footnote 62]
* Tax expenditures may not be an effective way to achieve federal goals
if targeting them to entities or activities meant to receive the
benefits is difficult, if they subsidize activities that would have
been undertaken without their stimulus, or if they serve to exacerbate
other key private sector and public policy challenges. For example, the
income tax exclusion of employer-paid health insurance premiums reduces
the after-tax cost of insurance for the beneficiary. However, the
exclusion offers no benefit to workers whose employers do not offer
health benefits or who purchase their own insurance. Further, this tax
benefit also leads people to obtain more comprehensive coverage than
they would otherwise and could increase the demand for health care to
the extent that it shields those insured from the full costs of health
care, complicating efforts to moderate health care spending. The
exclusion also tends to favor higher-income workers more likely to have
employer-sponsored coverage. In another example, individual retirement
accounts (IRAs) also receive preferential tax treatment with $7.5
billion in estimated revenue losses in fiscal year 2004. Contributions
may be tax-deductible depending on the IRA type, and earnings generally
are not taxable until distribution and not taxable at all in some
cases.[Footnote 63] Although the tax benefits indeed seem to encourage
individuals to contribute to these kinds of accounts, the amounts
contributed may not be totally new saving. Some contributions may
represent amounts that would have occurred without the tax incentives
or amounts shifted from taxable assets or financed by borrowing. In a
1996 symposium examining universal deductible IRAs available in the
early 1980s, researchers reached three widely divergent conclusions:
(1) yes, most contributions represented new saving, (2) no, most IRAs
contributions were not new saving; and (3) maybe, about 26 cents of
each dollar contributed may have represented new saving.[Footnote 64]
More recent research examining the universal IRA experience estimated
that at most 9 cents of each dollar contributed represented new
saving.[Footnote 65] Since 1986, Congress has restricted IRA
eligibility for higher-income taxpayers and increased the contribution
limits, and the overall effect of IRAs on personal saving remains
subject to considerable debate.
* Although tax expenditures, by design, result in individuals with
similar incomes and expenses paying differing amounts of tax depending
on whether they engage in tax-subsidized activities, tax expenditures
still may raise equity concerns. Some tax expenditures benefit mainly
upper-income taxpayers because they are most likely to itemize and
because the value of tax expenditures is generally greatest for those
in higher tax brackets.
Tax expenditures also can contribute to mission fragmentation and
program overlap,[Footnote 66] and this, in turn, creates the potential
for duplication and service gaps. Though sometimes necessary to meet
federal priorities, mission fragmentation and program overlap can
create an environment in which programs do not serve participants as
efficiently and effectively as possible. Like spending programs, tax
expenditures may reduce government effectiveness to the extent that
they duplicate or interfere with other federal programs. For example,
in the higher education mission area, the federal government helps
students and families save and pay for the costs of postsecondary
education through tax expenditures and longer-standing federal
financial aid programs, consisting of grants, loans, and work-study
income. Since the 1990s, the federal government has offered multiple
tax incentives to help families pay for post-secondary education,
including the nonrefundable Lifetime Learning and HOPE tax credits,
deductions for qualifying post-secondary expenses and interest on
student loans, and two tax-preferred ways to save for future education
expenses. The tax-preferred saving vehicles interact with the
traditional federal aid system and can affect the net federal
assistance received. Further, some tax filers do not appear to make the
most effective use of certain education-related tax incentives, and we
have found that some people who appear eligible for the tuition
deduction and/or the tax credits did not claim them.[Footnote 67] One
reason may be that the differing income phaseouts and interactions
among the tax credits and deductions are difficult for taxpayers to
understand; CBO, JCT, IRS's National Taxpayer Advocate, Treasury, and
others have suggested ways to consolidate the education tax credits and
deductions.
Others have also questioned the efficiency, effectiveness, and equity
of other tax expenditures and suggested ways to design and better
target specific provisions.
* In December 2004, the IRS National Taxpayer Advocate designated the
complexity of the Internal Revenue Code, including the complexity of
reporting requirements related to tax expenditures, as the most serious
problem facing taxpayers and the IRS.[Footnote 68] The IRS National
Taxpayer Advocate also recommended consolidating the various types of
retirement saving vehicles and creating uniform rules regarding early
withdrawals, plan loans, and portability.
* In its January 2005 report to the Senate Finance Committee, JCT staff
presented various options to improve tax compliance and reform tax
expenditures.[Footnote 69] Options include repealing some tax
expenditures and restructuring others to simplify the law or achieve
the intended purpose in a more fair or efficient way.
* In its February 2005 budget options compendium prepared for the House
and Senate Budget Committees, CBO listed several options to eliminate
or restructure tax expenditures.[Footnote 70] Options include further
limiting the tax benefit of itemized deductions to the 15 percent rate
for higher-bracket taxpayers and capping itemized deductions for state
and local taxes and charitable contributions to the amount exceeding 2
percent of adjusted gross income.
* Finally, in December 2004 for the Senate Budget Committee, CRS
updated its biennial compendium on tax expenditures.[Footnote 71] This
volume includes for each tax expenditure: JCT's revenue loss estimate,
the legal authorization, a description of the tax provision, its impact
including distribution of benefits when available, the rationale at the
time of adoption, assessment summarizing the arguments for and against
the provision, citations to relevant research. According to CRS,
congressional budget decisions will take into account the full spectrum
of federal programs only when tax expenditures are considered in
conjunction with direct spending programs.
Assessing the Efficiency, Effectiveness, or Equity of Tax Expenditures
Can Be Challenging:
Inadequate or missing data and difficulties in quantifying the benefits
of some tax expenditures can impede studies of their efficiency,
effectiveness, and equity.[Footnote 72] A key challenge is that data
necessary to assess how often a tax expenditure is used and by whom
generally would not be collected on tax returns unless IRS needs the
information to know the correct amount of taxes owed or is
legislatively mandated to collect or report the information. For
example, tax exclusions--including those for employer-provided health
insurance and pensions which are among the largest tax expenditures--
generally are not reported on individual taxpayers' returns. In some
cases, IRS may combine reporting requirements to minimize its workload
and taxpayer burden, and as a result, the information collected may not
identify specific beneficiaries or activities targeted by a tax
expenditure. For example:
* In our 2002 report on three tax expenditures meant to encourage
employment of the disabled among other economically disadvantaged
workers, we could not determine the amounts used to hire, retain, and
accommodate workers with disabilities.[Footnote 73] We found that
information on the work opportunity and disabled access credits was not
available from tax data because tax returns provided only the total
amount of credits reported, and employers could claim the work
opportunity credit for employing other types of workers and claim the
disabled access credit for expenditures made to accommodate customers
with disabilities. Also, information regarding use of the barrier
removal deduction for providing transportation or architectural
accommodations was not available in IRS databases.
* As we reported in 2003, for one of the seven Liberty Zone tax
benefits, the business employee credit, IRS was in the process of
collecting but was not planning to report information about the number
of taxpayers claiming the credit and the amount of credit
claimed.[Footnote 74] IRS was also not planning to collect or report
information about the use of the other six benefits, and taxpayers do
not report these benefits as separate items on the existing returns.
For example, taxpayers added the amount of depreciation they are
allowed under the Liberty Zone special depreciation allowance benefit
to other depreciation expenses and report their total depreciation
expenses on their returns. IRS officials said that they do not need
information on each specific benefit claimed to properly target their
enforcement efforts.
Further, IRS's financial management system does not currently have cost
accounting capabilities. As a result, comparisons of the costs of
administering existing or proposed tax expenditures with similar
administrative costs for spending programs may be impossible. Regarding
taxpayer compliance costs, although IRS is working to develop improved
estimates of taxpayer compliance burden, it is not yet clear whether
this modeling effort will provide estimates of additional compliance
costs that may result from particular tax expenditures.
According to IRS officials, IRS seeks to collect information necessary
to determine whether taxpayers have accurately reported their income
and calculated the correct amount of tax liability. By focusing on
information essential to administering the tax code, IRS aims to ensure
that taxpayers are not burdened unnecessarily by record keeping and
reporting, and IRS can minimize its own administrative costs for data
collection and processing. For tax expenditures recorded on particular
lines on tax forms, such as deductions and credits for individual
taxpayers, data on the use of these tax expenditures are available. IRS
Statistics of Income Division publications detail the number of
individual tax returns on which taxpayers claimed each deduction or
credit, the total amounts claimed, and the distribution of claims among
taxpayers by income level.
If policymakers conclude that additional data would facilitate
reexamining a particular tax expenditure, decisions would be required
on what data are needed, who should provide the data, who should
collect the data, how to collect the data, what it would cost to
collect the data, and whether the benefits of collecting additional
data warrant the cost of doing so. Another factor to consider is how to
facilitate data sharing and collaborative evaluation efforts. For
example:
* Limited data are available on the prevalence and use of business-
owned life insurance, and GAO has reported that more comprehensive data
could be useful in assessing the tax-favored treatment of this
investment.[Footnote 75] Data on the amount of tax-free income that
businesses received from death benefits could help explain the
potential effect of changes to the tax treatment of policies on tax
revenues. Businesses holding the policies or insurance companies that
sold them could provide this and other data. Several agencies,
including Treasury and the Securities and Exchange Commission, already
collect some financial information from businesses and insurers and
could be tasked to collect additional data for tax policy purposes.
* In the higher education area, the Department of Education (Education)
is unable to analyze the use of higher education tax credits or their
effects because it lacks access to individual taxpayer data needed to
identify users of the credits. Treasury has access to taxpayer data but
has not used these data for evaluating the education tax credits since
their implementation in 1998. In 2002, GAO recommended that Education
and Treasury collaborate in studying the impact of tax credits and
student aid programs on postsecondary attendance, choice, completion,
and costs.[Footnote 76] A key first step would be identifying
opportunities for, and limits to, data sharing and develop a plan to
address data needs, but little action has been taken.
* In the case of the empowerment zone, enterprise community, and
renewal community programs, the lack of tax benefit data limits the
ability of the Department of Housing and Urban Development (HUD) and
the Department of Agriculture (USDA) to administer and evaluate the
overall programs.[Footnote 77] We recommended that HUD, USDA, and IRS
collaborate to (1) identify the data needed to assess the use of the
tax benefits and the various means of collecting such data; (2)
determine the cost-effectiveness of collecting these data, including
the potential impact on taxpayers and other program participants; (3)
document the findings of their analysis; and, if necessary, (4) seek
the authority to collect the data, if a cost-effective means is
available.
When data on the cost and use of tax expenditures are available or can
be reasonably estimated and other relevant data are available, economic
analysis can be useful in evaluating whether a tax expenditure is
efficient, effective, or equitable. Econometric modeling analysis can
estimate how a tax expenditure affects the prices and quantities of
targeted goods and services and determine how taxpayers' incomes are
affected. Although isolating and quantifying the outcomes associated
with tax expenditures is challenging--just as it is for spending
programs, research results are useful in demonstrating how particular
tax expenditures work or providing insight on ways to refine their
design. For example, research has generally shown that the EITC
effectively increases recipients' participation in the labor force,
particularly for single parents, and lifts millions of recipients out
of poverty. Some tax expenditures are enacted on a temporary basis,
specifically to provide an opportunity for evaluating their effects
before they are extended. For example, the research tax credit, enacted
on a temporary basis in 1981 and extended 11 times as of 2004, was
substantially modified in 1989 after researchers showed the original
credit formula undercut the incentive it was intended to provide to
undertake additional research spending.
In some cases, economic research has not yielded definitive results or
was limited by data and methodological issues. For example, although
the various tax expenditures aimed at encouraging saving for, among
other things, retirement, education, and health care have resulted in
substantial sums being placed in these tax preferred accounts,
economists disagree about whether tax incentives, such as for IRAs, are
effective in increasing the overall level of personal saving. In the
case of the research credit, GAO reported in 1996 that studies done at
that time provided mixed evidence on the amount of spending stimulated
and used publicly available data that were not a suitable proxy for tax
return data.[Footnote 78] To fully assess the value to society of the
research tax credit, researchers need to look at more than just the
amount of spending stimulated per dollar of revenue cost. Comparisons
should include (1) the total benefits gained by society from research
stimulated by the credit and (2) the estimated costs to society
resulting from the collection of taxes required to fund the credit. The
social benefits of the research conducted by individual companies
include any new products, productivity increases, or cost reductions
that benefit other companies and consumers throughout the economy.
Although most economists agree that research spending can generate
social benefits, the effects of the research on other companies and
consumers are difficult to measure.
Ultimately, evaluation results could be used to identify how well tax
expenditures are working, to both identify ways to better manage
individual tax expenditures and decide how best to ensure prudent
stewardship of taxpayers' resources. Whether in time of deficit or
surplus, reexamining both the spending and tax sides of the budget is
essential to ensure the reasonableness, relevancy, and sustainability
of existing programs and position the nation for the future. In the
case of the EITC, Treasury and IRS are using evaluation results to
identify ways of reducing erroneous claims, while maintaining
participation among eligible claimants and minimizing taxpayer and
IRS's administrative burden. Additional evaluations of other tax
expenditures may identify opportunities to retarget or eliminate
ineffective or outdated tax expenditures. Tax expenditures, unless well
designed to correct market failures, can distort economic decisions in
ways that reduce economic performance from what it otherwise could be
and thereby lower our future economic well-being. If a tax expenditure
or group of tax expenditures is reduced or eliminated, any resulting
increase in tax revenues could be offset if policymakers deem that to
be appropriate fiscal policy. In any event, in order to raise a given
amount of federal revenue, tax rates must be raised higher than they
otherwise need to be due to revenue losses from tax expenditures. Thus,
the net change after tax rate adjustments could, depending on overall
congressional priorities and preferences, result in tax reductions for
many taxpayers in place of the preferential treatment for some
taxpayers. According to a recent estimate, a broad-based income tax
system--eliminating basically all credits, deductions, special rates,
exclusions for employer-provided fringe benefits and employee
contributions to retirement account as well as eliminating the AMT---
could raise about the same amount of revenue as the current income tax
system while lowering tax rates by about one-third.[Footnote 79]
The Executive Branch Has Made Little Progress Since 1994 to Improve
Scrutiny of Tax Expenditures:
Although OMB and Treasury in 1994 supported expanding federal reviews
of tax expenditures, the Executive Branch made little progress over the
past decade to integrate tax expenditures in the budget presentation
and to incorporate tax expenditures under review processes that apply
to spending programs, as we recommended in 1994. Even though the sum of
tax expenditure outlay-equivalent estimates is about the same magnitude
as discretionary spending overall and greater than outlays in some
budget functions, this is not readily visible to policymakers and the
public because tax expenditures are not integrated in the budget
presentation. Since their initial efforts to outline a framework for
evaluating tax expenditures and preliminary performance measures, OMB
and Treasury have largely ceased to make progress and have retreated
from setting a schedule for evaluating tax expenditures. One of the key
impediments to moving forward in conducting reviews of tax
expenditures' performance is the continuing lack of clarity about the
roles of OMB, Treasury, IRS, and departments or agencies with outlay
program responsibilities. So far, GPRA plans and reports are
underutilized as a way to provide more information about the
performance of tax expenditures and their contributions relative to
spending programs. Tax expenditures are not subject to annual budget
reviews, and OMB has not generally subjected them to scrutiny under
PART in tandem with spending programs sharing common, crosscutting
goals.
Tax Expenditures Are Not Integrated in the Annual Budget Presentation
or Financial Statement Reporting:
Integrating tax expenditure costs in the annual budget presentation is
crucial to providing a comprehensive picture of federal resources to
facilitate reexamining the base. As a start in acting on our 1994
recommendation, OMB began presenting revenue loss sums for tax
expenditures alongside outlays and credit activity for each budget
function in the fiscal year 1998 budget. These summary tables were a
useful starting point in highlighting the relative magnitude of tax
expenditures across mission areas. However, OMB discontinued the
reporting practice after the fiscal year 2002 budget, and instead, the
Analytical Perspectives contains Treasury's list of tax expenditures
with associated revenue loss estimates for each one. Isolating tax
expenditure cost information in a supplemental volume, however,
provides a less comprehensive picture for policymakers and the public
to compare all of the policy tools used within a mission area, such as
health care or energy, because all the tools are not displayed together
in the budget. OMB has demonstrated that it is feasible to display tax
expenditure totals alongside spending programs in each budget function.
Such a display is a first step in providing the public and policymakers
with a more useful and accurate picture of the extent of federal
support and activities.
GAO also recommended in 1994 that the budget presentation include, to
the extent possible, information to highlight for policymakers and the
public the effectiveness, distributional equity, and economic
efficiency for all federal resources allocated in a mission area. In
the tax expenditure chapter in Analytical Perspectives, OMB added a
section outlining possible performance measures developed by Treasury,
which could be used to present information about the performance of tax
expenditures. Although this overview was initially introduced in the
1997 budget and expanded in the 1999 budget, no performance information
is actually displayed. OMB states that the measure examples provided
are "illustrative" in nature, acknowledges that the performance measure
discussion "although broad, is nonetheless incomplete," and noted that
many tax expenditures are not explicitly cited.
The Chief Financial Officers Act,[Footnote 80] as expanded by the
Government Management Reform Act of 1994,[Footnote 81] required federal
agencies to prepare annual audited financial statements beginning in
fiscal year 1996. OMB Circular A-136 Financial Reporting Requirements
requires agencies to combine the annual GPRA program performance report
with the financial statements and other information in a combined
performance and accountability report. In accordance with generally
accepted accounting principles, the basis on which federal agencies are
required to prepare their financial statements, tax expenditures may be
presented as other accompanying information. The Federal Accounting
Standards Advisory Board (FASAB), which promulgates federal accounting
standards, recognized that tax expenditures, which can be large in
relation to spending programs that are measured under federal
accounting standards, may not be fully considered in entity reporting.
FASAB based its views, in part, on the fact that, in some cases, the
association of tax expenditures with particular programs is not clear
and the information is available elsewhere. The Board agreed to permit
reporting entities to present, as other accompanying information,
information on tax expenditures that the reporting entity considers
relevant to its programs, if suitable explanations and qualifications
are provided. As a result, tax expenditure amounts, which in some cases
are larger than similar spending programs, are not required to be
disclosed to the public as part of federal agencies' financial
statements nor are they disclosed in the consolidated financial
statements of the federal government. Similarly, OMB's guidance for the
performance and accountability reports does not require reporting of
tax expenditure information in agencies' reports. Reporting such
information would ensure greater transparency of and accountability for
tax expenditures.
Progress on Developing Structure for Reviewing Tax Expenditures'
Performance Has Stalled:
OMB has not designed and implemented a structure for conducting reviews
of tax expenditures' performance, as we recommended in 1994. Our
recommendation was consistent with language in the Senate Committee on
Government Affairs' Report[Footnote 82] on GPRA, which specified that
the Director of OMB was to establish an appropriate framework for
periodic analyses of the effects of tax expenditures in achieving
performance goals. To significantly increase the oversight and analysis
of tax expenditures, the committee report also called for a schedule
for periodic tax expenditure evaluations.
The ultimate goal of designing a structure for conducting performance
reviews of tax expenditures was to begin developing and presenting
performance information in the federal budget that would help
demonstrate the relative effectiveness, efficiency, and equity of
federal outlays and tax expenditure efforts within a mission area. In
our 1994 report, we emphasized that in designing the structure for tax
expenditure performance reviews, OMB should consider:
* the roles of OMB, Treasury, and departments or agencies with outlay
program responsibilities in assessing the performance of tax
expenditures and their relationship and interaction with related
spending programs; and:
* which tax expenditures and outlay programs are related or interact
and should be jointly considered.
GAO recommended that OMB and Treasury conduct case studies of the
proposed review structure to identify (1) successful methods agencies
devise for reviewing tax expenditures' performance, (2) how best to
report the results of these reviews, and (3) how to ensure that
adequate resources are available for such reviews.
Although OMB, working with Treasury, took a number of steps consistent
with our recommendation, it has not resolved the roles of OMB,
Treasury, and departments or agencies with outlay program
responsibilities; established a schedule for reviewing tax
expenditures; or addressed lessons learned from tax expenditure case
study reviews that Treasury performed. If the Executive Branch cannot
define roles and set firm plans, it will continue to face additional
challenges in developing objective, measurable, and quantifiable
performance measures for tax expenditures that support federal missions
and goals.
Defining roles of agencies. One of the key impediments to moving
forward in conducting reviews of tax expenditures' performance is the
continuing lack of clarity about the roles of OMB, Treasury, IRS, and
departments or agencies with outlay program responsibilities. According
to officials at OMB, it is difficult to determine which agencies in
addition to Treasury and IRS have jurisdiction over particular tax
expenditures. For example, one OMB official noted that tax expenditures
meant to encourage savings were not the purview of any single agency.
OMB officials also stated that OMB does not have the expertise or
resources to conduct its own comprehensive analyses of tax
expenditures, so individual agencies should take responsibility for
identifying tax expenditures that affect their missions, with
Treasury's Office of Tax Analysis leading efforts to evaluate tax
expenditures.
Without clarification on the roles of federal agencies, inaction,
overlap or inconsistency in evaluating tax expenditures can occur. For
example, in 2002 we reported that gaps existed in monitoring the
relative effectiveness of Title IV grants and loans and the HOPE and
Lifetime Learning tax credits in promoting postsecondary
education.[Footnote 83] The lack of collaboration between the
Department of Education and the Treasury left little information
available to help Congress weigh the relative effectiveness of grants,
loans, and tax credits. Although data and methodological challenges
make it difficult to isolate the impact of these tools, some academic
researchers have used statistical techniques and research designs to
mitigate these challenges. We recommended in 2002 that the departments
develop a plan to share data and collaborate to provide Congress with
evidence about the impact of higher education tax credits and student
aid, but little action has been taken to implement the recommendation.
To define the roles of federal agencies in reviewing tax expenditures,
OMB, working with Treasury and other federal agencies, will need to
exercise judgment in resolving how to address tax expenditures spanning
mission areas. In some cases, Treasury could take the lead, such as in
evaluating tax expenditures that broadly support investment and saving,
or other agencies could work with Treasury to evaluate tax expenditures
that directly affect their mission areas. For example, an evaluation of
the various energy supply tax expenditures might involve both Treasury
and the Department of Energy in assessing their effects on increasing
production as well as on energy security and the environment.
Establishing a schedule for evaluations. Periodic reviews of tax
expenditures are also impeded because OMB has not developed a schedule
for such reviews. In its 1997 GPRA report and again in the fiscal year
1999 budget, OMB set the expectation that the Executive Branch would
lay out a schedule for tax expenditure evaluations. Beyond three
initial pilot studies in 1997, however, no schedule has been set for
further evaluations or case studies to explore methods and resource
needs for measuring and reporting tax expenditure performance.
