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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 as of the latest President’s budget for fiscal year 2017. OMB has not presented tax expenditures in the budget together with the related outlay programs. OMB did not agree that GAO’s September 2005 recommendation is necessary and stated that presenting information on tax expenditures together with related outlay programs is not useful for budgeting and that such a presentation is not part of the congressional budget process. However, the Congressional Budget Act of 1974 requires a list of tax expenditures, including special tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates. 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 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. Tax expenditures resulted in $1.2 trillion in forgone revenue in fiscal year 2015, similar to the discretionary spending level that year. Until tax expenditures are integrated in the President’s budget, the budget will 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. As of October 2016, 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 have 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 due to limited data availability and analytical constraints of isolating the effect of any single program. The administration planned to focus on addressing some of these challenges so it can work toward crosscutting analyses that examine tax expenditures alongside related spending programs. However, OMB has not reported on progress on this recommendation since the President’s fiscal year 2012 budget, and OMB and the Department of the Treasury staff said there was no update as of October 2016. The President’s fiscal year 2017 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 tax expenditures that function as entitlement programs do not compete overtly in the annual budget process. In addition, many tax expenditures are not subject to congressional reauthorization, and therefore Congress does not have the opportunity to regularly review their effectiveness. Periodic reviews could help identify redundancies in related tax and spending programs and could help 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 OMB has not developed a systematic approach for conducting such reviews. The President’s fiscal year 2012 budget stated that the administration would work toward examining the objectives and effects of the wide range of tax expenditures in the budget. The GPRA Modernization Act of 2010 (GPRMA) requires OMB and the agencies to identify the relevant tax expenditures that contribute to each crosscutting priority goal. Beginning with its August 2012 update to Circular No. A-11 with guidance for implementing GPRAMA and continuing in subsequent annual updates, OMB has directed agencies to identify tax expenditures that contribute to each of their agency priority goals. Beginning with the July 2013 update, OMB expanded its guidance to include identifying these contributions to agency strategic objectives. In both its July 2013 and July 2014 guidance, OMB stated that it planned to work with the Department of the Treasury (Treasury) and agencies to facilitate alignment of tax expenditure information with agency priority goals and strategic objectives. However, in its June 2015 update of this guidance, OMB removed the language about working with Treasury and agencies to align tax expenditures with agency goals. As of November 2015, OMB had not made progress on the alignment effort and did not provide GAO with any plans or time frames for doing so. OMB’s July 2016 guidance still requires agencies to identify tax expenditures that contribute to their agency priority goals and strategic objectives. 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 of delivering federal support. Ensuring the inclusion of tax expenditures in the GPRAMA crosscutting goals along with other related programs would be an important step toward providing policymakers with the breadth of information needed to understand the full federal effort to accomplish national objectives.

Action:

The Director of the Office of Management and Budget (OMB) should review whether all relevant tax expenditures that contribute to a cross-agency priority (CAP) goal have been identified, and as necessary, include any additional tax expenditures in the list of federal contributors for each goal.

This action was identified in GAO’s June 2013 report, Managing For Results: Executive Branch Should More Fully Implement the GPRA Modernization Act to Address Pressing Governance Challenges (GAO-13-518), and was added to the Action Tracker in April 2015.

Progress:

OMB reviewed whether tax expenditures that contribute to the current CAP goals have been identified, as GAO recommended in June 2013. The GPRA Modernization Act of 2010 (GPRAMA) requires OMB and the agencies to identify the relevant tax expenditures that contribute to each CAP goal. In September 2015, OMB staff told GAO that OMB had analyzed the CAP goals, established in March 2014, and determined that there were no tax expenditure programs that were critical to support achievement of these CAP goals. In May 2016, GAO corroborated OMB's findings as part of work reviewing implementation of a sample of seven CAP goals. CAP goal teams GAO spoke with during the review said that they did not identify any relevant tax expenditures related to their goals. GAO determined that all of the selected CAP goal teams fully met the requirement to identify the agencies, organizations, program activities, regulations, tax expenditures, and other activities that contribute to their goals.

Action:

The Director of the Office of Management and Budget (OMB) should assess the contributions relevant tax expenditures are making toward the achievement of each cross-agency priority (CAP) goal.

This action was identified in GAO’s June 2013 report, Managing For Results: Executive Branch Should More Fully Implement the GPRA Modernization Act to Address Pressing Governance Challenges (GAO-13-518), and was added to the Action Tracker in April 2015.

Progress:

OMB reviewed whether tax expenditures that contribute to the current CAP goals have been identified, as GAO recommended in June 2013. The GPRA Modernization Act of 2010 (GPRAMA) requires OMB and the agencies to identify the relevant tax expenditures that contribute to each CAP goal. In September 2015, OMB staff told GAO that OMB had analyzed the CAP goals, established in March 2014, and determined that there were no tax expenditure programs that were critical to support achievement of these CAP goals. In May 2016, GAO corroborated OMB's findings as part of work reviewing implementation of a sample of seven CAP goals. CAP goal teams GAO spoke with during the review said that they did not identify any relevant tax expenditures related to their goals. GAO determined that all of the selected CAP goal teams fully met the requirement to identify the agencies, organizations, program activities, regulations, tax expenditures, and other activities that contribute to their goals.

