GAO Spending Through the Tax Code How tax expenditures, also known as tax incentives, affect the federal budget AN OVERVIEW FROM GAO-16-622 What are "tax expenditures"? - tax credits - deductions - exclusions - exemptions - deferrals - preferential tax rates They are special tax provisions that have the same net effect on the federal budget as spending programs. What are they for? Many are designed to help achieve national social and economic goals, such as: - home ownership - postsecondary education - renewable energy How much do they cost? Line Graph -- Mandatory Spending, Discretionary Spending, and Estimated Tax Expenditure Revenue Loss, 1985-2015 (in 2015 dollars) Billions of dollars: Fiscal year Discretionary spending Mandatory spending (minus net interest) Tax expenditure revenue loss (estimated) 1985 802 773.6 682.4 1986 826.9 784.1 742.8 1987 819.4 776.9 695.3 1988 829.7 800.8 539.4 1989 839.9 834.9 570.7 1990 830.2 942.1 578 1991 854.1 955.3 569.4 1992 834.5 1013.6 589.2 1993 824.3 1024.5 596.7 1994 808.9 1072.2 627.1 1995 797.3 1081.1 649.4 1996 765.3 1130.2 653.2 1997 772.2 1143.6 682 1998 769.8 1198.3 771.5 1999 787.8 1239.3 830.4 2000 829.1 1283.4 867.9 2001 855 1327.4 940.8 2002 951.6 1433.9 977.3 2003 1048.6 1504.3 938.1 2004 1111.2 1536.2 903.9 2005 1165.7 1588 933.6 2006 1185 1645.7 987 2007 1182.1 1645.5 958.1 2008 1261.8 1773.2 976 2009 1360 2300.4 1077.9 2010 1467.7 2084.8 1116.3 2011 1438.3 2163.2 1145.1 2012 1348.6 2129.2 1132.6 2013 1239.3 2094.3 1180.7 2014 1194.7 2126.9 1184.5 2015 1168.6 2296.6 1351.4 Source: GAO analysis of Department of the Treasury and Office of Management and Budget data. They are comparable in size to discretionary spending. Pull-out: Estimated total of tax expenditures in FY 2015: $1.2 Trillion How do tax expenditures affect the budget? The federal government does not collect revenue it otherwise would have, requiring higher tax rates to raise the same amount of revenue. As with any federal spending program, tax expenditures: 1. Increase federal deficits or reduce federal surpluses Bar chart -- Federal Deficits or Surpluses, 1976-2015: Fiscal Year Percentage of gross domestic product 1976 -4.1 1977 -2.6 1978 -2.6 1979 -1.6 1980 -2.6 1981 -2.5 1982 -3.9 1983 -5.9 1984 -4.7 1985 -5 1986 -4.9 1987 -3.1 1988 -3 1989 -2.7 1990 -3.7 1991 -4.4 1992 -4.5 1993 -3.8 1994 -2.8 1995 -2.2 1996 -1.3 1997 -0.3 1998 0.8 1999 1.3 2000 2.3 2001 1.2 2002 -1.5 2003 -3.3 2004 -3.4 2005 -2.5 2006 -1.8 2007 -1.1 2008 -3.1 2009 -9.8 2010 -8.7 2011 -8.5 2012 -6.8 2013 -4.1 2014 -2.8 2015 -2.5 Source: Congressional Budget Office. and/or 2. Reduce available funding for other programs Illustration: Dollars flowing to three types of programs: - housing - education - energy How well are tax expenditures working? It's hard to know. - Congress annually reviews discretionary spending. - Existing tax expenditures are not regularly reviewed. - Tax expenditure outcomes are not measured as closely as spending program outcomes. See how a spending program and a tax expenditure with the same policy goal are evaluated: Flowchart -- Goal: to create more fuel-efficient modes of transportation Left side: Vehicle Technologies spending program, administered by the Department of Energy (DOE) 1. Performance measure identified: reduce gas consumption by 850 million gallons in fiscal year 2014 2. DOE makes grants to businesses, non-profit organizations, and universities 3. Grantees report on the success of activities such as research and development 4. DOE reports to Congress and the public on program impact Right side: Alternative Motor Vehicle Credit, a tax credit created in 2005 1. No performance measure identified 2. Taxpayer spends funds on qualified vehicle, receives tax credit 3. Agencies do not gather performance data such as the effect of the credit on gas consumption 4. The government isn't measuring the impact Source: GAO analysis of agency documents. How can the government better track these tax expenditures? In past work, we have recommended greater scrutiny. Agencies could: - periodically review tax expenditures - compare tax expenditures to spending programs with similar goals - include tax expenditures in their annual performance management reviews - further incorporate tax expenditures into budget presentations Looking for more information? See GAO-16-622 at GAO.GOV This work has been released into the public domain. GAO