As the roles of federal agencies are clearly defined, OMB and Treasury,
working with other agencies, would be positioned to establish a
schedule for tax expenditure evaluations. Opportunities exist to
develop a strategic approach to the selection and prioritization of
areas in allocating scarce evaluation resources. In our January 2004
report on OMB's PART, we recommended that OMB target PART assessments
based on such factors as the relative priorities, costs, and risks
associated with related clusters of programs and activities and that
OMB select similar programs for review in the same year to facilitate
comparisons and tradeoffs.[Footnote 84] Similar considerations would be
useful in setting a schedule for tax expenditure evaluations.
Testing the evaluation framework. Although OMB outlined an initial
framework for tax expenditure analysis in its May 1997 GPRA report to
the President and Congress, OMB has not taken steps to address lessons
learned from tax expenditure case study reviews that Treasury
performed. OMB's framework focused on the methodology that could be
used to assess the performance of tax expenditures. OMB emphasized that
developing a framework that is comprehensive, accurate, and flexible to
reflect the objectives and effects of the wide range of tax
expenditures would be a significant challenge. The initial framework
for evaluating tax expenditures was expected to follow the basic
structure for performance measurement--inputs, outputs, and outcomes.
For tax expenditures, the primary input is the revenue loss. The
outputs are the quantitative or qualitative measures of goods and
services, or changes in investment and income, produced by the tax
expenditures. Outcomes, in turn, were defined as the changes in the
economy, society, or environment that the tax expenditures aim to
accomplish.
In 1997, Treasury did three pilot evaluations of selected tax
expenditures to test the evaluation methods that OMB had described in
its framework for tax expenditure analysis. In addition to seeking to
learn lessons about applying the framework, the pilots were also
intended to help identify resource needs for evaluating tax
expenditures. Treasury selected one pilot each to be done by the
individual, corporate, and international units within its Office of Tax
Analysis. Results from the three tax expenditure pilots--the exclusion
for worker's compensation benefits, the tax credit for non-conventional
fuels, and the tax exclusion for certain amounts of income earned by
Americans living abroad[Footnote 85]--were summarized alongside each
tax expenditure's description in the tax expenditure chapter of the
Analytical Perspective volume of the fiscal year 1999 budget. Although
OMB originally expected to complete additional evaluations to refine
the tax expenditure framework and improve performance measures, no
further pilot evaluations have been completed. In reporting the results
of these pilots, Treasury said that much of the data needed for
thorough analysis was not available and that in at least one case, it
was difficult to identify a clear purpose for the tax expenditure.
Treasury did not discuss the resources that would be needed to continue
doing such evaluations.
However, OMB officials we interviewed reiterated that the data
availability issues raised in the 1997 pilots remain a major challenge,
and data constraints limit the assessment of the effectiveness of many
tax expenditures. To improve the data available to assess the effects
of some major tax expenditures, principally those aimed at personal
savings, Treasury and IRS are developing a data set that is to follow a
sample of individual income taxpayers over at least 10 years, beginning
with tax year 1999. The new data set aims to capture the changing
demographic and economic circumstances of individual taxpayers for use
in analyzing the effects of changes in tax law over time. In addition
to the panel sample, OMB reported in the fiscal year 2006 budget that
it is working with Treasury's Office of Tax Analysis and other agencies
to improve data available for assessment of saving-related tax
expenditures. No time frame was given in the 2006 budget for when any
results will be reported.
The challenges in producing credible performance information and the
ability of federal agencies to produce evaluations of their programs'
effectiveness are not unique to tax expenditures. As our work on GPRA
and PART implementation shows, the credibility of performance data has
been a long-standing weakness.[Footnote 86] Developing and reporting
credible information on outcomes achieved through federal programs
remains a work in progress. In past reports, we have identified several
promising ways agencies can maximize their evaluation capacity. For
example, careful targeting of federal evaluation resources on key
policy or performance questions and leveraging federal and nonfederal
resources show promise for addressing key questions about program
results. Other ways agencies might leverage their current evaluation
resources include adapting existing information systems to yield data
on program results, drawing on the findings of a wide array of
evaluations and audits, making multiple use of an evaluation's
findings, mining existing databases, and collaborating with state and
local program partners to develop mutually useful performance data.
Statutory Impetus for Tax Expenditure Reviews Is Underutilized:
Congressional expectations for reviews of tax expenditures in
connection with agencies' reviews of related outlay and other programs
generally have not been met. Enacted in 1993, GPRA is designed to
inform congressional and executive decisionmaking by providing
objective information on the effectiveness and efficiency of federal
programs and spending.[Footnote 87] GPRA requires agencies to measure
performance toward the achievement of annual goals and report on their
progress in annual program performance reports. Through the strategic
planning requirement, GPRA requires federal agencies to consult with
the Congress and key stakeholders to regularly reassess their missions
and strategic goals as well as the strategies and resources they will
need to achieve their goals. Although GPRA offers a promising
opportunity for the Executive Branch to develop useful information
about the results of tax expenditures, agencies are not using their
GPRA strategic plans and annual performance plans and reports to assess
tax expenditures and their performance relative to spending programs
contributing to the same strategic goals and objectives. Without
integrating tax expenditures that have a direct bearing on federal
missions and goals, policymakers may not have complete information to
fully evaluate whether the government is achieving results or how the
performance of tax expenditures interact with or compare to related
spending programs.
The Senate Governmental Affairs Committee Report on GPRA stated that
tax expenditures should be taken into consideration in a comprehensive
examination of government performance. The report stated that a
schedule for periodically assessing the effects of specific tax
expenditures in achieving performance goals should be included in the
annual performance plans and that annual performance reports would
subsequently be used to report on these tax expenditure assessments. In
addition, the report noted that these assessments should consider the
relationship and interactions between spending programs and tax
expenditures and the effects of tax expenditures in achieving federal
performance goals.
Although GPRA expanded the supply of performance information generated
by federal agencies, evaluating crosscutting federal efforts continues
to be a challenge. GPRA requires the President to include in his annual
budget submission a federal government performance plan. Congress
intended that this plan provide a single cohesive picture of the annual
performance goals for the fiscal year.[Footnote 88] The governmentwide
performance plan could help Congress and the Executive Branch address
critical federal performance and management issues, including
redundancy and other inefficiencies in how we do business. However,
this provision has not been fully implemented, and the current agency-
by-agency focus of the budget does not have a broad, integrated
perspective of planned performance on governmentwide outcomes. As
envisioned by Congress, the governmentwide plan could relate and
address the contributions of alternative federal strategies, including
tax expenditures, to governmentwide goals. Agencies' annual performance
plans and reports could highlight crosscutting program efforts and
provide evidence of the coordination of those efforts. We have
previously recommended that OMB fully implement GPRA's requirement to
develop a governmentwide plan to provide a more cohesive picture of the
federal government's goals and strategies.[Footnote 89]
Prior to a 2003 revision, OMB's Circular A-11 guidance on GPRA
reporting stated that descriptions should be provided for use of tax
expenditures in annual performance plans when achievement of program or
policy goals is dependent upon these governmental actions and annual
performance reports must include the results of any assessment of how
specific tax expenditures affect achieving its performance
goals.[Footnote 90] However, the circular also stated that few agencies
were responsible for such analyses. In addition, as part of a broader A-
11 revision update, OMB streamlined its GPRA guidance in 2003 and no
longer describes tax expenditures as part of guidance on performance
plans and performance reports in the circular. According to OMB, it is
up to individual agencies to decide whether to address tax expenditures
in their GPRA reports and that many agencies focus on outlay programs
over which they have more direct control. OMB officials told us that
some agencies see tax expenditures as closely related to what they do
and some do not, or agencies might not have enough knowledge about tax
expenditures to consider them carefully. Our review of selected GPRA
Performance and Accountability reports indicated the acknowledgement of
tax expenditures in achieving federal performance goals varied by
agency. For example:
* The Department of Energy (DOE) and HUD both acknowledged tax
expenditures or tax policy as factors that affect agency goals.
However, the DOE's fiscal year 2004 report provided no further
discussion on how the tax expenditures contributed to achieving the
agencies' performance goals. HUD's fiscal year 2004 report acknowledged
the tax incentives for renewal communities, empowerment zones, and
enterprise communities as helping to achieve its objective of providing
capital resources to improve economic conditions in distressed
communities. As discussed previously, the outlay-equivalent value for
tax expenditures amounts to more than other spending in the energy as
well as the commerce and housing credit mission areas.
* The fiscal year 2004 reports released by the Department of Commerce
(Commerce), the Department of Veterans Affairs, and the Department of
Health and Human Services (HHS) do not mention tax expenditures at all,
even though tax expenditures exist under the different mission areas
related to these departments. For instance, several large tax
expenditures, such as capital gains and accelerated depreciation, are
listed by Treasury as related to the Commerce mission area, but it is
unclear how, if at all, these tax expenditures relate to Commerce's
performance goals. Also, the income tax exclusion for employer-provided
health care, the largest single tax expenditure, clearly intersects
with HHS's mission to assure access to health care.
* Treasury's fiscal year 2004 report explicitly identified a few tax
expenditures--the New Markets Tax Credit and a new health coverage tax
credit--as related to achieving its strategic objective to stimulate
U.S. economic growth. In the context of its strategic objective to
improve and simplify the tax code, Treasury reported on its efforts to,
among other things, simplify the EITC and consolidate the higher
education tax benefits. Treasury also reported on its efforts to
improve determination of EITC eligibility and educate taxpayers about
this provision. Treasury did not include information about tax
expenditures as other accompanying information in the financial
statement in its 2004 report.
Tax Expenditures Are Not Subject to Annual Budget Reviews:
Tax expenditures have not been incorporated into Executive Branch
budget reviews, as we recommended in 1994. We recommended that OMB use
information on outlay programs and tax expenditures to make
recommendations to the President and Congress about the most effective
methods for accomplishing federal objectives. We concluded that better
targeting by Congress and the Executive Branch of all federal spending
and subsidy programs could save resources and increase economic
efficiency through (1) better coordination of spending programs with
tax expenditures; (2) reduction of overlap and inconsistencies among
all federal subsidy programs; and (3) encouragement of trade-offs among
tax expenditures, outlays, and loans.
The congressional budget process is the annual vehicle through which
Congress articulates both an overall fiscal stance--overall targets for
spending and revenue--and its priorities across various broad
categories. The process provides the overall constraints for spending
and revenue actions by Congress for each year and the rules of
procedure that can be used to constrain new entitlement and tax
legislation not assumed in the annual budget resolution. The conflicts
and uncertainties entailed in budgeting and policymaking are often
mitigated by focusing decisions on incremental changes in resources
each year. As a result, this incremental process focuses
disproportionate attention on proposed changes to existing programs and
proposals for new programs, with the base of programs often being taken
as "given." Moreover, the process routinely examines only the one-third
of federal spending subject to the annual appropriations process.
Unlike discretionary spending programs, which are subject to periodic
reauthorization and annual appropriation, tax expenditures--like
entitlement programs--are permanent law and are generally not subject
to a legislative process that would ensure systematic annual or
periodic review. In addition, the budget rules that were grounded in
statute--including discretionary spending caps, pay-as-you-go (PAYGO)
limits on mandatory spending and tax cuts--and enforced by executive
actions if violated, expired at the end of fiscal year 2002. Before
their expiration, PAYGO procedures restricted Congress' ability to add
new tax expenditures or expand existing ones unless offsetting funds
could be raised. Because tax provisions are not as visible in the
budget as spending programs, there is an incentive for policymakers to
use tax provisions rather than spending programs to accomplish
programmatic ends. However, both have a negative effect on the
government's "bottom-line." Reinstituting budget enforcement
mechanisms, such as discretionary spending caps, PAYGO discipline on
both the spending and tax side, and fiscal benchmarks, could help the
President and Congress sort out the many claims on the federal budget,
including tax expenditures.
Within the Executive Branch, OMB has not used its PART process, which
is central to the Executive Branch's budget and performance integration
initiative,[Footnote 91] to systematically review tax expenditures and
promote joint and integrated reviews of tax and spending programs
sharing common, crosscutting goals. OMB describes PART as a diagnostic
tool meant to provide a consistent approach to assessing federal
programs as part of the executive budget formulation process. It
applies 25 questions to all "programs"[Footnote 92] under four broad
topics: (1) program purpose and design, (2) strategic planning, (3)
program management, and (4) program results (i.e., whether a program is
meeting its long-term and annual goals) as well as additional questions
that are specific to one of seven mechanisms or approaches used to
deliver the program.[Footnote 93] PART is designed to be evidence-
based, drawing on a wide array of information, including authorizing
legislation, GPRA strategic plans and performance plans and reports,
financial statements, inspectors general and GAO reports, and
independent program evaluations. Drawing on available performance and
evaluation information, the PART questionnaire attempts to determine
the strengths and weaknesses of federal programs with a particular
focus on individual program results and improving outcome measures.
Since the fiscal year 2004 budget cycle, OMB has applied PART to 607
programs (about 60 percent of the federal budget), and given each
program one of four overall ratings: (1) "effective," (2) "moderately
effective," (3) "adequate," or (4) "ineffective" based on program
design, strategic planning, management, and results. A fifth rating,
"results not demonstrated," was given--independent of a program's
numerical score--if OMB decided that a program's performance
information, performance measures, or both were insufficient or
inadequate. Over the next 2 years, OMB plans to assess nearly all
remaining Executive Branch spending programs.[Footnote 94]
Whereas OMB, through its development and use of PART, has provided
agencies with a powerful incentive for improving data quality and
availability on the spending side, relatively little progress has been
made in evaluating the effectiveness of tax expenditures. So far, OMB
has used PART to address tax expenditures in only two cases--the EITC
compliance initiative and the New Markets Tax Credit (NMTC).[Footnote
95]
* For the EITC, which has outlays for the refundable portion, the
direct federal spending PART instrument was used to evaluate IRS'
initiative to improve the payment accuracy rate for the EITC--and not
the refundable EITC itself. OMB rated the compliance initiative as
"ineffective" in the fiscal year 2004 budget because data showed no
progress in reducing the high rates of erroneous payments. The review
did not evaluate the effects of the EITC on workforce participation or
examine its contribution relative to other federal programs aimed at
reducing poverty.
* The NMTC, which is administered like a grant by CDFI, was evaluated
as part of OMB's crosscutting review of community and economic
development programs. OMB rated the NMTC as "adequate" and reported in
2005 that CDFI had established meaningful long-term and annual
performance measures but that data were not yet available to evaluate
the effectiveness of the NMTC or establish baselines for the
performance measures.
We have urged a more comprehensive, consistent, and integrated approach
to evaluating all programs relevant to common goals--encompassing
spending, tax expenditures, and regulatory programs--using a common
framework. Such an analysis is necessary to capture whether a program
complements and supports other related programs, whether it is
duplicative and redundant, or whether it actually works at cross-
purposes to other initiatives. OMB officials we interviewed said that
OMB would need Treasury's assistance to determine what information or
criteria to include in a PART instrument tailored to examine tax
expenditures. As of July 2005, OMB said that it was planning to review
the health insurance tax credit program next year but that it has not
decided whether the PART review will be limited to administration or
will also cover the program's tax policy purpose.
Conclusions:
As we move forward in shaping government for this century, the federal
government cannot accept all of its existing programs, policies,
functions, and activities as "givens." Outmoded commitments and
operations constitute an encumbrance on the future that can erode the
capacity of the nation to better align its government with the needs
and demands of a changing world and society. Reexamining the base of
all major existing federal spending and tax programs, policies,
functions, and activities by reviewing their results and testing their
continued relevance and relative priority for our changing society is
an important step in recapturing our fiscal flexibility and bringing
the panoply of federal activities into line with 21st century trends
and challenges. The decisions we face involve difficult choices about
the appropriate size and role of the federal government and how to
finance the federal government. The revenues forgone through tax
expenditures reduce resources available to fund other federal
activities or they require higher tax rates to raise a given amount of
revenue. Reviewing their results and testing their continued relevance
and relative priority is an important step in the process towards
fiscal responsibility and national renewal. Such a fundamental review
of major programs, policies, and activities, including tax
expenditures, can serve the vital function of updating the federal
government's approach to meet current and future challenges.
Regular and systematic evaluation will be necessary to inform policy
decisions about the efficiency, effectiveness, and equity of tax
expenditures or whether they are the best tool for accomplishing
federal objectives within a functional area. Beginning the
governmentwide reexamination process now would enable decisionmakers to
be more strategic and selective in choosing areas for review over a
period of years. Reexamining selected parts of the budget base over
time may make the reviews more feasible and less burdensome, and it
would allow decisionmakers to focus on all federal efforts--
discretionary spending, mandatory spending, and tax expenditures--
sharing common goals.
Unfortunately, over a decade has passed since Congress encouraged
systematic reviews of tax expenditures and since we made
recommendations to facilitate such reviews and to display information
on tax expenditures in the federal budget in a manner that enables
policymakers to look at resource commitments across related outlays and
tax expenditures. Although specific tax expenditures, such as the EITC
and Liberty Zone tax benefits, have received varying degrees of
scrutiny, efforts to date have not provided the Congress and others
with an integrated perspective on the extent to which programs and
tools--including tax expenditures--contribute to national goals and
position the government to successfully meet 21st century demands. In
addition, the lack of a requirement to disclose tax expenditures in
agencies' annual performance and accountability reports may result in
important performance and cost related data not being fully considered
with other federal resources allocated to achieve similar objectives.
Although challenges must be overcome to provide systematic reviews of
tax expenditures, these challenges cannot be addressed absent effective
leadership within the Executive Branch. Accordingly, we are making
several recommendations to OMB.
Recommendations for Executive Action:
To ensure that policymakers and the public have the necessary
information to make informed decisions and to improve the progress
toward exercising greater scrutiny of tax expenditures, we recommend
that the Director of OMB, in consultation with the Secretary of the
Treasury, take the following four actions:
* resume presenting tax expenditures in the budget together with
related outlay programs to show a truer picture of the federal support
within a mission area;
* develop and implement a framework for conducting performance reviews
of tax expenditures. In developing the framework, (1) determine which
agencies will have leadership responsibilities to review tax
expenditures, how reviews will be coordinated among agencies with
related responsibilities, and how to address the lack of credible
performance information on tax expenditures; (2) set a schedule for
conducting tax expenditure evaluations; (3) re-establish appropriate
methods to test the overall evaluation framework and make improvements
as experience is gained; and (4) to identify any additional resources
that may be needed for tax expenditure reviews.
* develop clear and consistent guidance to Executive Branch agencies on
how to incorporate tax expenditures in strategic plans, annual
performance plans, and performance and accountability reports, to
provide a broader perspective and more cohesive picture of the federal
government's goals and strategies to address issues that cut across
Executive Branch agencies; and:
* require that tax expenditures be included in the PART process and any
future such budget and performance review processes so that tax
expenditures are considered along with related outlay programs in
determining the adequacy of federal efforts to achieve national
objectives.
Agency Comments and Our Evaluation:
We provided a draft of this report to OMB, Treasury, and IRS for their
review and comments. We received written comments from OMB's Associate
Director for Economic Policy in a letter dated September 2, 2005. These
comments are reprinted in app. II along with our analysis of certain
issues raised by OMB. OMB disagreed with our recommendations and
several of our findings, and also raised concerns about our use of
Treasury's tax expenditure estimates. Where appropriate, we made
changes in our report in response to these comments. The Secretary of
the Treasury did not submit comments, instead deferring to OMB. IRS
staff provided a technical correction that we incorporated.
In commenting on our report, OMB raised concerns about our use of tax
expenditure estimates developed by Treasury and reported in the annual
federal budget. For example, OMB commented that we accepted
uncritically the concept of tax expenditures first advanced in the
1960s and said that we ignored limitations about the "volume" of total
tax expenditures. To the contrary, the background section of our draft
report, as well as several pages in app. III, clearly identified issues
related to the tax expenditure concept, including that characterizing
individual provisions as tax expenditures is a matter of judgment, and
that disagreements exist about classifying what should be included in
the income tax base. Pursuant to the Congressional Budget Act of 1974,
the term tax expenditure, as our draft stated, has been used in the
federal budget for three decades, and the tax expenditure concept--
while not precisely defined--is nevertheless a valid representation of
one tool that the federal government uses to allocate resources.
Regarding the "volume" of tax expenditures, we acknowledged throughout
our draft report limitations in the methodology of summing the
individual tax expenditures. To provide an example of the extent that
interaction effects among tax expenditure estimates can affect summing
them, at our request, Treasury calculated total tax expenditures for
five itemized deductions that took these effects into account; we
included this information in our draft report. As our report stated,
tax expenditure estimates--both those published in the budget as well
as those produced by JCT--are the best and only data available to
measure the value of tax expenditures and make comparisons to other
spending programs. In our opinion, summing the estimates provides
perspective on the use of tax expenditures as a policy tool and
represents a useful gauge of the general magnitude of government
subsidies carried out through the tax code.
OMB also stated that we reported that more attention should be given to
tax expenditures due to the severity of the nation's long-term fiscal
imbalance and stated that the Administration rejects any attempt to
address the long-term fiscal imbalance with tax increases. To the
contrary, we believe that tax expenditures, like other federal programs
and activities, should be reevaluated as to their effectiveness and
continued relevance as part of a periodic reexamination of what the
federal government does and how it does business. Although the long-
term fiscal gap heightens the need to ensure resources are not wasted,
this reexamination would be appropriate regardless of the fiscal
position. Further, OMB's implication that focusing more attention on
tax expenditures would automatically increase taxes is unfounded. As
our report clearly stated, for any given level of revenue, the revenues
forgone through tax expenditures require higher tax rates to obtain a
given amount of revenue. Thus, if the evaluations of tax expenditures
we call for lead to reducing or eliminating some tax expenditures, the
net change after rate adjustments could, depending on overall
congressional priorities and preferences, result in tax reductions for
many taxpayers. We adjusted sections of our report to reinforce the
point that reviewing tax expenditures is consistent with good
stewardship of taxpayers' resources and does not automatically result
in tax increases depending on other related changes. At the same time,
our current and projected fiscal imbalance serves to reinforce the need
for reassessing all activities. We also added a recent estimate
calculated by the Department of the Treasury for the President's
Advisory Panel on Federal Tax Reform which showed that a tax system
where basically all tax expenditures were eliminated could raise the
same amount of revenue as the current tax system while lowering tax
rates by about a third.