Action:

The Director of the Office of Management and Budget (OMB) should ensure that agencies adhere to OMB's guidance for website updates by providing complete information about the organizations, program activities, regulations, tax expenditures, policies, and other activities--both within and external to the agency--that contribute to each Agency Priority Goal (APG).

This action was identified in GAO’s April 2013 report, Managing For Results: Agencies Should More Fully Develop Priority Goals under the GPRA Modernization Act (GAO-13-174), and was added to the Action Tracker in April 2015.

Progress:

OMB has taken action to help ensure that agencies provide complete information about the various organizations and activities that contribute to their APGs, as GAO recommended in April 2013, although more needs to be done to identify tax expenditures. According to information provided by OMB staff in April 2015, agencies were asked to identify organizations, program activities, regulations, policies, tax expenditures, and other activities contributing to their 2014-2015 APGs. This process began as part of the September 2014 update to Performance.gov, with opportunities for revisions in subsequent quarterly updates. Based on an analysis of the final quarterly updates for those APGs, GAO found that agencies had made progress in identifying external organizations and programs for their APGs, although they generally did not identify tax expenditures as contributors. As of January 2016, 7 of the 24 Chief Financial Officer Act agencies identified tax expenditures as contributors to their APGs or agency missions. The tax expenditures they identified accounted for only 11 of the 169 tax expenditures reported in the President’s fiscal year 2017 budget, representing an estimated $31.9 billion of $1.23 trillion in forgone revenues for fiscal year 2015. Without information about which tax expenditures support agency goals and measures of their performance, Congress and other decision makers will not have the needed information to assess overall federal contributions toward desired results and the costs and relative effectiveness associated with those contributions.

Action:

The Director of the Office of Management and Budget (OMB) should include tax expenditures in the federal program inventory effort by designating tax expenditure as a program type in relevant guidance.

This action was identified in GAO’s October 2014 report, Government Efficiency and Effectiveness: Inconsistent Definitions and Information Limit the Usefulness of Federal Program Inventories (GAO-15-83), and was added to the Action Tracker in April 2015.

Progress:

No executive action taken. As of October 2016, OMB had not taken action to include tax expenditures in the federal program inventory, as GAO recommended in October 2014. The GPRA Modernization Act of 2010 (GPRAMA) requires OMB to publish a list of all federal programs on a central, government-wide website. The federal program inventory is the primary tool for agencies to identify programs that contribute to their goals, according to OMB’s guidance. By including tax expenditures in the inventory, OMB could help ensure that agencies are properly identifying the contributions of tax expenditures to the achievement of their goals. Although OMB published an initial inventory covering the programs of 24 federal agencies in May 2013, OMB decided to postpone further development of the inventory in order to coordinate with the implementation of the Digital Accountability and Transparency Act of 2014 (DATA Act). In July 2015, GAO recommended that OMB accelerate efforts to merge DATA Act purposes with the production of a federal program inventory. In June 2016, OMB staff said they continue to determine how best to implement the program inventory requirements in coordination with those of the DATA Act; OMB staff said there was no update as of October 2016. Without including tax expenditures in the inventory, OMB is missing an important opportunity to increase the transparency of tax expenditures and the outcomes to which they contribute.

Action:

The Director of the Office of Management and Budget (OMB) should develop, in coordination with the Secretary of the Treasury, a tax expenditure inventory that identifies each tax expenditure and describes its definition, its purpose, and its related performance and budget information.

This action was identified in GAO’s October 2014 report, Government Efficiency and Effectiveness: Inconsistent Definitions and Information Limit the Usefulness of Federal Program Inventories (GAO-15-83), and was added to the Action Tracker in April 2015.

Progress:

No executive action taken. As of October 2016, OMB had not taken action to develop a tax expenditure inventory describing the purpose of each tax expenditure with related performance and budget information, as GAO recommended in October 2014. The GPRA Modernization Act of 2010 (GPRAMA) requires OMB to publish a list of all federal programs on a central, government-wide website. The federal program inventory is the primary tool for agencies to identify programs that contribute to their goals, according to OMB’s guidance. By including tax expenditures in the inventory and centralizing information about their performance, OMB could help ensure that agencies are properly identifying the contributions of tax expenditures to the achievement of their goals. Although OMB published an initial inventory covering the programs of 24 federal agencies in May 2013, OMB decided to postpone further development of the inventory in order to coordinate with the implementation of the Digital Accountability and Transparency Act of 2014 (DATA Act). In July 2015, GAO recommended that OMB accelerate efforts to merge DATA Act purposes with the production of a federal program inventory. In June 2016, OMB staff said they continue to determine how best to implement the program inventory requirements in coordination with those of the DATA Act, and OMB staff said there was no update as of October 2016. Without including tax expenditures in the inventory, OMB is missing an important opportunity to increase the transparency of tax expenditures and the outcomes to which they contribute.

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    • James R. McTigue, Jr.
    • Director, Strategic Issues
    • mctiguej@gao.gov
    • (202) 512-9110