Tax expenditures—special tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates—substantially reduce the revenue the government collects from federal income taxes but can help achieve national social and economic goals. However, it is not always easy to determine how successful tax expenditures are in achieving their intended policy goals.
The U.S. Department of the Treasury estimated that 169 tax expenditures cost the federal government approximately $1.2 trillion in tax revenue in fiscal year 2015. Many analysts consider tax expenditures to be federal spending channeled through the tax system—and the amount of this type of spending has been roughly approximate to federal discretionary spending levels in recent years.
Figure: Tax Expenditures Are Comparable in Size to Discretionary Spending Levels
Note: Summing tax expenditure estimates provides a sense of size but does not take into account possible interactions among individual tax expenditures and within the tax code. Total change in tax revenues from repealing all tax expenditures could differ from the sum of the estimates.
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However, unlike federal discretionary spending, tax expenditures do not compete with other priorities in the annual appropriations process, and many are not subject to congressional reauthorization. Instead, many tax expenditures operate like mandatory spending programs (such as Medicare), with eligibility rules and formulas that provide benefits to those who wish to participate.
Tax expenditures also affect overall tax rates, as well as the overall budget outlook. The revenue the federal government forgoes when it uses tax expenditures reduces the tax base and requires higher tax rates to raise the same amount of federal revenue. The seven largest tax expenditures accounted for over half of all revenue forgone by the federal government in fiscal year 2015.
Figure: Largest Income Tax Expenditures in Fiscal Year 2015
aThe value of employer-provided health insurance is excluded from Medicare and Social Security payroll taxes, and Treasury estimated that the payroll tax revenue losses were $127.5 billion in 2015.
bTreasury's estimate reflects revenue losses of approximately $2.1 billion and outlays of approximately $61.9 billion in 2015.
Tax expenditures, like all federal program spending, can reduce the amount of funds available for other federal activities, increase the budget deficit, or reduce budget surpluses. Additionally, the many types of tax expenditures add to the complexity of the tax code. Eliminating or combining tax expenditures could simplify the tax code, but this could reduce the incentives for certain activities.
Figure: Examples of Six Types of Tax Expenditures
Greater scrutiny of tax expenditures, such as by periodic reviews could help determine how successful specific tax expenditures are at achieving their goals, and how their benefits and costs compare to other programs with similar goals. Tax expenditures may also be included as part of broader tax reform discussions.
GAO-16-622: Published: Jul 7, 2016. Publicly Released: Jul 7, 2016.
GAO-16-475: Published: May 27, 2016. Publicly Released: Jun 27, 2016.
GAO-13-479: Published: Apr 30, 2013. Publicly Released: May 30, 2013.
GAO-13-167SP: Published: Nov 29, 2012. Publicly Released: Jan 8, 2013.
GAO-10-136: Published: Nov 6, 2009. Publicly Released: Dec 8, 2009.
GAO-17-94: Published: Nov 28, 2016. Publicly Released: Nov 28, 2016.
GAO-17-108: Published: Nov 28, 2016. Publicly Released: Nov 28, 2016.
GAO-16-708T: Published: Jul 6, 2016. Publicly Released: Jul 6, 2016.
GAO-16-360: Published: May 11, 2016. Publicly Released: Jun 8, 2016.
GAO-16-263: Published: Apr 14, 2016. Publicly Released: Apr 14, 2016.
GAO-16-491T: Published: Mar 22, 2016. Publicly Released: Mar 22, 2016.
GAO-16-506T: Published: Mar 17, 2016. Publicly Released: Mar 17, 2016.
GAO-16-363: Published: Mar 17, 2016. Publicly Released: Apr 13, 2016.
GAO-16-29: Published: Feb 23, 2016. Publicly Released: Feb 24, 2016.
GAO-16-190: Published: Feb 10, 2016. Publicly Released: Mar 10, 2016.