OMB also stated that information on tax expenditures is not useful for
budgeting and that tax expenditures have never been included in the
congressional budget process. To the contrary, the tax expenditure list
is legally required under the 1974 Congressional Budget Act and, before
the expiration of the Budget Enforcement Act in 2002, PAYGO procedures
restricted Congress' ability to add new tax expenditures or expand
existing ones unless offsetting funds could be raised. Whereas OMB
favors reporting tax expenditures separately from the rest of the
budget, we believe an integrated presentation is also useful to show
the relative magnitude of tax expenditures compared to spending and
credit programs across mission areas. This is not a recommendation to
equate tax expenditures with outlays. We are recommending that OMB
focus on integrating tax expenditures in the President's budget
presentation to show a truer picture of federal support in a mission
area and on including tax expenditures under budget and performance
review processes that apply to related spending programs. As our report
stated, OMB began presenting tax expenditure sums alongside outlays and
credit activity for each budget function in the federal budget from
fiscal year 1998 through fiscal year 2002, but has discontinued the
practice.
Finally, OMB commented that it would be unwise to follow our
recommendations for the conceptual and methodological reasons mentioned
above, as well as for other practical reasons. We address OMB's
comments on our recommendation to resume including tax expenditures in
the budget together with related outlay programs in the paragraph
above.
* Regarding our recommendation to develop a framework for conducting
performance reviews of tax expenditures, OMB stated that it has some
potential promise but it is clearly a job for Treasury because no other
agency has access to the data that would be needed to conduct such an
analysis. However, we are not recommending that OMB be responsible for
conducting the actual reviews, just for developing and overseeing the
implementation of a framework for conducting the performance reviews.
OMB would not need to have access to taxpayer data to manage the
process. In addition, we recognize the challenges in using taxpayer
data, which is the reason we recommend that OMB work in consultation
with Treasury to develop and implement the framework. Also, our report
recognizes the scarcity of evaluation resources, and we suggest factors
that would be useful in taking a strategic approach to selecting and
prioritizing tax expenditure evaluations. To make this point more
apparent in our report, we added a fourth requirement to our
recommendation to identify any additional resources that may be needed
for tax expenditure reviews.
* OMB said that our recommendation to develop clear and consistent
guidance to Executive Branch agencies on how to incorporate tax
expenditures in GPRA reports would be counterproductive because
agencies do not administer the tax code, and they should not be saddled
with responsibility for something they do not control. OMB misstated
our recommendation; this report does not recommend that agencies be
responsible for administering parts of the tax code. As the tax
expenditure chapter in OMB's Analytical Perspectives volume of the
fiscal year 2006 budget states, tax expenditures may also contribute to
achieving goals identified in Federal agencies annual and strategic
plans for their programs and activities. The aim of our recommendation
was to provide a more cohesive perspective of the government's programs
and strategies--including tax expenditures--to address common federal
goals. As our report states, in passing the Government Performance and
Results Act, the Senate Governmental Affairs Committee called for
inclusion of tax expenditures in the GPRA process so that more and
better information would be available on the performance of tax
expenditures themselves and the effects of tax expenditures would be
considered in achieving federal performance goals. Our recommendation
is consistent with this intent.
* Regarding our recommendation to require tax expenditures to be
included in the PART process and any future such budget and performance
review processes, OMB stated that it has no current plans to implement
any of the recommendations in this report, but stated that other tax
expenditures may be evaluated with the PART in the future. OMB also
stated that the Department of the Treasury manages the tax code, so any
new PARTs for tax expenditures would generally mean more PARTs for
Treasury. Within the Executive Branch, major responsibility for
management of the tax code was given to the Department of the Treasury.
Given that the Administration is aiming to assess nearly 100 percent of
federal outlay programs under PART, Treasury would be facing less
scrutiny than other agencies to the extent that tax expenditures are
not similarly evaluated under PART. Our recommendation merely calls for
bringing tax expenditures in line with the performance management
attention PART gives to outlay programs. Further, if our second
recommendation to develop an evaluation framework for tax expenditures
is implemented, OMB would be better positioned to target crosscutting
reviews of related clusters of programs and activities.
We are sending copies of this report to the relevant congressional
committees and other interested parties. Copies of this report will
also be made available to others upon request. In addition, the report
will also be available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact Mike Brostek at (202) 512-9110 or [Hyperlink,
brostekm@gao.gov]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix VI.
Sincerely yours,
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
A decade ago, we examined the growth in tax expenditures and examined
opportunities to focus policymakers' attention on tax
expenditures.[Footnote 96] To assist the Congress in reexamining the
base of federal programs and policies critical to achieving fiscal
discipline in the budget as a whole, this report updates our 1994 work.
Specifically, this report describes (1) how tax expenditures have
changed over the past three decades in reported number and aggregate
size and in comparison to federal spending, revenue, and the economy;
and (2) the progress that has been made since 1994 in how the Executive
Branch scrutinizes tax expenditures. To meet each of our objectives, we
relied on past GAO work, agency and congressional reports, and relevant
tax expenditure literature. In addition, we interviewed agency
officials from the Department of the Treasury's Office of Tax Analysis;
the Internal Revenue Service's Office of Research, Analysis, and
Statistics; the Office of Management and Budget (OMB); congressional
staff from the Joint Committee on Taxation (JCT); and experts on tax
policy to obtain a greater understanding of information gained through
our literature review and to corroborate findings.
To identify how tax expenditures have changed over the past three
decades in number and size in terms of aggregate revenue loss and
outlay-equivalents, we analyzed tax expenditure estimates developed by
Treasury and reported by OMB in the Federal Budget's Special Analyses,
Appendixes, and Analytical Perspectives for fiscal years 1974 to 2004.
Tax expenditure estimates are reported for individual and corporate
taxpayer groups and categorized by budget function. We chose the tax
expenditure estimates reported in the budget for our analysis because
Treasury develops (1) revised estimates based on changes in tax policy
and economic activity for the year prior to the reported fiscal budget
year (i.e., retrospective estimates), and (2) outlay-equivalent
estimates that facilitate comparison to federal spending. Even though
Treasury's estimates are retrospective, the final reported numbers are
still estimates and may not reflect additional policy changes. Although
the tax expenditure concept can also be applied to other kinds of
taxes, such as excise taxes, this report only covers tax expenditures
for the federal income tax system.
We determined the number of tax expenditures for each fiscal year by
adding the number of items in the list of tax expenditures reported by
Treasury for each fiscal year. In certain fiscal years, Treasury
reported estimates for select tax expenditures as two line items on
their list, such as the expensing of exploration and development costs,
which was split out as two tax expenditures, one pertaining to oil and
gas and one for other fuels between fiscal years 1980 and 1995. To be
consistent with Treasury's reporting of these tax expenditures in years
when they were listed as only one item, we summed the revenue loss
estimates in the years they were listed as two tax expenditures and
counted them as one. To determine the number of distinct tax
expenditures across fiscal years, we reviewed the names and
descriptions for each tax expenditure reported by OMB in the Budget's
Special Analyses, Appendixes, and Analytical Perspectives for fiscal
years 1974 to 2004. We conducted two independent reviews to verify that
our list contained only distinct tax expenditures across fiscal years.
To assist in our review, we also relied on the descriptions reported in
the Congressional Research Service's compendiums on tax expenditures
and legislative histories of certain tax expenditures, as needed. App.
IV contains our compilation of all tax expenditures reported by
Treasury between 1974 and 2004.
We aggregated tax expenditure revenue loss estimates to measure growth
over time. We also summed the revenue loss estimates by their reported
corporate and individual basis to see how the amounts differed between
the two taxpayer groups. We converted all sums for each fiscal year
into constant dollars to adjust for inflation using the chain price
indexes reported in the fiscal year 2006 federal budget. While summing
tax expenditure estimates provides a useful perspective, aggregate
numbers should be interpreted carefully due to interactive effects
between tax expenditures and potential behavioral changes.
To identify how tax expenditures have changed over the past three
decades in comparison to federal spending, revenue, and the economy, we
summed the outlay-equivalent estimates for each fiscal year and
compared them to the federal budget position in aggregate. We used
historical data on spending drawn from OMB historical tables and
compared them to the sums for tax expenditure outlay-equivalent
estimates in dollar value and as a percentage of GDP. We also used
outlay-equivalent estimates to compare tax expenditure trends over time
by budget function. Finally, we used historical data on spending by
budget function from OMB historical tables and compared them to the sum
of tax expenditures by budget functions for fiscal year 2004. We worked
with Treasury officials to verify any discrepancies we found in using
the tax expenditure estimates and modified our data accordingly.
To determine the amount of progress since 1994 in how the federal
government scrutinizes tax expenditures, we examined actions taken to
implement our earlier recommendations to OMB intended to encourage more
informed policy debate about tax expenditures and to stimulate joint
review of related tax and spending programs. We recommended (1)
developing a structure for conducting reviews of tax expenditures'
performance (2) conducting case studies to assess performance review
structure (3) presenting tax expenditures in the annual budget, and (4)
incorporating tax expenditures into the annual budgetary review
process. We reviewed relevant literature, interviewed relevant agency
officials and tax policy experts, and relied on previous GAO work to
determine the progress that has been made in implementing our
recommendations. We reviewed efforts to include tax expenditures under
the Government Performance and Results Act's statutory framework for
strategic planning, performance measurement, and program
evaluation.[Footnote 97] We also considered activities to include tax
expenditures under OMB's Program Assessment Rating Tool process.
To describe how tax expenditures are measured and reported, we
reviewed, but did not verify, the procedures used by the Joint
Committee on Taxation and Treasury to estimate the magnitude of
revenues forgone through tax expenditures or, in Treasury's case, their
outlay-equivalent values as well. As described in app. III, JCT and
Treasury use different conceptual approaches to identify the provisions
of the tax code they label as tax expenditures. In addition, their
estimating models, macroeconomic assumptions, and choice of data cause
their revenue loss estimates to differ somewhat.
We conducted our work between August 2003 and July 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Office of Management and Budget:
EXECUTIVE OFFICE OF THE PRESIDENT:
OFFICE OF MANAGEMENT AND BUDGET:
WASHINGTON, D.C. 20503:
September 2, 2005:
Mr. Michael Brostek:
Director, Tax Policy and Administration:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Brostek:
Thank you for your August 15, 2005, message conveying the draft report,
Tax Expenditures Represent a Substantial Commitment of Federal Support
and Need to Be Reexamined, and requesting written comments from the
Office of Management and Budget (OMB). The GAO analysis in this report
is deeply flawed and it would be unwise for the Administration to
follow its recommendations. GAO believes that the Administration should
pay more attention to tax expenditures as it formulates the budget,
because of "the severity of the nation's long-term fiscal imbalance."
The Administration rejects any attempt to address the long-term fiscal
imbalance with tax increases.
The Administration clearly believes, and has consistently stated, that
long-run Federal budget projections show an unsustainable rise in
Federal deficits and Federal debt. The long-run budget problem results
from projected increases in the retired population and expected
increases in health care costs that exceed the overall rate of growth
in the economy. In contrast, Federal receipts are now projected soon to
return to and then steadily rise above the long-run average of receipts
as a share of GDP. The long-run fiscal imbalance is solely related to
Federal spending policies already in place. GAO does not attempt to
explain how extra attention to tax expenditures would help address
either of the root causes of the long-term budget problem.
Tax expenditures have been included in the Administration's annual
budget since the passage of the 1974 Congressional Budget Act, which
established the modern budget process. Each year, Treasury's Office of
Tax Analysis (OTA) identifies and computes the various tax
expenditures, and these are published in the budget. Since the mid-
1990s, the tax expenditure tables have appeared as a separate chapter
in the Analytical Perspectives volume that accompanies the budget,
before that they usually appeared as Special Analysis G. Although the
list of tax expenditures and the assumptions used to estimate them have
undergone changes, the presentation has not changed fundamentally since
the tax expenditures first appeared in the budget thirty years ago.
Tax expenditures have never been integrated with the rest of the
budget, nor has Congress ever attempted to integrate tax expenditures
in the Congressional budget process. GAO does not examine why this is
so. Given that no major attempt at such integration has been made in
the thirty years that tax expenditure estimates have been available,
this would seem to be something that GAO might have considered before
recommending such integration. In fact, there are several reasons both
conceptual and practical for firmly rejecting GAO's recommendations and
maintaining the traditional separation between tax expenditures and the
rest of the budget.
In this report, GAO accepts uncritically the concept of tax
expenditures first advanced in the 1960s. This view holds that many
parts of the tax code function like Government spending programs, hence
the term tax expenditures. Because these tax expenditures are seen as
equivalent to other types of spending, it is argued that they ought to
be budgeted and managed like other spending programs. This is
essentially what GAO proposes to do in this report. To do this
effectively, however, it is first necessary to identify exactly what
parts of the tax code are really Government expenditures in disguise.
Early proponents of the tax expenditure concept assumed that it would
be relatively easy to separate a normative tax structure intended to
raise revenue from the various exceptions to that structure, which
function like spending. The problem with this assumption was pointed
out in the Fiscal Year 2002 Budget: "Underlying the 'tax expenditure'
concept is the notion that the Federal Government would otherwise
collect additional revenues but for these provisions. It assumes an
arbitrary tax base is available to the Government in its entirety as a
resource to be spent. Because of the breadth of this arbitrary tax
base, the Administration believes that the concept of `tax expenditure'
is of questionable analytic value." A basic conceptual problem with
GAO's recommendations is that the current list of tax expenditures is
based on an arbitrary baseline and, consequently, lacks analytical
rigor.
Although the normal tax baseline that has been used by OTA to identify
tax expenditures is loosely patterned on a comprehensive income tax, it
deviates from that concept in some significant ways. In the Fiscal Year
2003 Budget, OTA undertook to refine the tax expenditure list by
eliminating the arbitrariness in the current definition, and it has
continued to update that work for subsequent Budgets. OTA considered as
alternatives to the normal tax baseline both a pure income tax and a
pure consumption tax. Treasury's analysis revealed that many of the
largest tax expenditures would not be classified as such with this
change in baselines. For example, as of the 2006 Budget, only 15 of the
30 largest tax expenditures would be sure to continue as such under a
comprehensive income tax baseline, while 9 others might possibly be
considered. With a comprehensive consumption tax baseline, there are
even fewer unambiguous tax expenditures. Using a consumption tax
standard, only 2 of the 30 largest tax expenditures would be sure to
remain, along with possibly 7 others. That is less than a third of the
30 current largest expenditures. With this degree of uncertainty about
what constitutes a tax expenditure, GAO's recommendations for further
integration are to say the least premature.
OTA's analysis also points to another way to think about what
constitutes a tax expenditure. On this approach, any tax provision that
deviates from a clearly defined tax baseline would be considered a "tax
expenditure." Such deviations would differ from the traditional concept
of tax expenditures in two ways. First, they would not necessarily be
similar to any direct Government spending program. Although tax
expenditures can often be thought of as tax subsidies, they are
frequently unlike any of the subsidies found on the spending side of
the budget. The differences can be so great that comparing the two
types of subsidy is like comparing apples with oranges. In fact, that
has always been true of many of the traditional tax expenditures. GAO
spends no time in its report considering how tax expenditures differ
from other Government programs. It simply takes for granted that they
are similar, perhaps because of the label, but many so-called tax
expenditures have little resemblance to direct Government spending
programs. The "expenditure" element is purely metaphorical.
Second, thinking of tax expenditures as deviations from a standard
income or consumption tax implies that there can be negative as well as
positive tax expenditures. Not all deviations will reduce tax revenue;
some are likely to add to revenue creating a tax penalty or negative
tax expenditure. It is hard to imagine what a negative tax expenditure
would have in common with other spending programs.
The information in the tax expenditure tables can be useful to
policymakers and the public. Potentially, it indicates how the current
tax code deviates from an ideal tax system. That appears to have been
the main contribution of the tax expenditures currently published in
the budget, even though the existing list of tax expenditures as
measured against the normal tax base is conceptually flawed. Despite
the conceptual limitations, the tables of tax expenditures have
provided tax reformers with information about where the tax code
deviates from a defined baseline and about tax preferences that ought
to be limited or even eliminated to improve the tax code. Contrary to
GAO, however, such information is not especially useful in budgeting.
One serious limitation on current tax expenditure estimates is that
they do not provide information about the volume of total tax
expenditures. This is a second serious conceptual limitation on current
tax expenditure estimates that GAO ignores. Such information is
essential for budgeting, but it is not possible to obtain using current
tax expenditure methodology. This is because the numerical estimate for
each tax expenditure assumes that other tax expenditures and the rest
of the tax code remain unchanged while the tax expenditure being
analyzed is assumed to be removed from the code. If all tax
expenditures were removed at once, however, or if all tax expenditures
within a single budget function were removed at once, there would be
interactions among the tax expenditures that would change the estimate.
Furthermore, estimating methods and assumptions have changed over time,
often significantly, so that past estimates of individual tax
expenditures are analytically inconsistent with recent estimates. GAO
spends a good part of this report totaling tax expenditures and
comparing trends over time, an analytical exercise that the Treasury
has for years warned against. Most of this analysis is wasted effort,
because of these analytical restrictions. GAO is aware of the
restrictions, and it offers no evidence to suggest that they are
quantitatively insignificant, but it has chosen to ignore them in
carrying out its calculations.
A further limitation on the use of tax expenditure estimates for
budgeting is the convention used in preparing these estimates that
economic behavior is not affected by tax expenditures. That is clearly
not true, and if not corrected, it would lead to very misleading budget
estimates. This convention is different from that used in preparing the
budget's revenue estimates. The revenue estimates do reflect behavioral
changes, although not all conceivable behavioral changes. The most
likely microeconomic responses to changes in taxes are always reflected
in the revenue estimates. Before tax expenditures could be used for
budgeting, it would be necessary to include their likely behavioral
effects as they are computed. The GAO report is silent on how this
might be done, and GAO offers no reason for thinking that this problem
is quantitatively insignificant. It would be a mistake to substitute
the tax expenditure estimates for the budget's more accurate revenue
estimates in budget planning and preparation. The distinction between
revenue estimates and tax expenditure estimates is another reason for
keeping tax expenditures separate from the rest of the budget.
There is a final reason for thinking that the totals GAO computes
drastically overstate, any realistic revenue gain that might be
obtainable by eliminating or reducing tax expenditures. As has been
pointed out many times in previous Budgets, "past tax changes entailing
broad elimination of tax expenditures were generally accompanied by
changes in tax rates or other basic provisions, so that the net effects
on Federal revenues were considerably (if not totally) offset." Any
future tax reform that removes or modifies substantial numbers of tax
expenditures is likely to follow a similar pattern.
A third major conceptual shortcoming of the GAO report is that it
reflects the belief that tax expenditures must be treated like direct
Government spending programs or they will be neglected. GAO shows that
tax expenditures are not treated like direct spending programs, but
this does not prove that tax expenditures have been ignored. GAO has
overlooked the fact that the tax expenditures are regularly reviewed as
provisions of the tax code. It is not necessary to pretend that a tax
provision is really a spending program in order to review its
effectiveness or equity. The major tax expenditures have not been
ignored in Administration or Congressional deliberations about tax
policy. Indeed, the President's Advisory Panel on Federal Tax Reform,
named in January 2005, is even now going over the tax expenditures
along with other tax provisions looking for ways to reform and simplify
the tax code. A similar exercise produced fundamental tax reform in
1986. Neither effort has required treating tax expenditures as if they
belonged on the outlay side of the budget. Indeed, had tax expenditures
been treated like outlays, it might have been more difficult to
complete the complex trade-offs necessary to accomplish tax reform.
Changes in income tax rates and in the basic structure of the tax
system are apt to require adjustments in tax expenditures to "pay for"
the reform. That could be more difficult if the tax expenditures were
committed to an outlay function.
Tax proposals including proposals to modify tax expenditures have
always received considerable attention in the deliberations that
produce the budget. The budget includes an extended discussion of
Administration tax proposals. This material includes proposed changes
in tax expenditures along with any changes proposed to other parts of
the tax code. Contrary to the implication of the GAO report, it is not
necessary to treat taxes like spending in order to study the effects of
tax policy and to recommend changes as needed. This Administration has
certainly not ignored taxes in formulating its fiscal policy. Tax
policy changes since 2000 may conflict with GAO's policy preferences,
but GAO should not confuse a disagreement about the substance of tax
policy with a lack of attention to tax policy questions. This
Administration, like previous Administrations, has paid and will
continue to pay careful attention to all the key features of the
Nation's tax system as it continues to seek out measures that will
enhance the system's efficiency and equity.
GAO does provide some interesting comparisons of the tax expenditure
list compiled by OTA with the similar list prepared by the Joint
Committee on Taxation (JCT) and the different estimates made by the two
agencies. The report also shows how the list of tax expenditures has
changed over time. These are useful compilations for historical
purposes. The very fact, however, that there are enough differences
between the JCT and OTA estimates to warrant such a comparison suggests
that such estimates are not ready for more extensive use in the budget.
GAO also makes four specific recommendations for action by OMB:
1. Present the tax expenditures in the budget side-by-side with
outlays.
2. Develop a framework for conducting performance reviews and
evaluations of tax expenditures by agencies with "leadership"
responsibilities in the functional areas where tax expenditures fall.
3. Develop guidance on incorporating tax expenditures in agencies'
strategic plans, annual performance plans, and performance and
accountability reports.
4. Include tax expenditures in the PART process.
In addition to the broad conceptual and methodological reasons
described above for rejecting the general approach GAO has adopted in
this report, there are strong practical reasons for rejecting these
recommendations.
With respect to the first recommendation, OMB believes that the current
presentation of tax expenditure information in the budget is more than
adequate to provide the public and policymakers with what is useful to
know about these provisions of the tax code. Further analytical
refinement aimed at clarifying the definition of tax expenditures and
removing the arbitrariness from the current tax expenditure list would
be desirable, but that does not require combining tax expenditures with
outlay data. Inserting extraneous tax expenditure information at other
points in the budget is more likely to confuse than enlighten. As
pointed out above, the tax expenditure estimates cannot be meaningfully
added, nor can they be compared with current revenue estimates, and it
would be misleading to present analytically inappropriate totals for
separate budget functions.
The Department of Treasury has administrative responsibility for the
tax expenditures, so the only "mission area" in the main budget volume
where the tax expenditures could appear would be in the chapter devoted
to Treasury's activities. This would be unwieldy at best. The chapter
devoted to tax expenditures in Analytical Perspectives provides a clear
functional breakdown of all the tax expenditures in great detail.
Nothing would be gained by repeating this breakdown at other points in
the budget.
The second recommendation has some potential promise, but it is mainly
a job for the Department of Treasury. No other agency has access to the
data that would be needed to conduct such analysis. Confidentiality
requirements pose a serious barrier to sharing such information outside
Treasury. GAO gives no attention to the risks to confidentiality
inherent in its recommendation. Care must also be taken in analyzing
tax expenditures to consider how they operate as part of the tax
system. No other agency but Treasury is in a position to do this. To
the extent that there are overlapping interests in the effects of tax
expenditures, Treasury should consult with other Departments and OMB
can help coordinate such consultations as needed. Reviews of some tax
expenditures have been conducted by OTA and others are ongoing. Such
reviews inform recommendations for tax policy changes incorporated in
the budget and in other legislative proposals.
