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General Government: Tax Expenditures

Periodic reviews could help identify ineffective tax expenditures and redundancies in related tax and spending programs, potentially reducing revenue losses by billions of dollars.

Action:

The Director of the Office of Management and Budget (OMB) in consultation with the Secretary of the Treasury should present tax expenditures in the budget together with related outlay programs.

Progress:

No executive action taken. OMB did not agree with GAO’s September 2005 recommendation and stated that information on tax expenditures is not useful for budgeting and that it has never been included in the congressional budget process. However, the Congressional Budget Act of 1974 requires a list of tax expenditures. Whereas OMB favors reporting tax expenditures separately from the rest of the budget, GAO has reported that an integrated presentation is also useful to show the relative magnitude of tax expenditures compared to spending and credit programs across mission areas. OMB had previously presented 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 discontinued the practice. Moreover, tax expenditures were not integrated in the President’s fiscal year 2015 budget.  As a result, the budget does not provide a comprehensive picture for policymakers and the public to compare all of the policy tools used within a mission area.

Action:

The Director of the Office of Management and Budget (OMB) in consultation with the Secretary of the Treasury should develop and implement a framework for conducting performance reviews of tax expenditures. This includes (1) outlining leadership responsibilities and coordination among agencies with related responsibilities; (2) setting a review schedule; (3) identifying review methods and ways to address the lack of credible tax expenditure performance information; and (4) identifying resources needed for tax expenditure reviews.

Progress:

No executive action taken. The Director of OMB has not developed a framework for reviewing tax expenditure performance, as GAO recommended in June 1994 and again in September 2005.Since their initial efforts in 1997 and 1999 to outline a framework for evaluating tax expenditures and preliminary performance measures, OMB and the Department of the Treasury ceased to make progress and retreated from setting a schedule for evaluating tax expenditures. The President's fiscal year 2012 budget stated that developing an evaluation framework is a significant challenge and that the administration's focus is on addressing challenges with data availability and analytical constraints so that the administration can work towards crosscutting analyses examining tax expenditures alongside related spending programs. The President's fiscal years 2013, 2014, and 2015 budgets did not provide an update on these efforts. The President's fiscal year 2015 budget laid out tax reform principles and proposed numerous reforms to tax expenditures, which OMB estimated would save hundreds of billions in total; however, published evaluations of specific tax expenditures were not available. Assessing the performance of tax expenditures is critically important given that many that function as entitlement programs—although perhaps with even less transparency—do not compete overtly in the annual budget process. In addition, many tax expenditures are not subject to congressional reauthorization. Therefore, Congress does not have the opportunity to regularly review their effectiveness. Periodic reviews could help identify redundancy in related tax and spending programs and determine how well specific tax expenditures work to achieve their goals and how their benefits and costs compare to those of programs with similar goals.

Action:

The Director of the Office of Management and Budget (OMB) in consultation with the Secretary of Treasury should develop guidance on incorporating tax expenditures in agencies’ strategic plans and performance reports.

Progress:

OMB has taken action to address how agencies should incorporate tax expenditures in strategic plans and annual performance plans and reports, as GAO recommended in September 2005. The GPRA Modernization Act of 2010 (GPRAMA) established a framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. GPRAMA requires OMB, in coordination with agencies, to identify tax expenditures among programs and activities that contribute to federal government-wide goals and to assess their contributions.  In August 2012, OMB updated Circular A-11 with information on implementing GPRAMA in agency performance planning and reporting.  The 2012 guidance instructed agencies to identify tax expenditures that contribute to agency priority goals, which represent a small subset of agencies’ goals overall. However, in April 2013, GAO’s review of the agency priority goals found that only one agency, for one of its priority goals, identified two relevant tax expenditures—the only agency priority goal out of all 102 to have tax expenditures identified as external contributors. In July 2013, OMB updated Circular A-11 and directed agencies to identify tax expenditures that contribute to each of their strategic objectives. In the guidance, OMB stated that it plans to work with the Department of the Treasury and agencies to facilitate alignment of tax expenditure information with agency priority goals and strategic objectives. This guidance, if properly implemented, should position OMB and the agencies to more broadly identify how tax expenditures contribute to each agency’s overall performance. 

Action:

The Director of the Office of Management and Budget (OMB) in consultation with the Secretary of the Treasury should require that tax expenditures be included in executive branch budget and performance review processes.

Progress:

OMB has made some progress in including tax expenditures along with related outlay programs in the executive branch’s budget and performance review processes as GAO recommended in September 2005, but has not developed a systematic approach for conducting such reviews. The President’s fiscal year 2012 budget stated that the administration would work towards examining the objectives and effects of the wide range of tax expenditures in the budget. For the 14 interim federal priority goals presented in the President’s 2013 budget submission, OMB identified 20 tax expenditures as potential contributors for 5 goals, as consistent with the requirements of the GPRA Modernization Act of 2010 (GPRAMA). On a quarterly basis, OMB is to assess whether the relevant federal agencies and program activities, including any related tax expenditures, are contributing as planned to achieving each priority goal. However, OMB subsequently removed many of the tax expenditures originally identified as potential contributors in the quarterly updates on Performance.gov. The two tax expenditures that continued to be listed for two crosscutting goals represent only $2.7 billion or 0.3 percent of the $1 trillion sum for tax expenditures estimated for fiscal year 2012 by the Department of the Treasury. As GAO reported in June 2013, OMB staff said the removal of tax expenditures for two goals was an oversight and that OMB planned to add tax expenditures in the near future. Per July 2013 guidance for GPRAMA implementation, OMB planned to work with the Department of the Treasury and agencies to facilitate alignment of tax expenditure information. As of December 2013, the two interim crosscutting goals for which tax expenditures were mistakenly removed had not been updated to include any tax expenditures among potential contributors.

Concurrent with the President’s 2015 budget, OMB released new crosscutting and agency priority goals on its Performance.gov website. Some agency plans and goals are still under development and will be released later in the spring. As of March 2014, OMB officials said that they are still planning to work with the Department of the Treasury and agencies to identify tax expenditures contributing to the new goals.

Coordinated reviews of tax expenditures with related federal spending programs—which are consistent with GPRAMA requirements—could help policymakers reduce overlap and inconsistencies and direct scarce resources to the most effective or least costly methods to deliver federal support. Ensuring the inclusion of tax expenditures along with related other programs in the GPRAMA crosscutting goals would be an important step toward providing policymakers with the breadth of information needed to understand the full federal effort to accomplish national objectives.

  • portrait of
    • James R. White
    • Director, Strategic Issues
    • whitej@gao.gov
    • (202) 512-9110