Government Performance and Accountability:
Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined
GAO-05-690, Sep 23, 2005
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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.
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.
Status Legend:
- Review Pending
- Open
- Closed - implemented
- Closed - not implemented
Recommendations for Executive Action
Recommendation: 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, the Director of OMB, in consultation with the Secretary of the Treasury, should develop and implement a framework for conducting performance reviews of tax expenditures. In developing the framework, the Director should (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.
Agency Affected: Executive Office of the President: Office of Management and Budget
Status: Open
Comments: In September 2005 comments on the draft report, OMB said that this recommendation had potential promise but was mainly a job for the Department of Treasury. OMB Circular A-11 (last update August 2011) specifies that Treasury Office of Tax Analysis has lead responsibility for tax policy and analysis of tax expenditures. The President's Fiscal Year 2012 Budget said that developing an evaluation framework is a significant challenge and that the Administration focus is on addressing challenges with data availability and analytical constraints. As of August 2011, no timetable or specifics were available on plans and progress in developing the evaluation framework described in the budget.
Recommendation: 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, the Director of OMB, in consultation with the Secretary of the Treasury, should 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.
Agency Affected: Executive Office of the President: Office of Management and Budget
Status: Open
Comments: In October 2005, the Department of the Treasury responded that this recommendation did not relate to Treasury. On March 31, 2009, the Director for Treasury's Office of Tax Analysis responded that the department is waiting for the appointment and confirmation of appropriate officials. Consequently, Treasury was not able to respond with an update on GAO's tax expenditure recommendations at the present time. We have reached out to Treasury and OMB and are awaiting their responses on Treasury's role in supporting OMB in developing guidance addressing tax expenditures in strategic plans and performance and accountability reporting.
Recommendation: 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, the Director of OMB, in consultation with the Secretary of the Treasury, should develop and implement a framework for conducting performance reviews of tax expenditures. In developing the framework, the Director should (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.
Agency Affected: Department of the Treasury
Status: Open
Comments: In October 2005, the Department of the Treasury responded that Treasury had issued a number of reports examining various tax expenditures over the years. The President's Fiscal Year 2012 Budget said that developing an evaluation framework is a significant challenge and that the Administration focus is on addressing challenges with data availability and analytical constraints. As of August 2011, no timetable or specifics were available on plans and progress in developing the evaluation framework described in the budget.
Recommendation: 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, the Director of OMB, in consultation with the Secretary of the Treasury, should 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 Affected: Executive Office of the President: Office of Management and Budget
Status: Open
Comments: In September 2005 comments on the draft report, OMB stated that it it had 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. On June 8, 2010, OMB issued guidance directing federal agencies to consider tax and spending policy integration in the fiscal year 2012 budget submissions due on September 13, 2010. Specifically, agency budget submissions are to include, where appropriate, analysis of how to better integrate key tax and spending policies with similar objectives and goals. According to the guidance, agency staff were to work with their OMB contact to develop this analysis. The President's Fiscal Year 2012 Budget said that the Administration will be working towards examining the objectives and effects of the wide range of tax expenditures in the budget. As of June 2011, no timetable or specifics were available from OMB. GPRAMA establishes a new framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. Effective GPRAMA implementation could help inform reexamination or restructuring efforts and lead to more efficient and economical service delivery in overlapping program areas by identifying the various agencies and federal activities--including tax expenditures--that contribute to crosscutting outcomes. As of August 2011, GPRAMA guidance issued by OMB did not explicitly address tax expenditures.
Recommendation: 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, the Director of the Office of Management and Budget (OMB), in consultation with the Secretary of the Treasury, should 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.
Agency Affected: Department of the Treasury
Status: Open
Comments: In October 2005, the Department of the Treasury responded that this recommendation did not relate to Treasury. In June 2010, Treasury reiterated that OMB controls budget presentation. In the President's Fiscal Year 2012 Budget, tax expenditures were separately reported rather than integrated alongside related spending.
Recommendation: 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, the Director of OMB, in consultation with the Secretary of the Treasury, should 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.
Agency Affected: Department of the Treasury
Status: Open
Comments: In October 2005, the Department of the Treasury responded that this recommendation did not relate to Treasury. OMB Circular A-11 (last update August 2011) specifies that Treasury Office of Tax Analysis has lead responsibility for tax policy and analysis of tax expenditures and that agencies are to work with this Treasury Office, to develop data and methods to evaluate the effects of tax expenditures that affect (or are directed at the same goals as)agency spending programs. The Government Performance and Results Act (GPRA) Modernization Act of 2010 (GPRAMA) (Public Law 111-352) requires agencies to identify priority goals and OMB, in coordination with agencies, to develop outcome-oriented goals for a limited number of crosscutting policy areas. On an annual basis, OMB is to provide information on how these crosscutting goals will be achieved. GPRAMA requires performance reporting for governmentwide and agency priority goals on a quarterly basis. The act is intended to identify the various agencies and federal activities--including tax expenditures--that contribute to crosscutting outcomes. As of August 2011, GPRAMA implementation guidance issued by OMB does not explicitly address tax expenditures.
Recommendation: 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, the Director of the Office of Management and Budget (OMB), in consultation with the Secretary of the Treasury, should 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.
Agency Affected: Executive Office of the President: Office of Management and Budget
Status: Open
Comments: In September 2005 comments on the draft report, OMB characterized the separate reporting of tax expenditures as "more than adequate" for the public and policymakers. 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. In the President's Fiscal Year 2012 Budget, tax expenditures were separately reported rather than integrated alongside related spending.
Recommendation: 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, the Director of OMB, in consultation with the Secretary of the Treasury, should 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 Affected: Department of the Treasury
Status: Open
Comments: In September 2005 comments on the draft report, OMB stated that it it had 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. On June 8, 2010, OMB issued guidance directing federal agencies to consider tax and spending policy integration in the fiscal year 2012 budget submissions due on September 13, 2010. Specifically, agency budget submissions are to include, where appropriate, analysis of how to better integrate key tax and spending policies with similar objectives and goals. According to the guidance, agency staff should work with their OMB contact to develop this analysis.