The third recommendation would be counterproductive. The agencies do
not administer the tax code, and they should not be saddled with
responsibility for something they do not control. Including tax
expenditures in agency plans and performance reports would work against
one of the main goals of improved strategic planning, which is the
proper alignment of resources and responsibilities. If GAO were
proposing to shift responsibility for major parts of the tax code away
from Treasury to the agencies with Administrative responsibility for
budget functions like commerce, housing, or health, then it might make
sense to require the agencies to include tax expenditures in their
planning, but that would require, among other wrenching changes,
similar adjustments in the Congressional committee structure that GAO
is surely not contemplating. Without responsibility for taxes, there is
no reason for any agency except Treasury to include them in a plan or a
performance report. Agencies may choose to discuss the effects of tax
policy on the programs for which they are responsible, but if they are
not charged with administering the tax code it would be wrong to
include revisions to tax law in their plans or performance reports.
GAO's final recommendation to OMB is to use the Program Assessment
Rating Tool (PART) to assess tax expenditures. The PART is used by OMB
and the agencies to assess program management and to suggest steps to
improve performance. The Department of Treasury manages the tax code,
so any new PARTS for tax expenditures would generally mean more PARTs
for Treasury. The Treasury Department has already been examined using
PARTS for a number of its programs including the New Markets Tax Credit
(NMTC), which is a tax expenditure. Other tax expenditures may be
evaluated with the PART in the future.
OMB has no current plans to implement the recommendations in this
report. Tax expenditures are not being under analyzed. They are
examined, but as part of the tax code not as spending programs in
disguise. Tax expenditures have not been integrated with other
Government spending programs either by the Administration or by
Congress, but such integration is not necessary for these elements of
the tax system to be scrutinized and modified if need be. Major changes
in tax expenditures are likely to be proposed by the President's
Advisory Panel on Federal Tax Reform, which is scheduled to issue its
findings later in 2005. It is not necessary to treat tax expenditures
like spending programs in disguise to examine them, manage them, or
even reform them.
Sincerely,
Signed by:
James D. Foster:
Associate Director for Economic Policy:
The agency comments and evaluation section of this report discusses our
overall comments on the Office of Management and Budget's letter dated
September 2, 2005. The following are our additional comments on issues
raised by OMB.
GAO Comments:
1. See the agency comments and evaluation section of this report.
2. While we believe that the nation's current and projected fiscal
imbalance provides an additional impetus for engaging in such a review
and reassessment, we believe tax expenditures should be reviewed and
evaluated for efficiency and effectiveness even if there were no fiscal
imbalance. We did not suggest that extra attention to tax expenditures
would eliminate the long-term fiscal imbalance. As our report stated,
substantive reform of Social Security and the major health programs
remains critical to recapturing our fiscal flexibility.
3. Our report cites several examples of changes in the presentation of
tax expenditures over time. For example, starting with the fiscal year
1999 budget, OMB began including a section outlining possible
performance measures and issues in evaluating tax expenditures. This
section was a first step in responding to congressional expectations
for the Executive Branch to provide information about how tax
expenditures meet their objectives and affect the performance of other
federal programs.
4. We do not take for granted that tax expenditures are similar to
spending programs. We devote a section of our background to describing
how tax expenditures differ from, may substitute for, and work in
conjunction with other spending programs to achieve policy objectives.
Also, see the agency comments and evaluation section of this report.
5. In our report, we recommend adding useful comparisons to spending
programs to the budget document, while not detracting from or changing
in any way how the tax expenditure lists can be used to think about tax
policies.
6. To the contrary, throughout our draft report we note and even
emphasize the limitations in the methodology of summing the individual
tax expenditures. In fact, to ensure that summing limitations of tax
expenditures were clearly acknowledged, we discussed the limitations in
(1) the introduction of our methodology, (2) a footnote in the Results
In Brief section, (3) the section devoted to explaining the limitations
which precedes our presentation of the trends in tax expenditures over
time, and (4) a footnote for all 10 figures where we summed the tax
expenditure estimates. In addition, we report a quantitatively
significant example of interaction effects of tax expenditure
estimates, which was developed by Treasury at our request. The example
shows that the revenue loss calculation assuming the simultaneous
elimination of several itemized deductions would be less than the sum
of the revenue loss estimates for each itemized deduction, each
calculated assuming the rest of the tax code was unchanged. As our
report stated, tax expenditure estimates produced by Treasury and JCT
are the best and only available data to measure the value of tax
expenditures and make comparisons to other spending programs. In our
view, summing the estimates provides perspective on the use of tax
expenditures as a policy tool and represents a useful gauge of the
general magnitude of government subsidies carried out through the tax
code. Our report also cites several other researchers who have summed
tax expenditure estimates to help gain perspective on the use of this
policy tool and examine trends in the aggregate growth of tax
expenditure estimates over time.
7. In this report, we provide a number of examples of studies we and
others have done of tax expenditures; our reviews often are at the
request of Congress, and OMB examined two tax expenditures under the
Administration's PART initiative. We also provide illustrations of the
major legislation that has affected tax expenditures since the late
1970s. However, we stand by our statement that tax expenditures are not
subject, or effectively subject, to several major processes that apply
to outlay programs that increase the likelihood of reviews and, perhaps
more importantly, increase the quantity and quality of information
available to policymakers in determining whether and how to modify tax
expenditures. Developing such enhanced information for policymakers and
displaying it in a manner that facilitates their understanding of the
total federal effort to address functionally related issues, e.g.,
ensuring adequate housing or stimulating economic development, is the
thrust and intent of our report and recommendations.
8. We disagree with OMB's characterization that the current tax
expenditure presentation is "more than adequate" for the public and
policymakers. We realize that the current budget volume is not
organized by separate budget functions; however, OMB had previously
presented revenue loss sums for tax expenditures alongside outlays and
credit activity for each budget function in the federal budget from
fiscal year 1998 through fiscal year 2002. As we state in our report,
these summary tables were a useful starting point in highlighting the
relative magnitude of tax expenditures and related outlay programs
across mission areas. In addition, our current recommendation gives OMB
latitude on how to present them with other outlay programs with similar
purposes. Further, Congress has shown significant interest in reviewing
all tools within a mission area. For example, recent congressionally-
requested studies we conducted have reviewed all tools--including tax
expenditures--used in the post-secondary education and energy
areas.[Footnote 98] Also, see comment 2 as well as the agency comments
and evaluation section of this report.
9. We disagree with the opinion that OMB has implicitly expressed that
it would not have a leadership role regarding our second
recommendation. First, we are not recommending that OMB be responsible
for conducting the actual reviews, just to develop and oversee the
implementation of a framework for conducting the performance reviews.
OMB would not need to have access to taxpayer data to manage the
process. Secondly, we recognize the challenges in using taxpayer data,
which is the reason we recommend that OMB work in consultation with
Treasury to develop and implement the framework. Third, taxpayer data
may not be the only source of performance information on tax
expenditures, which is why we recommend that the framework address the
lack of credible performance information on tax expenditures. Finally,
our report recognizes the scarcity of evaluation resources and we
suggest taking a strategic approach to select and prioritize tax
expenditure evaluations based on such factors as the relative
priorities, costs, and risks associated with related clusters of
programs and activities and that OMB select similar programs for review
in the same year to facilitate comparisons and tradeoffs. To make this
point more apparent in our report, we added a fourth element to our
recommendation that OMB and Treasury in developing a framework for
evaluating tax expenditures are to identify any additional resources
that may be needed for tax expenditure reviews.
10. OMB misstated our recommendation. This report does not recommend
that agencies be responsible for administering parts of the tax code.
As we state in our report, in passing the Government Performance and
Results Act, the Senate Governmental Affairs Committee called for
inclusion of tax expenditures in the GPRA process so that more and
better information would be available on the performance of tax
expenditures themselves and the effects of tax expenditures would be
considered in achieving federal performance goals. Our recommendation
is consistent with this intent. Also, see the agency comments and
evaluation section of this report.
11. Our recommendation aims to bring tax expenditures in line with the
performance management attention PART gives to outlay programs. Our
report discussed the two cases where OMB has applied PART to tax
expenditures--the EITC compliance initiative and the New Markets Tax
Credit. Within the executive branch, the Department of the Treasury has
major responsibility for managing programs implemented through the tax
system. Given that over the next 2 years the Administration plans to
assess nearly all remaining executive branch outlay programs, Treasury
would be facing relative less scrutiny than other agencies to the
extent that the tax expenditure tool is not similarly evaluated under
PART. Although OMB disagreed with our recommendations as a whole, we
are encouraged that OMB is still considering how other tax expenditures
could be evaluated with PART in the future. In moving forward, PART
reviews of tax expenditures in isolation might be revealing, but we
would urge a more comprehensive and crosscutting approach to assessing
all tools--including tax expenditures--related to common goals.
[End of section]
Appendix III: How Tax Expenditures Are Measured and Reported:
To understand the trends in the size of tax expenditures, it is helpful
to understand how tax expenditures are measured and reported annually.
This appendix explains the baselines used to distinguish tax
expenditures from other provisions in the tax code and provides an
explanation of the different methods that are used to measure tax
expenditures.
Tax Expenditures Are Reported Annually by Law and Measurements Depend
on Baselines Used:
The Congressional Budget Act of 1974 defines tax expenditures as "those
revenue losses attributable to provisions of the federal tax laws which
allow a special exclusion, exemption, or deduction from gross income or
which provide a special credit, a preferential rate of tax, or a
deferral of tax liability. Both the congressional Joint Committee on
Taxation (JCT) and the Department of the Treasury's Office of Tax
Analysis annually compile a list of tax expenditures and estimates of
their cost each year. The Department of the Treasury's (Treasury) tax
expenditure estimates are included in the annual federal budget by the
Office of Management and Budget (OMB).
While, in general, the tax expenditure lists published annually by JCT
and Treasury are similar, they differ somewhat in the number of tax
expenditures reported and the estimated revenue loss for particular
expenditures. Part of this difference arises because the organizations
use different income tax baselines to determine tax expenditures. To
determine the tax code provisions that satisfy the definition of a tax
expenditure, the existing tax law must be compared or measured against
an alternative set of tax rules that represent a baseline. The
Congressional Budget Act did not define a specific baseline tax
structure. As a result, the Treasury and the staff of the JCT have used
judgment to define the different baselines that they use to develop
lists of tax expenditures. Before the fiscal year 1983 budget, there
were few differences between the Treasury and JCT tax expenditure lists
because both organizations used a baseline patterned on a comprehensive
income tax, which was deemed the "normal" baseline. JCT has used this
baseline consistently over time in producing its tax expenditure list,
while Treasury has modified its normal baseline over time and provided
alternative baselines. In general, the normal income tax law baseline
developed by both Treasury and JCT represents a broad-based income tax
on individuals and a separate income tax on corporations. The normal
baseline includes income from all sources, including wages and
salaries, fringe benefits and other forms of employee compensation,
interest income, dividends, realized capital gains, and net income from
non-corporate businesses such as sole proprietorships and partnerships.
The normal baseline generally allows for personal exemptions,
deductions for costs incurred to earn income, and a standard deduction.
Currently, the normal baselines used by both Treasury and JCT differ
somewhat. Treasury's normal baseline excludes several tax expenditures
that are included in the normal baseline used by JCT and leads to
several tax expenditures being reported by JCT only. For instance, the
exclusion of Medicare hospital insurance benefits is included in the
JCT list but this provision is not included in the federal budget tax
expenditure list because Treasury views the exclusion of government
benefits received in kind as part of its normal baseline. Additional
examples of specific tax expenditures reported by only JCT or Treasury
can be found at the end of this appendix in table 2.
In the fiscal year 1983 budget, Treasury introduced the concept of a
reference baseline. The reference baseline used by Treasury is also
patterned on a broad-based income tax, but it is closer to existing law
because tax expenditures by definition are limited to special
exceptions that serve programmatic functions, such as national defense,
income security, and education. Under Treasury's reference baseline,
two conditions are necessary for a provision to qualify as a tax
expenditure: (1) The provision must be "special" in that it applies to
a narrow class of transactions or taxpayers and (2) There must be a
general provision to which the special provision is a clear exception.
The set of general tax rules in the existing tax code is used as the
standard by which various provisions are determined to be special.
Whereas accelerated depreciation was considered a special rule
exception under the normal baseline, these provisions were not
considered tax expenditures under the reference baseline, because
accelerated depreciation was considered to be the general treatment for
the depreciation of business assets. The preferential tax rate for
capital gains was included in Treasury's tax expenditure list based on
the general tax code rule that income from any source is considered
taxable. For fiscal year 1983, Treasury began to report estimates using
the reference baseline for some tax expenditures and then reinstituted
reporting estimates for the normal baseline in fiscal year 1985. This
reporting practice has continued to the present.
In recent years, Treasury modified treatment of certain provisions
under its normal and reference baselines and introduced two
supplemental baselines. In the 2005 and 2006 budgets, Treasury excluded
the reduced tax rate on dividends and capital gains that have already
been taxed under the corporate income tax from the reference law
baseline because it believes that since current law taxes these forms
of corporate income twice, it is an inappropriate baseline to use.
Also, in the 2004, 2005, and 2006 budgets, Treasury changed how it
computed the accelerated depreciation tax expenditure under the normal
baseline by using a measure of economic depreciation rather than
straight-line depreciation as the baseline depreciation method, which
was used in prior years. The measure of economic depreciation is
generally faster than the straight-line method, so the tax expenditure
estimates for accelerated depreciation for fiscal years 2002, 2003, and
2004 (from the 2004, 2005, and 2006 budgets) are smaller than what they
would have been if the straight-line depreciation method were used. In
addition, in the 2004 budget, Treasury began reporting two supplemental
baselines, as discussed in figure 14.
Figure 14: Treasury's Supplemental Reporting for Comprehensive Income
and Consumption Tax Baselines:
[See PDF for image]
In the 2004 budget, Treasury began reporting estimates for the 30
largest tax expenditures using comprehensive income and consumption tax
baselines.
* Treasury defines its comprehensive income baseline as the
real”inflation adjusted” accrual of wealth arising between the
beginning and end of the year. The comprehensive income baseline
includes all accrual of wealth, whether or not realized, whether or not
related to a market transaction, and whether it is a return to capital
or labor. Inflation adjusted capital gains would be included in
comprehensive income as they accrue. According to Treasury‘s reporting,
13 large tax expenditures under its normal and reference baselines,
such as capital gains on home sales, would continue to be considered
tax expenditures under a comprehensive baseline. Treasury was uncertain
about whether 6 would still be considered tax expenditures and
concluded 4 would probably not be tax expenditures under the
comprehensive income tax baseline. The tax exemption of in-kind
benefits from government programs such as food stamps, public housing,
and Medicaid would be added to Treasury‘s tax expenditure list under
the comprehensive income tax baseline.
* Treasury defines its consumption baseline as a combination of an
income tax plus a deduction for net saving. The major difference
between Treasury‘s comprehensive income and consumption baselines is
the treatment of tax expenditures related to saving. According to
Treasury, 4 tax expenditures under its normal or reference baseline
would still be considered tax expenditures under its consumption
baseline, and another 12 would probably still be considered tax
expenditures as well, such as the child tax credit. The capital gains
exclusion on home sales would not be considered a tax expenditure under
the consumption tax baseline. However, tax expenditures unrelated to
broad based saving incentives would remain tax expenditures under a
consumption baseline.
Source: Office of Management and Budget. Analytical Perspectives,
Budget of the United States Government, Fiscal Year 2006, (Washington,
D.C.: 2005).
[End of figure]
Both Treasury and JCT provide estimates of revenue loss, which is the
amount of revenue that the government forgoes as the result of each
special provision in the tax code. Revenue loss is estimated for each
tax expenditure separately by comparing the revenue raised under
current law with the revenue that would have been raised if the single
provision did not exist, assuming that taxpayer behavior and all other
tax and spending provisions remain constant. A revenue loss estimate
does not represent the amount of revenue that would be gained if a
particular tax expenditure were repealed, since repeal of the
expenditure would probably change taxpayer behavior in some way that
would affect revenue.
Treasury and JCT tax expenditure lists will also differ because each
organization uses a different de minimis amount, which is the minimum
amount of revenue loss threshold for Treasury and JCT to report a tax
expenditure. JCT excludes tax expenditure estimates that result in
revenue losses that are less than $50 million over its 5-year projected
period. For instance, the tax exemption for certain small insurance
companies was not included in JCT's January 2005 list of tax
expenditures because the estimated revenue loss was below its de
minimis amount. Treasury rounds all yearly estimates to the nearest $10
million and excludes tax expenditures with estimates that round to zero
in each of the 7 years that it reports tax expenditure estimates.
JCT and Treasury estimates of revenue loss also differ somewhat due to
different economic and technical assumptions. For instance, JCT and
Treasury use different sources for macroeconomic assumptions
incorporated in their revenue loss estimates. JCT uses CBO
macroeconomic assumptions in its tax expenditure projections and
Treasury uses assumptions based on consultations with OMB, and the
Council of Economic Advisers,[Footnote 99] the same assumptions used
for the President's budget. In addition to projecting future revenue
losses, Treasury also reports re-estimates for the past fiscal year,
which incorporate changes in tax policy and reflect more up-to-date
economic and taxpayer data. Table 3 compares tax expenditure reporting
by JCT and Treasury.
Table 3: Comparison of Tax Expenditure Reporting by JCT and Treasury:
Report Elements: Period covered;
Joint Committee on Taxation (JCT): Current fiscal year and 4 future
fiscal years;
U.S. Department of the Treasury: Last fiscal year, current fiscal year,
and 5 future fiscal years.
Report Elements: Baseline used;
Joint Committee on Taxation (JCT): Normal;
U.S. Department of the Treasury: Reference (since 1983), normal.
Report Elements: Measurement estimates produced;
Joint Committee on Taxation (JCT): Revenue loss;
U.S. Department of the Treasury: Revenue loss, outlay-equivalent.
Report Elements: Macroeconomic assumptions;
Joint Committee on Taxation (JCT): Congressional Budget Office (CBO)
(mid-year update);
U.S. Department of the Treasury: OMB, Treasury, and Council of Economic
Advisers[A].
Report Elements: De minimis rule;
Joint Committee on Taxation (JCT): Excludes provisions with estimates
of less than $50 million over the 5- year period;
U.S. Department of the Treasury: Rounds all yearly estimates to the
nearest $10 million and excludes provisions with estimates that round
to zero in each of the 7 years.
Report Elements: Categorized by;
Joint Committee on Taxation (JCT): Budget function, taxpayer group
(i.e., individual or corporate);
U.S. Department of the Treasury: Budget function, taxpayer group (i.e.,
individual or corporate).
Report Elements: Supplemental information;
Joint Committee on Taxation (JCT): Distributional estimates by income
class (for 9 expenditures); summary of recent legislation regarding tax
expenditures; list of expiring tax expenditure provisions; and summary
of differences between Treasury and JCT lists of tax expenditures;
U.S. Department of the Treasury: Present value estimates (for deferral
expenditures); comprehensive and consumption baselines used (for select
expenditures).
Sources: Office of Management and Budget, Analytical Perspectives,
Budget of the United States Government, Fiscal Year 2006 (Washington,
D.C.: 2005);Joint Committee on Taxation, Estimates of Federal Tax
Expenditures for Fiscal Years 2005-2009, JCS-1-05 (Washington, D.C.:
Jan. 12, 2005); and Polackova Brixi, Hana, and Christian M.A. Valenduc,
and Zhicheng Li Swift, Tax Expenditures--Shedding Light on Government
Spending through the Tax System: Lessons from Developed and Transition
Economies (Washington, D.C.: The World Bank, 2004).
[A] Estimates are based on mid-session economic assumptions; exceptions
are the earned income tax credit and the child tax credit, which
involve outlay components and hence are updated to reflect the economic
assumptions used elsewhere in the budget. At OMB, the economic forecast
is produced by the Troika: economists drawn from the Council of
Economic Advisers, the Department of the Treasury, and OMB. See
Analytical Perspectives, "Economic Assumptions and Analyses" for a
discussion of the Troika assumptions.
[End of table]
Outlay-Equivalent Estimates Facilitate Comparison to Direct Spending
Programs:
In addition to revenue loss estimates, Treasury also measures tax
expenditures in terms of their outlay-equivalent value, which allows
the cost of a tax expenditure to be compared with a direct federal
outlay, were each to provide the same benefit to the taxpayer. JCT does
not produce outlay-equivalent estimates. The underlying economic
assumptions used for the outlay-equivalent and revenue loss estimates
are the same. However, to estimate outlay-equivalents, Treasury will
increase--"gross up"--the revenue loss estimate by the average marginal
tax rate that applies to the relevant taxpayers (the taxpayers that
take the particular credit or deduction or earn the income that is
excluded from tax).[Footnote 100] The result is an estimate of the
amount of direct spending that would be needed to leave the relevant
taxpayer with the same amount of benefit, after he or she paid tax on
the amount received through the spending, as the taxpayer would get
from the tax provision itself. For example, the outlay-equivalent
estimate for the housing and meal allowances for military personnel tax
expenditure reflects the additional pre-tax income that military
personnel would have to be paid to raise their income after federal
taxes by the amount of the benefits, so that it can be compared with
other defense outlays on a consistent basis. An exception to this
general rule of increasing the revenue loss estimate is made for tax
expenditures that are believed to reduce the price of particular goods
and services. In this case no gross up is made because a spending
program that led to the same price reduction would not increase the tax
liability of the taxpayer. For instance, revenue loss estimates for
accelerated depreciation on rental housing and state prepaid tuition do
not differ from the outlay-equivalent estimates for these tax
expenditures.
Outlay-equivalents can also differ from revenue loss estimates because
they are calculated based on an even flow of virtual payments over the
year to make the estimates comparable to actual outlay programs. Even
for those tax expenditures that do not require a calculated adjustment,
differences between the revenue losses and outlay-equivalents can occur
solely because of differences in timing factors. Although revenue loss
estimates can be affected by the collection patterns of the corporate
and personal income taxes, the cash flow of direct spending programs
can differ widely from the annual tax collection cycle. Of the 146 tax
expenditures reported in the fiscal year 2006 budget, 91 were "grossed
up" for the outlay-equivalent estimate with the implied rate varying
across different provisions. Just as there is debate over which tax
provisions should be listed as tax expenditures, tax experts do not
always agree on whether specific tax expenditures should be grossed up
or not. It may not be apparent to observers why the outlay-equivalent
and revenue loss estimates are the same for some tax expenditures and
why they differ for other tax expenditures.[Footnote 101]
Other estimates of tax expenditures produced by JCT and Treasury also
may differ from revenue loss estimates. These supplemental estimates
are discussed in figure 15.
Figure 15: Supplemental Estimates Developed by Treasury and JCT:
* Since the 1995 fiscal year budget, Treasury has produced present
value estimates for the approximately 20 tax expenditures that involve
tax deferrals or other long-term revenue effects. Revenue loss
estimates, which are cash based, can overstate the real effect on
receipts to the government for tax deferrals because deferred taxes
will ultimately be paid. To produce present value estimates Treasury
must make certain assumptions. Assumptions also may be specific to
individual tax expenditures, such as the time frame when people will
retire and begin to collect funds from retirement accounts (and pay
income taxes on them). Treasury uses the simplifying assumption that
interest rates and tax rates remain constant over time.
* JCT also presents a distributional analysis of several tax
expenditures. This analysis estimates the amount of benefits by income
class for the deductions for medical expenses, real estate taxes,
charitable contributions, and the child care and earned income credits.
JCT does not report all individual tax expenditures because of the
difficulty in making reliable estimates of the income distribution of
items that do not appear on tax returns under present law.
Sources: Office of Management and Budget, Analytical Perspectives,
Budget of the United States Government, Fiscal Year 2006 (Washington,
D.C.: 2005); and Joint Committee on Taxation, Estimates of Federal Tax
Expenditures for Fiscal Years 2004-2008, JCS-8-03 (Washington, D.C.:
Dec. 22, 2003).
[End of figure]
Comparison of JCT With Treasury Tax Expenditure Lists:
Although there are differences between how Treasury and JCT develop and
measure tax expenditures, the sum of revenue loss estimates from each
list has followed relatively the same trend in the past. Figure 16
compares the sum of revenue loss estimates for JCT and Treasury since
the last comprehensive tax reform, when the Tax Reform Act of 1986 was
adopted. Since fiscal year 2002, the trends in the sums of the two sets
of revenue loss estimates have diverged. Since the fiscal year 2004
Budget, Treasury's estimates of dividends and capital gains tax
expenditures are lower than JCT's, at least in part, because Treasury
changed its definition of the tax expenditures to reflect the reduced
tax rates only on dividends and capital gains from sources other than
corporate equity. Treasury also redefined the accelerated depreciation
tax expenditures under the normal baseline to reflect depreciation
relative to a replacement cost basis, rather than the historic cost
basis previously used.
Figure 16: Sum of Revenue Loss Estimates Reported by the Joint
Committee on Taxation and the U.S. Department of the Treasury (1987-
2004):
[See PDF for image]
Notes: Summing the revenue loss estimates does not take into account
possible interaction effects among the tax expenditures. Changes in
economic conditions and estimation techniques, can affect revenue loss
estimates for tax expenditures, making them differ from year to year.
Changes to the number of tax expenditures reported by Treasury would
also affect the amount of revenue loss reported if some tax
expenditures were eliminated or added. Finally, revenue loss estimates
include the effect of certain tax credits on receipts only and not the
effect of the credits on outlays.
[End of figure]
Table 4 lists the tax expenditures and their associated revenue loss
estimates that were reported by both Treasury and JCT for fiscal year
2004. The table details the number and size of tax expenditure
estimates between the two lists. For example, in the National Defense
budget function, the revenue loss estimate for the exclusion of
benefits and allowances to armed forces personnel was estimated at $2.5
billion by Treasury and $2.7 billion by JCT. In the same function, JCT
also reported revenue losses for two tax expenditures not listed by
Treasury.
Table 4: List of Tax Expenditures Reported by the U.S. Department of
the Treasury and the Joint Committee on Taxation for Fiscal Year 2004:
Dollars in millions.
Budget function: National Defense;
Tax expenditure name: Exclusion of benefits and allowances to Armed
Forces personnel;
Treasury estimates: Individual: $2,460;
JCT estimates: Individual: $2,700.
Tax expenditure name: Exclusion of military disability benefits[B];
JCT estimates: Individual: $100.
Tax expenditure name: Deduction for overnight-travel expenses of
National Guard and Reserve Members[B];
JCT estimates: Individual: $100.
Budget function: International Affairs;
Tax expenditure name: Exclusion of income earned abroad by U.S.
citizens;
Treasury estimates: Individual: $2,680;
JCT estimates: Individual: $3,400.
Tax expenditure name: Exclusion of certain allowances for federal
employees abroad;
Treasury estimates: Individual: $850;
JCT estimates: Individual: $400.
Tax expenditure name: Extraterritorial income exclusion;
Treasury estimates: Corporate: $5,500;
JCT estimates: Corporate: $5,200.
Tax expenditure name: Inventory property sales source rule exception;
Treasury estimates: Corporate: $1,500;
JCT estimates: Corporate: $5,400.
Tax expenditure name: Deferral of income of controlled foreign
corporations;
Treasury estimates: Corporate: $7,240;
JCT estimates: Corporate: $4,600.
Tax expenditure name: Deferred taxes for financial firms on certain
income earned overseas;
Treasury estimates: Corporate: $2,130;
JCT estimates: Corporate: $1,900.
Budget function: General Science, Space, and Technology;
Tax expenditure name: Expensing of research and experimental
expenditures;
Treasury estimates: Corporate: $-2,280;
Treasury estimates: Individual: $-50;
JCT estimates: Corporate: $3,500;
JCT estimates: Individual: $100.
Tax expenditure name: Credit for increasing research activities;
Treasury estimates: Corporate: $4,630;
Treasury estimates: Individual: $50;
JCT estimates: Corporate: $3,900;
JCT estimates: Individual: [A].
Budget function: Energy;
Tax expenditure name: Expensing of exploration and development costs
[D];
Treasury estimates: Corporate: $230;
Treasury estimates: Individual: $30;
JCT estimates: Corporate: $500;
JCT estimates: Individual: [A].
Tax expenditure name: Expensing of exploration and development costs:
other fuels[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Excess of percentage over cost depletion[E];
Treasury estimates: Corporate: $1,210;
Treasury estimates: Individual: $110;
JCT estimates: Corporate: $400;
JCT estimates: Individual: [A].
Tax expenditure name: Excess of percentage over cost depletion: other
fuelsb;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Alternative fuel production credit;
Treasury estimates: Corporate: $1,000;
Treasury estimates: Individual: $40;
JCT estimates: Corporate: $500;
JCT estimates: Individual: $100.
Tax expenditure name: Exception from passive loss limitation for
working interests in oil and gas properties[C];
Treasury estimates: Individual: $20.
Tax expenditure name: Capital gains treatment of royalties on coal[C];
Treasury estimates: Individual: $70.
Tax expenditure name: Exclusion of interest on energy facility bonds;
Treasury estimates: Corporate: $20;
Treasury estimates: Individual: $80;
JCT estimates: Corporate: [A];
JCT estimates: Individual: $100.
Tax expenditure name: Enhanced oil recovery credit;
Treasury estimates: Corporate: $300;
Treasury estimates: Individual: $30;
JCT estimates: Corporate: $200;
JCT estimates: Individual: $100.
Tax expenditure name: New technology credit;
Treasury estimates: Corporate: $330;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Alcohol fuel credit[F];
Treasury estimates: Corporate: $20;
Treasury estimates: Individual: $10;
JCT estimates: Corporate: [A].
Tax expenditure name: Tax credit and deduction for clean fuel-burning
vehicles[C];
Treasury estimates: Corporate: $20;
Treasury estimates: Individual: $50.
Tax expenditure name: Exclusion from income of conservation subsidies
provided by public utilities;
Treasury estimates: Individual: $100;
JCT estimates: Individual: [A].
Tax expenditure name: Tax credit for electricity production from wind,
biomass, and poultry waste[B];
JCT estimates: Corporate: $200;
JCT estimates: Individual: [A].
Budget function: Natural Resources and Environment;
Tax expenditure name: Expensing of exploration and development costs,
nonfuel minerals;
Treasury estimates: Corporate: $210;
Treasury estimates: Individual: $20;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Excess of percentage over cost depletion, nonfuel
minerals;
JCT estimates: Corporate: $100;
JCT estimates: Individual: $100.
Tax expenditure name: Exclusion of interest on bonds for water, sewage,
and hazardous waste facilities;
Treasury estimates: Corporate: $110;
Treasury estimates: Individual: $390;
JCT estimates: Corporate: $200;
JCT estimates: Individual: $500.
Tax expenditure name: Capital gains treatment of certain timber
income[C];
Treasury estimates: Individual: $70.
Tax expenditure name: Expensing of multiperiod timber-growing costs;
Treasury estimates: Corporate: $230;
Treasury estimates: Individual: $110;
JCT estimates: Corporate: $200;
JCT estimates: Individual: [A].
Tax expenditure name: Tax incentives for preservation of historic
structures; (under Commerce and housing credit budget function for
JCT);
Treasury estimates: Corporate: $230;
Treasury estimates: Individual: $70;
JCT estimates: Corporate: $400;
JCT estimates: Individual: $100.
Tax expenditure name: Special rules for mining reclamation reserves[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Special tax rate for nuclear decommissioning
reserve fund[B];
JCT estimates: Corporate: $300.
Tax expenditure name: Exclusion of contributions in aid of construction
for water and sewer utilities[B];
JCT estimates: Corporate: [A].
Tax expenditure name: Expensing of capital costs with respect to
complying with EPA sulfur regulations[B].
Tax expenditure name: Exclusion of gain or loss on sale or exchange of
certain brownfield sites[B].
Budget function: Agriculture;
Tax expenditure name: Expensing of certain capital outlays;
Treasury estimates: Corporate: $20;
Treasury estimates: Individual: $80;
JCT estimates: Corporate: [A];
JCT estimates: Individual: $300.
Tax expenditure name: Expensing of fertilizer and soil conditioner
costs[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: $100.
Tax expenditure name: Expensing of soil and water conservation
expenditures[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Expensing of certain multiperiod production
costs[C];
Treasury estimates: Corporate: $10;
Treasury estimates: Individual: $40.
Tax expenditure name: Treatment of loans forgiven for solvent farmers;
Treasury estimates: Individual: $10;
JCT estimates: Individual: $100.
Tax expenditure name: Capital gains treatment of certain income[C];
Treasury estimates: Individual: $670.
Tax expenditure name: Income averaging for farmers;
Treasury estimates: Individual: $40;
JCT estimates: Individual: [A].
Tax expenditure name: Deferral of gain on sales of farm refiners[C];
Treasury estimates: Corporate: $10.
Tax expenditure name: Bio-Diesel tax credit[B].
Tax expenditure name: Exclusion of cost- sharing payments[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Expensing of the costs of raising dairy and
breeding cattle[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: $100.
Tax expenditure name: Five-year carryback period for net operating
losses attributable to farming[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Budget function: Commerce and Housing Credit;
Tax expenditure name: Exemption of credit union income;
Treasury estimates: Corporate: $1,270;
JCT estimates: Corporate: $1,200.
Tax expenditure name: Excess bad debt reserves of financial
institutions[C];
Treasury estimates: Corporate: $-20.
Tax expenditure name: Exclusion of interest on life insurance savings;
Treasury estimates: Corporate: $2,010;
Treasury estimates: Individual: $18,820;
JCT estimates: Corporate: $1,400;
JCT estimates: Individual: $24,700.
Tax expenditure name: Special alternative tax on small property and
casualty insurance companies[C];
Treasury estimates: Corporate: $10.
Tax expenditure name: Deduction of unpaid property loss reserves for
property and casualty insurance companies[B];
JCT estimates: Corporate: $1,500.
Tax expenditure name: Tax exemption of certain insurance companies
owned by tax-exempt organizations[C];
Treasury estimates: Corporate: $180.
Tax expenditure name: Small life insurance company deduction;
Treasury estimates: Corporate: $80;
JCT estimates: Corporate: $100.
Tax expenditure name: Special treatment of life insurance company
reserves[B];
JCT estimates: Corporate: $1,700.
Tax expenditure name: Exclusion of interest on owner-occupied mortgage
subsidy bonds;
Treasury estimates: Corporate: $220;
Treasury estimates: Individual: $800;
JCT estimates: Corporate: $300;
JCT estimates: Individual: $800.
Tax expenditure name: Exclusion of interest on rental housing bonds;
Treasury estimates: Corporate: $80;
Treasury estimates: Individual: $280;
JCT estimates: Corporate: $100;
JCT estimates: Individual: $200.
Tax expenditure name: Deductibility of mortgage interest on owner-
occupied homes;
Treasury estimates: Individual: $61,450;
JCT estimates: Individual: $61,400.
Tax expenditure name: Deductibility of state and local property tax on
owner-occupied homes;
Treasury estimates: Individual: $19,930;
JCT estimates: Individual: $18,700.
Tax expenditure name: Capital gains exclusion on home sales;
Treasury estimates: Individual: $29,730;
JCT estimates: Individual: $17,900.
Tax expenditure name: Exclusion of net imputed rental income on owner-
occupied homes[C];
Treasury estimates: Individual: $24,590.
Tax expenditure name: Exception from passive loss rules for $25,000 of
rental loss[C];
Treasury estimates: Individual: $5,030.
Tax expenditure name: Credit for low-income housing investments;
Treasury estimates: Corporate: $2,930;
Treasury estimates: Individual: $730;
JCT estimates: Corporate: $3,000;
JCT estimates: Individual: $1,300.
Tax expenditure name: Accelerated depreciation on rental housing;
Treasury estimates: Corporate: $-10;
Treasury estimates: Individual: $760;
JCT estimates: Corporate: $300;
JCT estimates: Individual: $3,000.
Tax expenditure name: Deferral of income from post-1987 installment
sales;
Treasury estimates: Corporate: $290;
Treasury estimates: Individual: $810;
JCT estimates: Corporate: $600;
JCT estimates: Individual: $400.
Tax expenditure name: Cancellation of indebtedness[C];
Treasury estimates: Individual: $30.
Tax expenditure name: Exceptions from imputed interest rules;
Treasury estimates: Individual: $50;
JCT estimates: Corporate: [A];
JCT estimates: Individual: $300.
Tax expenditure name: Capital gains (except agriculture, timber, iron
ore, and coal);
Treasury estimates: Individual: $25,150;
JCT estimates: Individual: $66,100.
Tax expenditure name: Capital gains exclusion of small corporation
stock[C];
Treasury estimates: Individual: $160.
Tax expenditure name: Step-up basis of capital gains at death;
Treasury estimates: Individual: $24,200;
JCT estimates: Individual: $35,900.
Tax expenditure name: Carryover basis of capital gains on gifts;
Treasury estimates: Individual: $210;
JCT estimates: Individual: $4,300.
Tax expenditure name: Ordinary income treatment of loss from small
business corporation stock sale[C];
Treasury estimates: Individual: $50.
Tax expenditure name: Accelerated depreciation of buildings other than
rental housing;
Treasury estimates: Corporate: $-2,980;
Treasury estimates: Individual: $-280;
JCT estimates: Corporate: $1,800;
JCT estimates: Individual: $1,900.
Tax expenditure name: Accelerated depreciation of machinery and
equipment;
Treasury estimates: Corporate: $37,080;
Treasury estimates: Individual: $7,610;
JCT estimates: Corporate: $52,900;
JCT estimates: Individual: $16,100.
Tax expenditure name: Expensing of certain small investments; (JCT did
not report a revenue loss estimate);
Treasury estimates: Corporate: $680;
Treasury estimates: Individual: $840.
Tax expenditure name: Amortization of start-up costs;
Treasury estimates: Corporate: $70;
Treasury estimates: Individual: $10;
JCT estimates: Corporate: [A];
JCT estimates: Individual: $600.
Tax expenditure name: Deduction for U.S. production activities[B].
Tax expenditure name: Special rules for certain film and TV
production[B].
Tax expenditure name: Graduated corporation income tax rate;
Treasury estimates: Corporate: $2,450;
JCT estimates: Corporate: $3,300.
Tax expenditure name: Exclusion of interest on small issue bonds;
Treasury estimates: Corporate: $100;
Treasury estimates: Individual: $350;
JCT estimates: Corporate: $100;
JCT estimates: Individual: $300.
Tax expenditure name: Deferral of gain on like-kind exchanges[B];
JCT estimates: Corporate: $1,200;
JCT estimates: Individual: $400.
Tax expenditure name: Deferral of gain on involuntary conversions
resulting from Presidentially-declared disasters[B];
JCT estimates: Individual: [A].
Tax expenditure name: Expensing of magazine circulation
expenditures[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Special rules for magazine, paperback book, and
record returns[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Completed contract rules[B];
JCT estimates: Corporate: $200;
JCT estimates: Individual: [A].
Tax expenditure name: Cash accounting, other than agriculture[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: $700.
Tax expenditure name: Exception from net operating loss limitations for
corporations in bankruptcy proceedings[B];
JCT estimates: Corporate: $700.
Tax expenditure name: Tax credit for employer- paid FICA taxes on
tips[B];
JCT estimates: Corporate: $200;
JCT estimates: Individual: $300.
Budget function: Transportation;
Tax expenditure name: Deferral of tax on shipping companies;
Treasury estimates: Corporate: $20;
JCT estimates: Corporate: $100.
Tax expenditure name: Deduction for clean fuel vehicles and refueling
property[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: $200.
Tax expenditure name: Exclusion of reimbursed employee parking
expensesc[C];
Treasury estimates: Individual: $2,470.
Tax expenditure name: Exclusion of employer- provided transit passes;
Treasury estimates: Individual: $410;
JCT estimates: Individual: $3,800.
Tax expenditure name: Tax credit for certain expenditures for
maintaining railroad tracks[B].
Budget function: Community and Regional Development;
Tax expenditure name: Investment credit for rehabilitation of
structures, other than historic;
Treasury estimates: Corporate: $20;
Treasury estimates: Individual: $20;
JCT estimates: Corporate: $100;
JCT estimates: Individual: [A].
Tax expenditure name: Exclusion of interest for airport, dock, and
similar bonds;
Treasury estimates: Corporate: $180;
Treasury estimates: Individual: $670;
JCT estimates: Corporate: $200;
JCT estimates: Individual: $600.
Tax expenditure name: Exemption of certain mutuals and cooperatives
income[C];
Treasury estimates: Corporate: $60.
Tax expenditure name: Empowerment zones, enterprise communities, and
renewal communities[C];
Treasury estimates: Corporate: $280;
Treasury estimates: Individual: $800.
Tax expenditure name: Empowerment zone tax incentives[B];
JCT estimates: Corporate: $300;
JCT estimates: Individual: $300.
Tax expenditure name: Renewal community tax incentives[B];
JCT estimates: Corporate: $100;
JCT estimates: Individual: $300.
Tax expenditure name: New markets tax credit;
Treasury estimates: Corporate: $70;
Treasury estimates: Individual: $220;
JCT estimates: Corporate: $100;
JCT estimates: Individual: $200.
Tax expenditure name: Expensing of environmental remediation costs;
Treasury estimates: Corporate: $70;
Treasury estimates: Individual: $10;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Deferral of capital gains with respect of
dispositions of transmission property [B].
Tax expenditure name: New York City Liberty Zone tax incentives[B];
JCT estimates: Corporate: $100;
JCT estimates: Individual: $200.
Tax expenditure name: District of Columbia tax incentives[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Wage credit for Indian reservation employment[B];
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Accelerated depreciation for Indian reservation
investments[B];
JCT estimates: Corporate: $100;
JCT estimates: Individual: $100.
Budget function: Education, Training, Employment, and Social Services;
Tax expenditure name: Exclusion of scholarship and fellowship income;
Treasury estimates: Individual: $1,320;
JCT estimates: Individual: $1,500.
Tax expenditure name: HOPE tax credit;
Treasury estimates: Individual: $3,320;
JCT estimates: Individual: $4,300.
Tax expenditure name: Lifetime Learning tax credit[C];
Treasury estimates: Individual: $2,190.
Tax expenditure name: Education Individual Retirement Accounts;
Treasury estimates: Individual: $110;
JCT estimates: Individual: $300.
Tax expenditure name: Deductibility of student loan interest;
Treasury estimates: Individual: $760;
JCT estimates: Individual: $700.
Tax expenditure name: Deduction for higher education expenses;
Treasury estimates: Individual: $1,280;
JCT estimates: Individual: $2,700.
Tax expenditure name: State pre-paid tuition plans;
Treasury estimates: Individual: $210;
JCT estimates: Individual: $500.
Tax expenditure name: Exclusion of interest on student loan bonds;
Treasury estimates: Corporate: $60;
Treasury estimates: Individual: $230;
JCT estimates: Corporate: $100;
JCT estimates: Individual: $300.
Tax expenditure name: Exclusion of interest on bonds for private
nonprofit educational facilities;
Treasury estimates: Corporate: $210;
Treasury estimates: Individual: $760;
JCT estimates: Corporate: $300;
JCT estimates: Individual: $800.
Tax expenditure name: Credit for holders of zone academy bonds;
Treasury estimates: Corporate: $90;
JCT estimates: Corporate: $100.
Tax expenditure name: Exclusion of interest on savings bonds redeemed
to finance educational expenses;
Treasury estimates: Individual: $10;
JCT estimates: Individual: [A].
Tax expenditure name: Parental personal exemption for students age 19
or over;
Treasury estimates: Individual: $3,200;
JCT estimates: Individual: $1,500.
Tax expenditure name: Deductibility for charitable contributions
(education);
Treasury estimates: Corporate: $510;
Treasury estimates: Individual: $3,180;
JCT estimates: Corporate: $1,100;
JCT estimates: Individual: $5,200.
Tax expenditure name: Exclusion of employer- provided education
assistance;
Treasury estimates: Individual: $530;
JCT estimates: Individual: $800.
Tax expenditure name: Special deduction for teacher expenses;
Treasury estimates: Individual: $150;
JCT estimates: Individual: $100.
Tax expenditure name: Work opportunity tax credit;
Treasury estimates: Corporate: $240;
Treasury estimates: Individual: $40;
JCT estimates: Corporate: $200;
JCT estimates: Individual: [A].
Tax expenditure name: Welfare-to-work tax credit;
Treasury estimates: Corporate: $50;
Treasury estimates: Individual: $10;
JCT estimates: Corporate: $100;
JCT estimates: Individual: [A].
Tax expenditure name: Employer-provided child care exclusion[G];
Treasury estimates: Individual: $600;
JCT estimates: Individual: $800.
Tax expenditure name: Employer-provided child care credit;
JCT estimates: Corporate: $100;
JCT estimates: Individual: [A].
Tax expenditure name: Assistance for adopted foster children[C];
Treasury estimates: Individual: $290.
Tax expenditure name: Adoption credit and exclusion;
Treasury estimates: Individual: $450;
JCT estimates: Individual: $100.
Tax expenditure name: Exclusion of employee meals and lodging (other
than military);
Treasury estimates: Individual: $810;
JCT estimates: Individual: $900.
Tax expenditure name: Child credit[H];
Treasury estimates: Individual: $22,400;
JCT estimates: Individual: $44,100.
Tax expenditure name: Credit for child and dependent care expenses;
Treasury estimates: Individual: $2,990;
JCT estimates: Individual: $3,100.
Tax expenditure name: Credit for disabled access expenditures;
Treasury estimates: Corporate: $10;
Treasury estimates: Individual: $20;
JCT estimates: Corporate: [A];
JCT estimates: Individual: $100.
Tax expenditure name: Deductibility for charitable contributions, other
than education and health;
Treasury estimates: Corporate: $1,170;
Treasury estimates: Individual: $26,200;
JCT estimates: Corporate: $1,800;
JCT estimates: Individual: $27,900.
Tax expenditure name: Exclusion of certain foster care payments;
Treasury estimates: Individual: $440;
JCT estimates: Individual: $600.
Tax expenditure name: Exclusion of parsonage allowances;
Treasury estimates: Individual: $430;
JCT estimates: Individual: $400.
Tax expenditure name: Exclusion of benefits provided under cafeteria
plans[B I];
JCT estimates: Individual: $16,900.
Tax expenditure name: Exclusion of miscellaneous fringe benefits[B];
JCT estimates: Individual: $5,800.
Tax expenditure name: Exclusion of employee awards[B];
JCT estimates: Individual: $100.
Tax expenditure name: Exclusion of income earned by voluntary
employees' beneficiary associations[B];
JCT estimates: Individual: $3,200.
Tax expenditure name: Deferral of taxation on spread on acquisition of
stock under incentive stock option plans and employee stock purchase
plans[B J];
JCT estimates: Individual: $400.
Budget function: Health;
Tax expenditure name: Exclusion of employer contributions for medial
insurance premiums and medical care[K];
Treasury estimates: Individual: $102,250;
JCT estimates: Individual: $96,000.
Tax expenditure name: Deductibility of self- employed medical insurance
premiums;
Treasury estimates: Individual: $3,300;
JCT estimates: Individual: $3,300.
Tax expenditure name: Medical savings accounts/health savings accounts;
Treasury estimates: Individual: $620;
JCT estimates: Individual: $300.
Tax expenditure name: Deductibility of medical expenses;
Treasury estimates: Individual: $7,380;
JCT estimates: Individual: $5,900.
Tax expenditure name: Exclusion of interest on hospital construction
bonds;
Treasury estimates: Corporate: $400;
Treasury estimates: Individual: $1,470;
JCT estimates: Corporate: $500;
JCT estimates: Individual: $1,200.
Tax expenditure name: Exclusion of workers' compensation benefits
(medical benefits)[B];
JCT estimates: Individual: $3,700.
Tax expenditure name: Deductibility of charitable contributions
(health);
Treasury estimates: Corporate: $150;
Treasury estimates: Individual: $2,940;
JCT estimates: Corporate: $900;
JCT estimates: Individual: $3,500.
Tax expenditure name: Tax credit for orphan drug research;
Treasury estimates: Corporate: $180;
JCT estimates: Corporate: $200.
Tax expenditure name: Special Blue Cross/Blue Shield deduction (in
Commerce and housing credit budget function for JCT);
Treasury estimates: Corporate: $400;
JCT estimates: Corporate: $500.
Tax expenditure name: Tax credit for health insurance purchased by
certain displaced and retired individuals[L];
Treasury estimates: Individual: $50;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Exclusion of medical care and CHAMPUS/TRICARE
medical insurance for military dependents, retirees, and retiree
dependents[B];
JCT estimates: Individual: $1,700.
Budget function: Medicare;
Tax expenditure name: Exclusion of untaxed Medicare benefits: hospital
insurance (Part A)[B];
JCT estimates: Individual: $16,800.
Tax expenditure name: Exclusion of untaxed Medicare benefits:
supplementary medical insurance (Part B)[B];
JCT estimates: Individual: $11,000.
Tax expenditure name: Exclusion of untaxed Medicare benefits:
prescription drug insurance (Part D)[B].
Tax expenditure name: Exclusion of certain subsidies to employers who
maintain prescription drug plans for Medicare[B].
Budget function: Income Security;
Tax expenditure name: Exclusion of railroad retirement system
benefits[C] (For JCT this is combined with the exclusion of Social
Security benefits: retired workers);
Treasury estimates: Individual: $400.
Tax expenditure name: Exclusion of worker's compensation benefits;
Treasury estimates: Individual: $5,490;
JCT estimates: Individual: $4,800.
Tax expenditure name: Exclusion of public assistance benefits;
Treasury estimates: Individual: $410;
JCT estimates: Individual: $3,200.
Tax expenditure name: Exclusion of special benefits for disabled coal
miners;
Treasury estimates: Individual: $60;
JCT estimates: Individual: $100.
Tax expenditure name: Exclusion of military disability pensions[C];
Treasury estimates: Individual: $100.
Tax expenditure name: Exclusion of damages on account of personal
physical injuries or physical sickness[B];
JCT estimates: Individual: $1,400.
Tax expenditure name: Net exclusion of pension contributions and
earnings: employer plans;
Treasury estimates: Individual: $46,970;
JCT estimates: Individual: $94,600.
Tax expenditure name: Net exclusion of pension contributions and
earnings: 401(k) plans[C];
Treasury estimates: Individual: $47,730.
Tax expenditure name: Net exclusion of pension contributions and
earnings: individual retirement plans;
Treasury estimates: Individual: $7,450;
JCT estimates: Individual: $13,000.
Tax expenditure name: Net exclusion of pension contributions and
earnings: low and moderate income savers credit[C];
Treasury estimates: Individual: $970.
Tax expenditure name: Net exclusion of pension contributions and
earnings: Keogh plans;
Treasury estimates: Individual: $8,830;
JCT estimates: Individual: $6,200.
Tax expenditure name: Exclusion of other employee benefits: premiums on
group term life insurance;
Treasury estimates: Individual: $2,070;
JCT estimates: Individual: $2,400.
Tax expenditure name: Exclusion of other employee benefits: premiums on
accident and disability insurance;
Treasury estimates: Individual: $260;
JCT estimates: Individual: $2,400.
Tax expenditure name: Small business retirement plan credit;
Treasury estimates: Corporate: $40;
Treasury estimates: Individual: $40;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Tax expenditure name: Income of trusts to finance supplementary
unemployment benefits[C];
Treasury estimates: Individual: $20.
Tax expenditure name: Special employee stock ownership plans (ESOPs)
rules (Located under the Education budget function for JCT);
Treasury estimates: Corporate: $1,600;
Treasury estimates: Individual: $320;
JCT estimates: Corporate: $800;
JCT estimates: Individual: $300.
Tax expenditure name: Additional deduction for the blind[C];
Treasury estimates: Individual: $30.
Tax expenditure name: Additional deduction for the elderly[C];
Treasury estimates: Individual: $1,700.
Tax expenditure name: Additional standard deduction for the blind and
the elderly[B];
JCT estimates: Individual: $2,000.
Tax expenditure name: Tax credit for the elderly and disabled;
Treasury estimates: Individual: $20;
JCT estimates: Individual: [A].
Tax expenditure name: Deduction of casualty losses;
Treasury estimates: Individual: $550;
JCT estimates: Individual: $200.
Tax expenditure name: Earned income tax credit (EITC)[M];
Treasury estimates: Individual: $4,893;
JCT estimates: Individual: $34,100.
Tax expenditure name: Tax credit for certain individuals for elective
deferrals and IRA contributions[B];
JCT estimates: Individual: $2,500.
Budget function: Social Security;
Tax expenditure name: Exclusion of Social Security benefits: retired
workers (JCT included railroad retirement benefits);
Treasury estimates: Individual: $19,200;
JCT estimates: Individual: $20,000.
Tax expenditure name: Exclusion of Social Security benefits:
disabled[C];
Treasury estimates: Individual: $3,580.
Tax expenditure name: Exclusion of Social Security benefits: dependents
and survivors[C];
Treasury estimates: Individual: $4,140.
Budget function: Veterans' Benefits and Services;
Tax expenditure name: Exclusion of veterans death benefits and
disability compensation;
Treasury estimates: Individual: $3,300;
JCT estimates: Individual: $3,100.
Tax expenditure name: Exclusion of veterans' pensions;
Treasury estimates: Individual: $110;
JCT estimates: Individual: $100.
Tax expenditure name: Exclusion of GI bill benefits;
Treasury estimates: Individual: $130;
JCT estimates: Individual: $200.
Tax expenditure name: Exclusion of interest on veterans' housing bonds;
Treasury estimates: Corporate: $10;
Treasury estimates: Individual: $40;
JCT estimates: Corporate: [A];
JCT estimates: Individual: [A].
Budget function: General Purpose Fiscal Assistance;
Tax expenditure name: Exclusion of interest on public purpose state and
local bonds;
Treasury estimates: Corporate: $6,210;
Treasury estimates: Individual: $19,940;
JCT estimates: Corporate: $7,100;
JCT estimates: Individual: $18,200.
Tax expenditure name: Deductibility of nonbusiness state and local
taxes other than owner-occupied homes;
Treasury estimates: Individual: $45,290;
JCT estimates: Individual: $44,300.
Tax expenditure name: Tax credit for corporations receiving income from
doing business in U.S. possessions;
Treasury estimates: Corporate: $1,000;
JCT estimates: Corporate: $1,400.
Budget function: Interest;
Tax expenditure name: Deferral of interest on U.S. savings bonds;
Treasury estimates: Individual: $50;
JCT estimates: Individual: $1,700.
Source: OMB. Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2006. (Washington, D.C.: 2005; and JCT,
Estimates of Federal Tax Expenditures for Fiscal Years 2004-2008, JCS-
8-03 (Washington, D.C.: December 22, 2003).
Notes: Treasury estimates were rounded to the nearest $10 million.
Provisions with estimates that rounded to zero in each year were not
reported by Treasury.
[A] An estimate was not reported by JCT because the positive tax
expenditure was less than $50 million.
[B] Tax expenditure reported by JCT only. The exclusion of untaxed
Medicare benefits: prescription drug insurance (Part D) and the
exclusion of certain subsidies to employers who maintain prescription
drug plans for Medcare were listed by JCT as tax expenditures, but
revenue loss estimates were reported only for future years.
[C] Tax expenditure reported by Treasury only. Seven additional tax
expenditures were reported on Treasury's list in the fiscal year 2006
budget, but estimates for these tax expenditures were reported only for
future years. The seven tax expenditures are: (1) expensing of capital
costs with respect to complying with EPA sulfur regulations, (2)
exclusion of gain or loss on sale or exchange of certain Brownfield
sites, (3) Bio-diesel tax credit, (4) deduction for U.S. production
activities, (5) special rules for certain film and TV production, (6)
tax credit for certain expenditures for maintaining railroad tracks,
and (7) deferral of capital gains with respect of dispositions of
transmission property.
[D] JCT reported this tax expenditure as "expensing of exploration and
development costs, oil and gas."
[E] JCT reported this tax expenditure as "excess of percentage over
cost depletion, oil and gas."
[F] For the Treasury estimates, the partial exemption from the excise
tax for alcohol fuels results in a reduction in excise tax receipts of
$1.4 billion in 2004. For the JCT estimates, the exemption from the
excise tax for alcohol fuels results in a reduction in excise tax
receipts, net of income tax effect, of $1.1 billion in each of the
fiscal years 2004 through 2006, and $1.2 billion per year in fiscal
years 2007 and 2008.
[G] The JCT estimate includes employer-provided child care purchased
through dependent care flexible spending accounts.
[H] The Treasury estimate in the table indicates the effect of the
child tax credit on receipts. The effect of the credit on outlays is
$8.9 billion in 2004. The JCT estimate includes refundable amounts,
amounts used to offset income taxes, and amounts used to offset other
taxes. The amount of refundable child tax credit and earned income tax
credit used to offset taxes other than income tax or paid out as
refunds is $44.3 billion in 2004.
[I] The estimate includes amounts of employer-provided health insurance
purchased through cafeteria plans and employer-provided child care
purchased through dependent care flexible spending accounts.
[J] The estimate does not include offsetting denial of corporate
deduction for qualified stock option compensation.
[K] The JCT estimate includes employer-provided health insurance
purchased through cafeteria plans.
[L] In addition to the receipts shown, there are outlays of $70 million
in 2004.
[M] The Treasury estimate indicates the effect of the earned income tax
credit on receipts. The effect of the credit on outlays is $33.1
billion in 2004. The JCT estimate includes refundable amounts, amounts
used to offset income taxes, and amounts used to offset other taxes.
The amount of refundable child tax credit and earned income tax credit
used to offset taxes other than income tax or paid out as refunds is
$44.3 billion in 2004.
[End of table]
For fiscal year 2004, table 5 lists the aggregate revenue loss
estimates reported by both Treasury and JCT for each budget function.
The table permits a comparison of the number and size of Treasury's
versus JCT's tax expenditure estimates when summed by budget function.
Table 5: Sum of Revenue Loss Estimates for Tax Expenditures by Budget
Function Reported by the U.S. Department of the Treasury and Joint
Committee on Taxation, Fiscal Year 2004:
Dollars in millions.
Budget function: National defense;
Treasury: Sum of Revenue Loss Estimates: $2,460;
Treasury: Number of Tax Expenditures: 1;
JCT: Sum of Revenue Loss Estimates: $2,900;
JCT: Number of Tax Expenditures: 3.
Budget function: International affairs;
Treasury: Sum of Revenue Loss Estimates: $19,900;
Treasury: Number of Tax Expenditures: 6;
JCT: Sum of Revenue Loss Estimates: $20,900;
JCT: Number of Tax Expenditures: 6.
Budget function: General science, space, and technology;
Treasury: Sum of Revenue Loss Estimates: $2,350;
Treasury: Number of Tax Expenditures: 12;
JCT: Sum of Revenue Loss Estimates: $7,500;
JCT: Number of Tax Expenditures: 2.
Budget function: Energy;
Treasury: Sum of Revenue Loss Estimates: $3,670;
Treasury: Number of Tax Expenditures: 11;
JCT: Sum of Revenue Loss Estimates: $2,100;
JCT: Number of Tax Expenditures: 11.
Budget function: Natural resources and environment;
Treasury: Sum of Revenue Loss Estimates: $1,440;
Treasury: Number of Tax Expenditures: 5;
JCT: Sum of Revenue Loss Estimates: $1,900;
JCT: Number of Tax Expenditures: 8.
Budget function: Agriculture;
Treasury: Sum of Revenue Loss Estimates: $880;
Treasury: Number of Tax Expenditures: 6;
JCT: Sum of Revenue Loss Estimates: $600;
JCT: Number of Tax Expenditures: 8.
Budget function: Commerce and housing credit;
Treasury: Sum of Revenue Loss Estimates: $265,750;
Treasury: Number of Tax Expenditures: 29;
JCT: Sum of Revenue Loss Estimates: $325,900;
JCT: Number of Tax Expenditures: 33.
Budget function: Transportation;
Treasury: Sum of Revenue Loss Estimates: $2,900;
Treasury: Number of Tax Expenditures: 3;
JCT: Sum of Revenue Loss Estimates: $4,100;
JCT: Number of Tax Expenditures: 3.
Budget function: Community and regional development;
Treasury: Sum of Revenue Loss Estimates: $2,400;
Treasury: Number of Tax Expenditures: 6;
JCT: Sum of Revenue Loss Estimates: $2,700;
JCT: Number of Tax Expenditures: 10.
Budget function: Education, training, employment, and social services;
Treasury: Sum of Revenue Loss Estimates: $74,270;
Treasury: Number of Tax Expenditures: 27;
JCT: Sum of Revenue Loss Estimates: $128,000;
JCT: Number of Tax Expenditures: 32.
Budget function: Health;
Treasury: Sum of Revenue Loss Estimates: $119,140;
Treasury: Number of Tax Expenditures: 9;
JCT: Sum of Revenue Loss Estimates: $117,700;
JCT: Number of Tax Expenditures: 11.
Budget function: Medicare;
Treasury: Sum of Revenue Loss Estimates: $N/A;
Treasury: Number of Tax Expenditures: N/A;
JCT: Sum of Revenue Loss Estimates: $27,800;
JCT: Number of Tax Expenditures: 4.
Budget function: Income security;
Treasury: Sum of Revenue Loss Estimates: $129,953;
Treasury: Number of Tax Expenditures: 20;
JCT: Sum of Revenue Loss Estimates: $168,000;
JCT: Number of Tax Expenditures: 16.
Budget function: Social security;
Treasury: Sum of Revenue Loss Estimates: $26,920;
Treasury: Number of Tax Expenditures: 3;
JCT: Sum of Revenue Loss Estimates: $20,000;
JCT: Number of Tax Expenditures: 1.
Budget function: Veterans' benefits and services;
Treasury: Sum of Revenue Loss Estimates: $3,590;
Treasury: Number of Tax Expenditures: 4;
JCT: Sum of Revenue Loss Estimates: $3,400;
JCT: Number of Tax Expenditures: 4.
Budget function: General purpose fiscal assistance;
Treasury: Sum of Revenue Loss Estimates: $72,440;
Treasury: Number of Tax Expenditures: 3;
JCT: Sum of Revenue Loss Estimates: $71,000;
JCT: Number of Tax Expenditures: 3.
Budget function: Interest;
Treasury: Sum of Revenue Loss Estimates: $50;
Treasury: Number of Tax Expenditures: 1;
JCT: Sum of Revenue Loss Estimates: $1,700;
JCT: Number of Tax Expenditures: 1.
Source: GAO Analysis.
Note: Summing the revenue loss estimates by budget fuction does not
take into account possible interaction effects among the tax
expenditures.
[End of table]
[End of section]
Appendix IV: Compilation of Tax Expenditures Reported by Treasury (1974
to 2004):
To identify how tax expenditures have changed over the past three
decades in number and size, in terms of aggregate revenue loss, we
analyzed the list of tax expenditures reported by the Department of the
Treasury (Treasury) in the Budget's Special Analyses, Appendixes, and
Analytical Perspectives for fiscal years 1974 to 2004. The tax
expenditures reported by Treasury during this period are listed in
table 6.
Table 6: Tax Expenditures Reported by the U.S. Department of the
Treasury (1974 to 2004):
Budget Function: National defense:
Name of Tax Expenditure: Exclusion of benefits and allowances to armed
forces personnel;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Budget Function: International affairs:
Name of Tax Expenditure: Exclusion of gross-up on dividends of LDC
corporations;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1976;
Type: Exclusion;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Special rate for Western Hemisphere trade
corporations;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1979;
Type: Preferential tax rate;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Deferral of income of domestic international
sales corporations (DISC);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1985;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of income earned abroad by U.S.
citizens;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deferral of income from controlled foreign
corporations (normal tax method);
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of income of foreign sales
corporations (FSC);
First Year Reported by Treasury: 1984;
Last Year Reported by Treasury: 2000;
Type: Exclusion;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Interest allocation rules exception for
certain financial operations;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 1995;
Type: Deduction;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Inventory property sales source rules
exception;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Deferred taxes for financial firms on certain
income earned overseas;
First Year Reported by Treasury: 1998;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of certain allowances for federal
employees abroad;
First Year Reported by Treasury: 1999;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Extraterritorial income exclusion;
First Year Reported by Treasury: 2000;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Corporate.
Budget function: General science, space, and technology:
Name of Tax Expenditure: Expensing of research and experimentation
expenditures (normal tax method);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Credit for increasing research activities;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Suspension of the allocation of research and
experimentation expenditures;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 1995;
Type: Deduction;
Taxpayer Group: Corporate.
Budget Function: Energy:
Name of Tax Expenditure: Capital gains treatment of royalties on coal;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Preferential tax rate;
Taxpayer Group: Individual.
Name of Tax Expenditure: Excess of percentage over cost depletion,
fuels;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Expensing of exploration and development
costs, fuels;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Residential energy credits;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 1987;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: New technology credit;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Energy credit for intercity buses;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 1989;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Alcohol fuel credits;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Alternative fuel production credit;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest on energy facility
bonds;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exception from passive loss limitation for
working interests in oil and gas properties;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Tax credit and deduction for clean-fuel
burning vehicles;
First Year Reported by Treasury: 1992;
Last Year Reported by Treasury: 2004;
Type: Credit/Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of conservation subsidies provided
by public utilities;
First Year Reported by Treasury: 1993;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Enhanced oil recovery credit;
First Year Reported by Treasury: 1994;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Budget Function: Natural resources and environment:
Name of Tax Expenditure: Pollution control: 5-year amortization;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1980;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Capital gains treatment of certain timber
income;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Preferential tax rate;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of interest on bonds for water,
sewage, and hazardous waste facilities;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of payments in aid of construction
of water, sewage, gas and electric utilities;
First Year Reported by Treasury: 1976;
Last Year Reported by Treasury: 1981;
Type: Exclusion;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Capital gains treatment of iron ore;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 1997;
Type: Preferential tax rate;
Taxpayer Group: Individual.
Name of Tax Expenditure: Tax incentives for preservation of historic
structures;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Investment credit and 7-year amortization for
reforestation expenditures;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2000;
Type: Credit/Deferral;
Taxpayer Group: Individual.
Name of Tax Expenditure: Excess of percentage over cost depletion,
nonfuel minerals;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Expensing of exploration and development
costs, nonfuel minerals;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Special rules for mining reclamation reserves;
First Year Reported by Treasury: 1984;
Last Year Reported by Treasury: 1997;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Expensing of multiperiod timber growing costs;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Expensing of capital costs with respect to
complying with EPA sulfur regulations;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of gain or loss on sale or exchange
of certain brownfield sites;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Budget Function: Agriculture:
Name of Tax Expenditure: Capital gain treatment of certain income;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Preferential tax rate;
Taxpayer Group: Individual.
Name of Tax Expenditure: Expensing of certain capital outlays;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Deductibility of noncash patronage dividends
and certain other items of cooperatives;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 1981;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of certain cost-sharing payments;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 1981;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Special investment tax credit carryback rules
for farming;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 1987;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Expensing of certain multiperiod production
costs;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Treatment of loans forgiven for solvent
farmers;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deferral of 1988 drought-related payments;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1990;
Type: Deferral;
Taxpayer Group: Individual.
Name of Tax Expenditure: Income averaging for farmers;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Preferential tax rate;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deferral of gain on sale of farm refiners;
First Year Reported by Treasury: 1998;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Bio-diesel tax credit;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Budget Function: Commerce and housing credit:
Name of Tax Expenditure: Surtax exemption (through 1978);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1980;
Type: Preferential tax rate;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Dividend exclusion;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1987;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deductibility of interest on consumer credit;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1990;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deferral of capital gain on home sales;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1997;
Type: Deferral;
Taxpayer Group: Individual.
Name of Tax Expenditure: Capital gains (except agriculture, timber,
iron ore, and coal);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Preferential tax rate;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deductibility of mortgage interest on owner-
occupied homes;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deductibility of state and local property tax
on owner-occupied homes;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Accelerated depreciation of buildings other
than rental housing (normal tax method);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Accelerated depreciation on rental housing
(normal tax method);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Excess bad debt reserves of financial
institutions;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of interest on life insurance
savings;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exemption of credit union income;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exemption;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Credit for purchase of new home;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 1977;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Excess first year depreciation;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 1980;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Expensing of construction period interest and
taxes;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 1981;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest on small issue bonds;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of certain income of cooperatives;
First Year Reported by Treasury: 1976;
Last Year Reported by Treasury: 1976;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Accelerated depreciation of machinery and
equipment;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Step-up basis of capital gains at death;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Investment credit, other than employee stock
ownership plans (ESOPs) and rehabilitation of structures, energy
property, and reforestation expenditures;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 1990;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of capital gains on home sales for
persons age 55 and over;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 1997;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of interest on owner-occupied
mortgage subsidy bonds;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Graduated corporation income tax rate (normal
tax method);
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 2004;
Type: Preferential tax rate;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Amortization of start-up costs;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest on rental housing bonds;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest on certain savings
certificates;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 1984;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Reinvestment of dividends in public utility
stock;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 1986;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Safe harbor leasing rules;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 1990;
Type: Deduction/Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Net interest exclusion;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 1983;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Small life insurance company deduction;
First Year Reported by Treasury: 1984;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Special investment tax credit carryback rules
for steel companies;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 1987;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Credit for low-income housing investments;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exemption of RIC expenses from the 2% floor
miscellaneous itemized deduction;
First Year Reported by Treasury: 1987;
Last Year Reported by Treasury: 1993;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deferral of income from post 1987 installment
sales;
First Year Reported by Treasury: 1987;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exception from passive loss rules for $25,000
of rental losses;
First Year Reported by Treasury: 1987;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Small property and casualty insurance company
deduction;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1988;
Type: Preferential tax rate;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Special merger rules for financial
institutions;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1990;
Type: Deduction;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Treatment of Alaska Native Corporation;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1996;
Type: Exemption;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Carryover basis of capital gains on gifts;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exceptions from imputed interest rules;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Special alternative tax on small property and
casualty insurance companies;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Exemption;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Tax exemption of certain insurance companies
owned by tax-exempt organizations;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Exemption;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Ordinary income treatment of loss from small
business corporation stock sale;
First Year Reported by Treasury: 1989;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deferral of gains from sale of broadcasting
facilities to minority owned business;
First Year Reported by Treasury: 1990;
Last Year Reported by Treasury: 1995;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Cancellation of indebtness;
First Year Reported by Treasury: 1993;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Expensing of certain small investments;
First Year Reported by Treasury: 1993;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Capital gains exclusion of small corporation
stock;
First Year Reported by Treasury: 1994;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Capital gains exclusion on home sales;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of net imputed rental income on
owner-occupied homes;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deduction for U.S. production activities;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Special rules for certain film and TV
production;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Budget Function: Transportation:
Name of Tax Expenditure: Deductibility of nonbusiness state gasoline
taxes;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1979;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Five-year amortization on railroad rolling
stock;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1980;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Deferral of tax on shipping companies;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Deduction for motor carrier operating rights;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 1986;
Type: Deduction;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of interest on state and local
government bonds for mass commuting vehicles;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 1990;
Type: Exclusion;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion for employer-provided transit
passes;
First Year Reported by Treasury: 1993;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of reimbursed employee parking
expenses;
First Year Reported by Treasury: 1993;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Tax credit for certain expenditures for
maintaining railroad tracks;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Budget Function: Community and regional development:
Name of Tax Expenditure: Five-year amortization for housing
rehabilitation;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1990;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Investment credit for rehabilitation of
structures (other than historic);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest for airport, dock, and
similar bonds;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exemption of certain mutuals and cooperatives
income;
First Year Reported by Treasury: 1989;
Last Year Reported by Treasury: 2004;
Type: Exemption;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Empowerment zones, enterprise communities, and
renewal communities;
First Year Reported by Treasury: 1993;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Expensing of environmental remediation costs;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: New market tax credit;
First Year Reported by Treasury: 2000;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Deferral of capital gains with respect of
dispositions of transmission property;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Corporate.
Budget Function: Education, training, employment, and social services:
Name of Tax Expenditure: Child care facilities: 5-year amortization;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1975;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Credit for employing AFDC recipients and
public assistance recipients under work incentive program;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1982;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Credit for child and dependent care expenses;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deductibility of charitable contributions
(education);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Deductibility of charitable contributions,
other than education and health;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of employee meals and lodging (other
than military);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of scholarship and fellowship
income;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Parental personal exemption for students age
19 or over;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exemption;
Taxpayer Group: Individual.
Name of Tax Expenditure: Maximum tax on personal service income;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 1980;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Investment credit for ESOPs;
First Year Reported by Treasury: 1976;
Last Year Reported by Treasury: 1990;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of other employee benefits: employer
contributions to prepaid legal expense plan;
First Year Reported by Treasury: 1976;
Last Year Reported by Treasury: 1992;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Expensing of costs of removing certain
architectural barriers to the handicapped;
First Year Reported by Treasury: 1976;
Last Year Reported by Treasury: 1999;
Type: Deferral;
Taxpayer Group: Corporate.
Name of Tax Expenditure: General jobs credit;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 1984;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of employer-provided educational
assistance;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Work opportunity tax credit;
First Year Reported by Treasury: 1978;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest on student loan bonds;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Deduction for certain adoption expenses;
First Year Reported by Treasury: 1981;
Last Year Reported by Treasury: 1987;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deduction for two earner married couples;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 1987;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Employer- provided child care exclusion;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of interest on bonds for private
nonprofit educational facilities;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of parsonage allowances;
First Year Reported by Treasury: 1984;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of certain foster care payments;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of interest on savings bonds
redeemed to finance educational expenses;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Credit for disabled access expenditures;
First Year Reported by Treasury: 1990;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Adoption credit and exclusion;
First Year Reported by Treasury: 1996;
Last Year Reported by Treasury: 2004;
Type: Credit/Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Child credit;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Credit for holders of zone academy bonds;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Deductibility of student loan interest;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: State prepaid tuition plans;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Education individual retirement accounts;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Welfare-to- work tax credit;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: HOPE tax credit;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Lifetime Learning tax credit;
First Year Reported by Treasury: 1997;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Assistance for adopted foster children;
First Year Reported by Treasury: 2000;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deduction for higher education expenses;
First Year Reported by Treasury: 2001;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Employer- provided child care credit;
First Year Reported by Treasury: 2001;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Special deduction for teacher expenses;
First Year Reported by Treasury: 2003;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Discharge of student loan indebtedness;
First Year Reported by Treasury: 2004;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Budget Function: Health:
Name of Tax Expenditure: Deductibility of medical expenses;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of employer contributions for
medical insurance premiums and medical care;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deductibility of charitable contributions
(health);
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Exclusion of interest on hospital construction
bonds;
First Year Reported by Treasury: 1980;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Tax credit for orphan drug research;
First Year Reported by Treasury: 1982;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Exclusion of employer share of hospital
insurance tax;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1992;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Special Blue Cross/Blue Shield deduction;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Credit for child medical insurance premiums;
First Year Reported by Treasury: 1990;
Last Year Reported by Treasury: 1993;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Medical Savings Accounts/Health Savings
Accounts;
First Year Reported by Treasury: 1996;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Workers' compensation insurance premiums;
First Year Reported by Treasury: 1998;
Last Year Reported by Treasury: 2002;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Self-employed medical insurance premiums;
First Year Reported by Treasury: 1998;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Tax credit for health insurance purchased by
certain displaced and retired individuals;
First Year Reported by Treasury: 2002;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Budget Function: Income security:
Name of Tax Expenditure: Excess of percentage standard deduction over
minimum standard deduction;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1977;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion on capital gains on home sales for
persons age 65 and over;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1979;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of disability pay;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1984;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Additional exemption for elderly;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1987;
Type: Exemption;
Taxpayer Group: Individual.
Name of Tax Expenditure: Additional exemption for the blind;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1987;
Type: Exemption;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of untaxed unemployment insurance
benefits;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1987;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Deductibility of casualty losses;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of military disability pensions;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of other employee benefits: premiums
on accident and disability insurance;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of other employee benefits: premiums
on group term life insurance;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Income of trusts to finance supplementary
unemployment benefits;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of public assistance benefits;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of railroad retirement system
benefits;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of worker's compensation benefits;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Net exclusion of pension contributions and
earnings: employer plans;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Net exclusion of pension contributions and
earnings: individual retirement accounts;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Tax credit for the elderly and disabled;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Earned income tax credit;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of special benefits for disabled
coal miners;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Net exclusion of pension contributions and
earnings: Keogh plans;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Additional deduction for the blind;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Additional deduction for the elderly;
First Year Reported by Treasury: 1986;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Extending tax- exempt organizations status to
voluntary employee beneficiary and other associations;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1990;
Type: Exemption;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of employer provided death benefits;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 1997;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Special ESOP rules;
First Year Reported by Treasury: 1988;
Last Year Reported by Treasury: 2004;
Type: Exemption;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Small business retirement plan credit;
First Year Reported by Treasury: 2001;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Net exclusion of pension contributions and
earnings: 401(k) plans;
First Year Reported by Treasury: 2001;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Net exclusion of pension contributions and
earnings: low and moderate income savers credit;
First Year Reported by Treasury: 2001;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Budget function: Social Security:
Name of Tax Expenditure: Exclusion of Social Security benefits:
dependents and survivors;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of Social Security benefits:
disabled;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of Social Security benefits: retired
workers;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Budget Function: Veterans' benefits and services:
Name of Tax Expenditure: Exclusion of GI bill benefits;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of veterans' death benefits and
disability compensation;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of veterans' pensions;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of interest on veterans' housing
bonds;
First Year Reported by Treasury: 1983;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Budget Function: General Purpose Fiscal Assistance:
Name of Tax Expenditure: Credit for corporations in U.S. possessions;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1976;
Type: Credit;
Taxpayer Group: Corporate.
Name of Tax Expenditure: Deductibility of nonbusiness state and local
taxes (other than on owner-occupied homes and gasoline);
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Deduction;
Taxpayer Group: Individual.
Name of Tax Expenditure: Exclusion of interest on public purpose state
and local bonds;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 2004;
Type: Exclusion;
Taxpayer Group: Individual and Corporate.
Name of Tax Expenditure: Tax credit for corporations receiving income
from doing business in U.S. possessions;
First Year Reported by Treasury: 1977;
Last Year Reported by Treasury: 2004;
Type: Credit;
Taxpayer Group: Corporate.
Budget Function: Interest:
Name of Tax Expenditure: Deferral of interest on U.S. savings bonds;
First Year Reported by Treasury: 1975;
Last Year Reported by Treasury: 2004;
Type: Deferral;
Taxpayer Group: Individual.
Budget function: General government:
Name of Tax Expenditure: Credits and deductions for political
contributions;
First Year Reported by Treasury: 1974;
Last Year Reported by Treasury: 1987;
Type: Credit/Deduction;
Taxpayer Group: Individual.
Source: GAO analysis of OMB budget reports on tax expenditures, fiscal
years 1976-2006.
Note: Names of tax expenditures may have changed over time. Our list
includes the most recent name reported by Treasury for each tax
expenditure. The list of tax expenditures reflects all provisions
reported by Treasury, including those enacted but effective for future
fiscal years.
[End of table]
[End of section]
Appendix V: Glossary:
Adjusted gross income (AGI): All income subject to taxation under the
individual income tax after subtracting above-the-line deductions, such
as certain contributions for individual retirement accounts and alimony
payments. Personal exemptions and the standard or itemized deductions
are subtracted from AGI to determine taxable income.
Alternative Minimum Tax (AMT): A separate tax system that applies to
both individual and corporate taxpayers. It parallels the regular
individual income tax system but with different rules for determining
taxable income, different tax rates for computing tax liability, and
different rules for allowing the use of tax credits.
Baseline: A benchmark for measuring the budgetary effects of proposed
changes in federal revenues or spending. Or, a benchmark for
identifying and measuring exceptions to the basic provisions of the tax
structure.
* CBO baseline: CBO's estimate of spending, revenue, the deficit or
surplus, and debt held by the public during a fiscal year under current
laws and current policy. For revenues and mandatory spending, CBO
projects the baseline under the assumption that present laws continue
without change. For discretionary spending subject to annual
appropriations, CBO is required to adjust the current year's
discretionary budget authority to reflect inflation, among other
factors.
* Comprehensive income tax baseline: This baseline, also called Haig-
Simons income, is the real, inflation adjusted, accretion to wealth
arising between the beginning and ending of the year. It includes all
accretions to wealth, whether or not realized, whether or not related
to a market transaction, and whether a return to capital or labor.
Inflation adjusted capital gains would be included in comprehensive
income as they accrue.
* Consumption tax baseline: A broad-based consumption tax is a
combination of an income tax plus a deduction for net saving. Many
current tax expenditures related to preferential taxation of capital
income and savings would not be considered tax preferences under a
consumption tax (e.g., capital gains), but preferences unrelated to
broad-based saving or investment incentives would remain tax
preferences under a consumption baseline.
* Normal income tax baseline: The Budget Act did not specify the
baseline income tax against which tax preference provisions should be
measured, and deciding whether provisions are exceptions from the
normal baseline is a matter of judgment. The normal income tax baseline
is meant to represent a practical and broad-based income tax that
reflects the general and widely applicable provisions of the current
federal income tax. For the individual income tax, the Joint Committee
on Taxation's (JCT) normal tax baseline includes one personal exemption
for each taxpayer, one for each dependent, the standard deduction, the
existing tax rate schedule, and deductions for investment and employee
business expenses. Itemized deductions that are not necessary for the
generation of income but exceed the standard deduction level are
classified as tax expenditures. Very similar in scope to JCT's normal
income tax baseline, Treasury's baseline is patterned on, but allows
several major departures from, a comprehensive income tax, where income
is defined as the sum of consumption and the change in net wealth
during a given period.
* Reference tax law baseline: The reference baseline is closer to
existing tax law and is also patterned on, but still allows several
major departures from, a comprehensive income tax. Thus fewer tax
provisions are considered tax preferences under the reference tax
baseline than under the normal tax baseline. These include the lower
tax rate for certain corporations, preferential rates on capital gains,
accelerated depreciation, deferral of tax on income from controlled
foreign corporations, etc.
Budget function: One of 20 broad categories into which budgetary
resources are grouped so that all budget authority and outlays can be
presented according to the national interests being addressed. There
are 17 broad budget functions, including national defense,
international affairs, energy, agriculture, health, income security,
and general government. Three other functions--net interest,
allowances, and undistributed offsetting receipts--are included to
complete the budget.
De minimis rule: The level of revenue loss below which a revenue loss
estimate is not reported for a tax preference.
Direct loans: A disbursement of funds by the government to a nonfederal
borrower under a contract that requires the repayment of such funds
with or without interest.
Discretionary spending: Outlays controlled by appropriation acts, other
than those that fund mandatory programs.
Entitlement authority: Authority to make payments (including loans and
grants) for which budget authority is provided in advance by
appropriations acts to any person or government if, under the
provisions of the law containing such authority, the U.S. government is
obligated to make the payments to persons or governments who meet the
requirements established by law.
Government Performance and Results Act (GPRA): Enacted in 1993, GPRA,
also known as the Results Act, intends to improve the efficiency and
effectiveness of federal programs by requiring federal agencies to
develop strategic plans, annual performance plans, and annual program
performance reports.
Grants: A federal financial assistance award making payment in cash or
in kind for a specified purpose. The federal government is not expected
to have substantial involvement with the state or local government or
other recipient while the contemplated activity is being performed.
Gross domestic product (GDP): The value of all final goods and services
produced within the borders of a country such as the United States
during a given period. The components of GDP are consumption
expenditures (both personal and government), gross investment (both
private and government), and net exports.
Mandatory spending: Also known as direct spending. Mandatory spending
includes outlays for entitlement authority (for example, the food
stamp, Medicare, and veterans' pension programs), payment of interest
on the public debt, and nonentitlements such as payments to the states
from Forest Service receipts. By defining eligibility and setting the
benefit or payment rules, the Congress controls spending for these
programs indirectly rather than directly through appropriations acts.
Tax expenditure: A revenue loss attributable to a provision of the
federal tax laws that grants special tax relief designed to encourage
certain kinds of behavior by taxpayers or to aid taxpayers in special
circumstances. The Congressional Budget and Impoundment Control Act of
1974[Footnote 102] lists six types of tax expenditures: exclusions,
exemptions, deductions, credits, preferential tax rates, and deferral
of tax liability.
* Preferential tax rates: A reduction of the tax rate on some forms of
income, such as capital gains.
* Tax credit: An amount that offsets or reduces tax liability. When the
allowable tax credit amount exceeds the tax liability, and the
difference is paid to the taxpayer, the credit is considered
refundable. Otherwise, the difference can be (1) allowed as a
carryforward against future tax liability, (2) allowed as a carryback
against past taxes paid, or (3) lost as a tax benefit.
* Tax deduction: An amount that is subtracted from the tax base before
tax liability is calculated. Deductions claimed before and after the
adjusted gross income line on the Form 1040 are sometimes called "above-
the-line" and "below-the-line" deductions, respectively.
* Tax deferral: A provision allowing taxpayers to reduce current tax
liability by delaying recognition of some income or accelerating some
deductions otherwise attributable to future years. This can increase
the taxpayer's future tax liability, as the deferred income is
eventually recognized, or reduce the deductions available on future
income.
* Tax exclusion: An item of income that would otherwise constitute a
part of the taxpayer's gross income, but is excluded under a specific
provision of the tax code. Exclusions generally do not appear on the
U.S. Individual Income Tax Return (Form 1040), and excluded income is
not reflected in total reported income.
* Tax exemption: A reduction in taxable income offered to taxpayers
because of their status or circumstances.
Tax expenditure revenue loss estimate: The measure of the revenue cost
of each tax expenditure. The revenue cost is the difference between tax
liability under current law and the tax liability that would result if
taxes were recomputed without that tax expenditure. Revenue cost
estimates assume (1) economic behavior does not change, and (2) all
other tax expenditures remain in the code unchanged.
Tax expenditure outlay-equivalent estimate: The amount of budget
outlays that would be required to provide the taxpayer the same after-
tax income as would be received through the tax provision. The outlay-
equivalent measure allows the cost of a tax preference to be compared
with a direct federal outlay, were each to provide the same benefit to
the taxpayer.
Unified budget: A comprehensive budget in which receipts and outlays
from federal funds and trust funds are consolidated; generally a cash
or cash equivalent measure in which receipts are recorded when received
and expenditures are recorded when paid, regardless of the accounting
period in which the receipts are earned or the costs incurred.
[End of section]
Appendix VI: GAO Contact and Acknowledgments:
GAO Contact:
Michael Brostek, (202) 512-9110:
Acknowledgments:
In addition to the individual named above, MaryLynn Sergent, Assistant
Director, as well as Eric Gorman, Edward Nannenhorn, Anne Stevens, and
Lynn Wasielewski made key contributions to this report. Other
individuals also contributing to this report included Ellen Grady,
Susan Irving, Shirley Jones, Donna Miller, Amy Rosewarne, and William
Trancucci.
[End of section]
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[End of section]
Related GAO Products:
Tax Policy and IRS Administration:
Understanding the Tax Reform Debate: Background, Criteria, and
Questions.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-1009SP]
Washington, D.C.: September 13, 2005.
Internal Revenue Service: Status of Recommendations from Financial
Audits and Related Financial Management Reports.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-393]
Washington, D.C.: April 29, 2005.
Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-103]
Washington, D.C.: November 10, 2004.
Tax Administration: IRS Should Reassess the Level of Resources for
Testing Forms and Instructions.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-486]
Washington, D.C.: April 11, 2003.
Tax Administration: IRS Should Continue to Expand Reporting on Its
Enforcement Efforts.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-378]
Washington, D.C.: January 31, 2003.
Tax Administration: Impact of Compliance and Collection Program
Declines on Taxpayers.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-674]
Washington, D.C.: May 22, 2002.
Tax Deductions: Further Estimates of Taxpayers Who May Have Overpaid
Federal Taxes by Not Itemizing.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-509]
Washington, D.C.: March 29, 2002.
Tax Policy: Tax Expenditures Deserve More Scrutiny.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD/AIMD-94-122]
Washington, D.C.: June 3, 1994.
Specific Tax Expenditures:
Climate Change: Federal Reports on Climate Change Funding Should Be
Clearer and More Complete.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-461]
Washington, D.C.: August 25, 2005.
Student Aid and Postsecondary Tax Preferences: Limited Research Exists
on Effectiveness of Tools to Assist Students and Families Through Title
IV Student Aid and Tax Preferences.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-684]
Washington, D.C.: July 29, 2005.
Earned Income Tax Credit: Implementation of Three New Tests Proceeded
Smoothly, But Tests and Evaluation Plans Were Not Fully Documented.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-92]
Washington, D.C.: December 30, 2004.
Community Development: Federal Revitalization Programs are Being
Implemented, but Data on the Use of Tax Benefits Are Limited.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-306]
Washington, D.C.: March 5, 2004.
Tax Administration: IRS Issued Advance Child Tax Credit Payments on
Time but Should Study Lessons Learned.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-372]
Washington, D.C.: February 17, 2004.
New Markets Tax Credit Program: Progress Made in Implementation, but
Further Actions Needed to Monitor Compliance.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-326]
Washington, D.C.: January 30, 2004.
Tax Administration: Information Is Not Available to Determine Whether
$5 Billion in Liberty Zone Tax Benefits Will Be Realized.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-1102]
Washington, D.C.: Sept. 30, 2003.
Business Tax Incentives: Incentives to Employ Workers with Disabilities
Receive Limited Use and Have an Uncertain Impact.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-39]
Washington, D.C.: December 11, 2002.
New Markets Tax Credit: Status of Implementation and Issues Related to
GAO's Mandated Reports.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-223R]
Washington, D.C.: December 6, 2002.
Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not Met
Annual Reporting Requirement.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-91]
Washington, D.C.: November 15, 2002.
Student Aid and Tax Benefits: Better Research and Guidance Will
Facilitate Comparison of Effectiveness and Student Use.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-751]
Washington, D.C.: Sept. 13, 2002.
Tax Policy and Administration: Review of Studies of the Effectiveness
of the Research Tax Credit.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-96-43]
Washington, D.C.: May 21, 1996.
Federal Budget:
Our Nation's Fiscal Outlook: The Federal Government's Long-Term Budget
Imbalance. [Hyperlink, http://www.gao.gov/special.pubs/longterm/].
21ST Century Challenges: Performance Budgeting Could Help Promote
Necessary Reexamination.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-709T]
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Management Reform: Assessing the President's Management Agenda.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-574T]
Washington, D.C.: April 21, 2005.
Long-Term Fiscal Issues: Increasing Transparency and Reexamining the
Base of the Federal Budget.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-317T]
Washington, D.C.: February 8, 2005.
21ST Century Challenges: Reexamining the Base of the Federal
Government.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP]
Washington, D.C.: February 2005.
Performance Budgeting: Efforts to Restructure Budgets to Better Align
Resources with Performance.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-117SP]
Washington, D.C.: February 2005.
Opportunities for Congressional Oversight and Improved Use of Taxpayer
Funds: Budgetary Implications of Selected GAO Work.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-649]
Washington, D.C.: May 7, 2004.
Budget Process: Long-term Focus Is Critical.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-585T]
Washington, D.C.: March 23, 2004.
Results-Oriented Government: GPRA Has Established a Solid Foundation
for Achieving Greater Results.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-38]
Washington, D.C.: March 10, 2004.
Performance Budgeting: Observations on the Use of OMB's Program
Assessment Rating Tool for the Fiscal Year 2004 Budget.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-174]
Washington, D.C.: January 30, 2004.
Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and
Uncertainties.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-213]
Washington, D.C.: January 24, 2003.
Federal Budget: Opportunities for Oversight and Improved Use of
Taxpayer Funds.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-1030T]
Washington, D.C.: July 17, 2003.
Performance Budgeting: Current Developments and Future Prospects.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-595T]
Washington, D.C.: April 1, 2003.
National Saving: Answers to Key Questions.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-591SP]
Washington, D.C.: June 2001.
(450260):
FOOTNOTES
[1] For more information, see GAO, 21ST Century Challenges: Reexamining
the Base of the Federal Government, GAO-05-325SP (Washington, D.C.:
February 2005).
[2] GAO, Tax Policy: Tax Expenditures Deserve More Scrutiny,
GAO/GGD/AIMD-94-122 (Washington, D.C.: June 3, 1994).
[3] We used revised estimates, which incorporate the most recent
changes in tax policy and economic activity, developed by the U.S.
Department of the Treasury and reported in each year's budget in either
the Special Analyses, Appendixes, or Analytical Perspectives. We chose
the tax expenditure estimates reported in the budget for our analysis
because Treasury develops (1) revised estimates based on changes in tax
policy and economic activity for the year prior to the reported fiscal
budget year and (2) outlay-equivalent estimates that facilitate
comparison to federal spending. Although they are the last available
estimates reported, Treasury's estimates are still projected estimates
and may not reflect additional policy changes.
[4] Pub. L. No. 103-62, Aug. 3, 1993.
[5] Aggregate tax expenditure estimates must be interpreted carefully
because of inherent limitations in the meaning of the summed estimates.
The sum of the individual tax expenditure estimates is useful for
gauging the general magnitude of revenue forgone through provisions of
the tax code but does not take into account interactions between
individual provisions.
[6] The concept of tax expenditures extends beyond the income tax. Tax
expenditures also exist for other types of taxes such as excise and
payroll taxes; however, this report considers only tax expenditures for
the federal income tax system.
[7] Some object that the distinction between those tax provisions
labeled tax expenditures and those that are not is arbitrary and, that
the very notion of labeling these provisions expenditures implies that
all income could be taxed and thus, all income inherently belongs to
the government. See, for example, Joint Economic Committee, Tax
Expenditures: A Review and Analysis (Washington, D.C.: August 1999).
[8] Office of Management and Budget, Analytical Perspectives, Budget of
the United States Government, Fiscal Year 2006 (Washington, D.C.:
2005); and Joint Committee on Taxation, Estimates of Federal Tax
Expenditures for Fiscal Years 2005-2009, JCS-1-05, (Washington, D.C.:
Jan. 12, 2005).
[9] Changes in taxpayer behavior are taken into account when JCT and
Treasury prepare revenue estimates for proposed legislation.
[10] Although outlay-equivalent estimates are often higher than revenue
loss estimates, the net estimated revenue loss for the government is
unchanged. For more information on how outlay-equivalent estimates are
measured, see app. III.
[11] Pub. L. No. 93-344, Sec. 3, 88 Stat. 299 (July 12, 1974) (codified
at 2 U.S.C. sec. 622(3)).
[12] Tax expenditures have been described by some analysts as being
directed toward social or business interests. A social tax expenditure
provides transfer payments related to old age, education, occupational
and health benefits. A business tax expenditure has as its central goal
the provision of financial support to corporations, partnerships, or
individuals in any industry. See Eric Toder, The Changing Composition
of Tax Incentives: 1980-99, (Washington, D.C.: The Urban Institute,
March 1999).
[13] Adjusted gross income is equal to gross income less qualifying
adjustments to income, including some deductions.
[14] Taxpayers list their itemized deductions on the U.S. Individual
Income Tax Return Form 1040 Schedule A--Itemized Deductions. In 2001,
we reported that less than one-third of individual taxpayers itemize
their deductions;in lieu of itemizing their deductions, most taxpayers
take the standard deduction, which is considered part of the individual
income tax structure. See GAO, Tax Deductions: Estimates of Taxpayers
Who May Have Overpaid Federal Taxes by Not Itemizing, GAO-01-529
(Washington, D.C.: Apr. 12, 2001).
[15] A marginal tax rate is the tax rate that applies to an additional
dollar of income.
[16] Marginal individual tax rates for 2004 taxes were 10 percent, 15
percent, 25 percent, 28 percent, 33 percent, and 35 percent.
[17] The reduction in itemized deductions for higher-income taxpayers
may also be viewed as a hidden tax rate.
[18] The AMT is a separate tax system that applies to both individual
and corporate taxpayers. It parallels the regular individual income tax
system but with different rules for determining taxable income,
different tax rates for computing tax liability, and different rules
for allowing the use of tax credits.
[19] For more information on the history of the mortgage interest
deduction, see Pamela J. Jackson, Fundamental Tax Reform: Options for
the Mortgage Interest Deduction, Library of Congress, Congressional
Research Service Report RL33025 (Washington, D.C.: Aug. 8, 2005).
[20] For more discussion of administering programs using tax
expenditures, see OMB, Analytical Perspectives, Budget of the United
States Government, Fiscal Year 2006 (Washington, D.C.: 2005); Eric J.
Toder, "Tax Cuts or Spending--Does It Make a Difference?" National Tax
Journal, Vol. LIII, No. 3, September 2000); and Joel Slemrod and Jon
Bakija, Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes,
3rd Edition (Cambridge, Mass.: The MIT Press, 2004).
[21] Entitlement statutes provide the authority to make payments to any
person or government if, under the provisions of the law containing
that authority, the United States is obligated to make such payments to
persons or governments who meet the requirements established by that
law.
[22] The NMTC legislation limits the allocation of equity eligible for
tax credits from 2001 through 2007 from $1 billion to $3.5 billion per
year, totaling $15 billion over the 7 years.
[23] The 2002 estimates for the five itemized deductions were: (1)
charitable contributions, $33.8 billion; (2) home mortgage interest
expenses, $69.2 billion; (3) state and local income taxes, $43.0
billion; (4) state and local property taxes, $24.2 billion; and (5)
medical expenses, $5.5 billion.
[24] The sum of Treasury's 2004 revenue loss estimates for the five
itemized deductions was about $168 billion; see app. III.
[25] Treasury's fiscal year 2004 re-estimates were published in
February 2005, still months before 2004 tax returns would be filed. JCT
projects the revenue loss for future years and does not re-estimate tax
expenditures for past fiscal years.
[26] See for example: Eric Toder, The Changing Composition of Tax
Incentives: 1980-1999. (Washington, D.C.: The Urban Institute, 1999);
Dhammika Dharmapala, Tax Expenditures Versus Direct Subsidies: A Review
of the Issues. (Austin, Tex.: National Tax Association, 91st Annual
Conference, 1998); Christopher Howard, "Tax Expenditures," The Tools of
Government: A Guide to the New Governance, edited by Lester M. Salamon
(New York, N.Y.: Oxford University Press, 2002), pp. 410-444;
Congressional Research Service, Overview of the Federal Tax System
(Washington, D.C.: 2005).
[27] The revenue loss estimates for fiscal year 1974 were reported in
the President's Budget for fiscal year 1976, published in 1975. The
list has been required by the Congressional Budget Act of 1974 in the
budget thereafter.
[28] Pub. L. No. 99-514, October 2, 1986.
[29] Pub. L. No. 94-455, October 4, 1976.
[30] Pub. L. No. 105-34, August 5, 1997.
[31] To determine the tax code provisions that satisfy the definition
of a tax expenditure, the existing tax law must be compared or measured
against an alternative set of tax rules that represent a baseline. App.
III discusses in more detail the baselines used by Treasury as well as
how Treasury measures and reports tax expenditures.
[32] The tax expenditure revenue loss estimates take into account the
AMT liability.
[33] In fiscal year 2004, the associated outlays were $33.1 billion for
the EITC, $8.9 billion for the child tax credit, and $0.7 billion for
the health insurance tax credit for certain displaced and retired
individuals.
[34] The effective tax rate is the ratio of taxes paid to a taxpayer's
total income.
[35] Pub. L. No. 99-514, October 21, 1986.
[36] Pub. L. No. 103-66, August 10, 1993.
[37] Pub. L. No. 107-16, June 7, 2001.
[38] This is one of the reasons why the sum of tax expenditure revenue
loss estimates by Treasury and JCT, which had been tracking each other
rather closely since 1987, diverged in 2003 and 2004. While Treasury
has changed its tax expenditure baselines over time, JCT's tax
expenditure baseline has changed little over time. See app. III for
additional information on how JCT and Treasury measure tax
expenditures.
[39] The exclusion of net imputed rental income on owner-occupied homes
is a long-standing feature of the income tax system. It was first
listed as a tax expenditure by Treasury in the 2006 budget; JCT does
not list this tax expenditure.
[40] Employers may deduct their premium payments as a business expense
in calculating their net taxable income; this deduction, like those for
other labor costs, is not a tax benefit for employers.
[41] John Sheils and Randall Haught, "The Cost of Tax-Exempt Health
Benefits in 2004," Health Affairs (Feb. 25, 2004 ); and Leonard E.
Burman and Jonathan Gruber, "Tax Credits for Health Insurance," Tax
Policy Center Discussion Paper No. 19 (Washington, D.C.: The Tax Policy
Center, June 2005).
[42] When measured in terms of sum of revenue loss estimates, tax
expenditures also exceeded discretionary spending in some years.
[43] The sum of tax expenditure outlay-equivalent estimates plus
outlays associated with refundable credits amounted to $896 billion in
fiscal year 2004.
[44] Expressing tax expenditures as a share of the nation's economy
provides the context for assessing trends in federal revenue and
spending. GDP is a commonly used measure of domestic national income.
GDP is the value of all goods and services produced within the United
States in a given year and is conceptually equivalent to incomes earned
in production. It is a rough indicator of the economic earnings base
from which the government draws its revenues.
[45] Whereas the unified budget is a consolidated measure of federal
activity, the on-budget deficit excludes Social Security and the Postal
Service which are off-budget under current law. In fiscal year 2004,
the off-budget surplus included a $151 billion Social Security surplus
and a $4 billion surplus for the Postal Service.
[46] Total outlays for the energy budget function were negative in
fiscal year 2004; energy discretionary outlays were $3.4 billion and
energy mandatory outlays were negative $3.6 billion. For more
information on the major federal energy-related tax and spending
programs, see GAO, National Energy Policy: Inventory of Major Federal
Energy Programs and Status of Policy Recommendations, GAO-05-379
(Washington, D.C.: June 10, 2005).
[47] Within the commerce and housing credit budget function, outlays in
fiscal year 2004 by subfunction were: $ 2.7 billion for mortgage
credit, negative $4.1 billion for the Postal Service, negative $2
billion for deposit insurance, and $8.7 billion for other advancement
of commerce.
[48] Housing assistance is a subfunction under the income security
budget function.
[49] The deduction for property taxes on owner-occupied homes is listed
under the commerce and housing credit budget function. Estimated at
$19.9 billion in outlay-equivalent value, this deduction was one of the
15 largest tax expenditures in fiscal year 2004. Including this
deduction, the sum of the outlay-equivalent estimates for tax
expenditures related to state and local governments amounted to $102.7
billion in fiscal year 2004. The outlay-equivalent value of the
exclusion for state-and local private purpose bonds totaled $9.4
billion in fiscal year 2004. These amounts are reflected across the
related budget functions.
[50] Total federal support includes federal outlays and tax expenditure
outlay-equivalent amounts within the same budget function.
[51] Treasury and JCT list the EITC tax expenditure under the income
security budget function and the child tax credit under the education,
training, employment and social services budget function.
[52] JCT does not list any tax expenditures under the administration of
justice budget function but does list exclusions for Medicare benefits
as a tax expenditure under the Medicare budget function.
[53] For additional information on our long-term fiscal modeling, see
GAO, Our Nation's Fiscal Outlook: The Federal Government's Long-Term
Budget Imbalance, http://www.gao.gov/special.pubs/longterm/. See also
U.S. Congressional Budget Office, The Long-Term Budget Outlook
(Washington, D.C.: December 2003), and the Office of Management and
Budget, Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2006 (Washington, D.C.: 2005).
[54] Long-term simulations illustrate the relative fiscal and economic
outcomes associated with alternative policy paths and should not be
viewed as precise forecasts.
[55] Congressional Budget Office, The Budget and Economic Outlook: An
Update (Washington, D.C.: August 2005).
[56] GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term
Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).
[57] See app. III for information about Treasury's supplemental
discounted present value estimates for select tax expenditures that
involve deferrals or other long-term revenue effects.
[58] GAO-05-325SP.
[59] For background information, criteria, and key questions for
assessing the pros and cons of tax reform proposals, both proposals for
a major overhaul of the current federal tax system and incremental
changes to the system, see GAO, Understanding the Tax Reform Debate:
Background, Criteria, and Questions, GAO-05-1009SP (Washington, D.C.:
September 2005).
[60] This tax-free benefit is not reported on the employee's W-2 form
as the amount is not considered wages subject to federal and state
income taxes or federal payroll taxes.
[61] Bob Lyke, Tax Benefits for Health Insurance and Expenses: Current
Legislation. Congressional Research Service Issue Brief IB98037
(Washington, D.C.: February 2005).
[62] Congressional Budget Office, Budget Options (Washington, D.C.:
February 2005).
[63] For more information on the types of IRAs as well as the rules and
limit on contributions and distributions, see Department of the
Treasury, Internal Revenue Service, Individual Retirement Accounts
(IRAs), Publication 590.
[64] GAO, National Saving: Answers to Key Questions, GAO-01-591SP
(Washington, D.C.: June 2001).
[65] Orazio P. Attanasio and Thomas DeLeire, "The Effect of Individual
Retirement Accounts on Household Consumption and National Saving," The
Economic Journal, Vol. 112, July 2002, pp. 504-538.
[66] We define mission fragmentation as the involvement of multiple
agencies in a similar programmatic area and program overlap as
providing the same services to the same target groups.
[67] GAO, Student Aid and Postsecondary Tax Preferences: Limited
Research Exists on Effectiveness of Tools to Assist Students and
Families Through Title IV Student Aid and Tax Preferences, GAO-05-684
(Washington, D.C.: July 29, 2005).
[68] IRS, Taxpayer Advocate Service, National Taxpayer Advocate 2004
Annual Report to Congress, (Washington, D.C.: December 2004).
[69] Joint Committee on Taxation, Options to Improve Tax Compliance and
Reform Tax Expenditures, JCS-2-05. Prepared by the staff of the Joint
Committee on Taxation. (Washington, D.C.: Jan. 27, 2005).
[70] Congressional Budget Office, Budget Options. (Washington, D.C.:
February 2005).
[71] U.S. Congress, Senate Committee on the Budget, Tax Expenditures:
Compendium of Background Material on Individual Provisions, S. Prt. 108-
54. Prepared by the Congressional Research Service (Washington, D.C.:
December 2004).
[72] We have also noted limitations in the quality of agency
performance and evaluation information and agency capacity to produce
rigorous evaluations of effectiveness for federal spending programs.
See GAO, Performance Budgeting: Current Developments and Future
Prospects, GAO-03-595T (Washington, D.C.: Apr. 1, 2003).
[73] GAO, Business Tax Incentives: Incentives to Employ Workers with
Disabilities Receive Limited Use and Have an Uncertain Impact, GAO-03-
39 (Washington, D.C.: Dec. 11, 2002).
[74] GAO, Tax Administration: Information Is Not Available to Determine
Whether $5 Billion in Liberty Zone Tax Benefits Will Be Realized, GAO-
03-1102 (Washington, D.C.: Sept. 30, 2003).
[75] GAO, Business-Owned Life Insurance: More Data Could Be Useful in
Making Tax Policy Decisions, GAO-04-303, (Washington, D.C.: May 13,
2004).
[76] GAO, Student Aid and Tax Benefits: Better Research and Guidance
Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751
(Washington, D.C.: Sept. 13, 2002).
[77] GAO, Community Development: Federal Revitalization Programs are
Being Implemented, but Data on the Use of Tax Benefits Are Limited, GAO-
04-306 (Washington, D.C.: Mar. 5, 2004).
[78] GAO, Tax Policy and Administration: Review of Studies of the
Effectiveness of the Research Tax Credit, GAO/GGD-96-43 (Washington,
D.C.: May 21, 1996).
[79] See the President's Advisory Panel on Federal Tax Reform,
"Understanding Tax Bases: Staff Presentation," (presentation before the
Panel's public meeting, Washington, D.C., July 20, 2005,
http://taxreformpanel.gov/meetings/docs/understanding_tax_bases.ppt
(downloaded September 13, 2005). The calculations for the presentation
were produced by the U.S. Department of the Treasury, Office of Tax
Analysis, at the request of the Panel. The broad income tax base
scenario assumes integration of individual and corporate income taxes
with the corporate tax rate set equal to the top individual rate.
[80] Pub. L. No. 101-576, Nov. 15, 1990.
[81] Pub. L. No. 103-356, Oct. 13, 1994.
[82] S. Rep. No. 103-58, p. 29 (1993).
[83] GAO-02-751.
[84] GAO, Performance Budgeting: Observations on the Use of OMB's
Program Assessment Rating Tool for the Fiscal Year 2004 Budget, GAO-04-
174 (Washington, D.C.: Jan. 30, 2004).
[85] Revenue loss estimates for the three tax expenditures included in
Treasury's first pilot study amounted to approximately $7.8 billion (in
2004 dollars) or 1.4 percent of total revenue loss in fiscal year 1997;
the three amounted to $9.2 billion or 1.3 percent of total revenue loss
for fiscal year 2004.
[86] GAO has suggested various approaches to addressing this and other
challenges. See GAO, The Government Performance and Results Act: 1997
Governmentwide Implementation Will Be Uneven, GAO/GGD-97-109
(Washington, D.C.: June 2, 1997); and GAO, Results-Oriented Government:
GPRA Has Established a Solid Foundation for Achieving Greater Results,
GAO-04-38 (Washington, D.C.: Mar. 10, 2004).
[87] GPRA is the centerpiece of a statutory framework for helping
resolve long-standing management problems that have undermined the
federal government's efficiency and effectiveness. The framework also
includes the Chief Financial Officers Act of 1990 as amended by the
Government Management Reform Act of 1994 and other reform legislation
such as the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act
of 1996. For more information on the Government Performance and Results
Act, see GAO-04-38.
[88] S. Rep. No. 103-58, p. 29 (1993).
[89] GAO-04-38.
[90] OMB, "Preparation and Submission of Strategic Plans, Annual
Performance Plans, and Annual Program Performance Report", Part 6 of
Circular A-11, Preparation, Submission, and Execution of the Budget
(Washington, D.C.: 2002).
[91] GAO, 21ST Century Challenges: Performance Budgeting Could Help
Promote Necessary Reexamination, GAO-05-709T (Washington, D.C.: June
14, 2005). For a detailed examination of PART, see GAO-04-174. Another
significant element of the performance and budget integration
initiative is efforts to restructure budgets. See GAO, Performance
Budgeting: Efforts to Restructure Budgets to Better Align Resources
with Performance, GAO-05-117SP (Washington, D.C.: February 2005).
[92] There is no standard definition for the term "program." For
purposes of PART, OMB described the unit of analysis (program) as (1)
an activity or set of activities clearly recognized as a program by the
public, OMB, and/or Congress; (2) having a discrete level of funding
clearly associated with it; and (3) corresponding to the level at which
budget decisions are made.
[93] The seven major categories are competitive grants, block/formula
grants, capital assets and service acquisition programs, credit
programs, regulatory-based programs, direct federal programs, and
research and development programs.
[94] For the limited exceptions, the Administration is considering
alternative methods and timelines for assessment of programs with
limited impact and large activities where it is difficult to determine
an appropriate unit of analysis.
[95] The NMTC program issues federal tax credits to private sector
entities in return for investments in low-income communities, such as
development or rehabilitation of real estate projects.
[96] GAO, Tax Policy: Tax Expenditures Deserve More Scrutiny,
GAO/GGD/AIMD-94-122 (Washington, D.C.: June 3, 1994).
[97] Pub. L. No. 103-62.
[98] GAO, Student Aid and Postsecondary Tax Preferences: Limited
Research Exists on Effectiveness of Tools to Assist Students and
Families Through Title IV Student Aid and Tax Preferences, GAO-05-684
(Washington, D.C.: Jul. 29, 2005), and National Energy Policy:
Inventory of Major Federal Energy Programs and Status of Policy
Recommendations, GAO-05-379 (Washington, D.C.: Jun. 10, 2005).
[99] At OMB, the economic forecast is produced by the Troika:
economists drawn from the Council of Economic Advisers, the Department
of the Treasury, and OMB.
[100] The net revenue loss for the federal government would be
unchanged. Assuming the comparable outlay program would be taxable, the
recipients would pay taxes on the higher outlay amount, and federal
revenue also would be higher--resulting in no net change in the federal
budget position.
[101] For more information on how outlay-equivalent estimates are
measured, see the Office of Management and Budget, Special Analysis G-
-Fiscal Year 1983 (Washington, D.C.: 1982); and the U.S. Congressional
Budget Office, Tax Expenditures: Current Issues and 5-Year Budget
Projections for Fiscal Years 1984-1988 (Washington, D.C.: October
1983).
[102] Pub. L. No. 93-344, July 12, 1974.
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