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Tax Expenditures: Background and Evaluation Criteria and Questions

GAO-13-167SP Published: Nov 29, 2012. Publicly Released: Jan 08, 2013.
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What GAO Found

GAO's previous work has shown that, once enacted, tax expenditures and their relative contributions toward achieving federal missions and goals are often less visible than spending programs, which are subject to more systematic review. One reason for this is that they often operate, in practice, like entitlement programs not subject to annual appropriations. Since 1994, GAO has recommended greater scrutiny of tax expenditures, as periodic reviews 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. However, the Executive Branch has made little progress in developing a framework for systematically evaluating tax expenditures.

More recently, the Government Performance and Results Act (GPRA) Modernization Act of 2010 (GPRAMA) established a framework for providing a more crosscutting and integrated approach to focusing on results and improving government performance, including for tax expenditures. GPRAMA makes clear that tax expenditures are to be included in identifying the range of federal agencies and activities that contribute to crosscutting goals. Moving forward, GPRAMA implementation can help inform tough choices in setting priorities as policymakers address the rapidly building fiscal pressures facing our national government.

Why GAO Did This Study

Tax expenditures are reductions in a taxpayer's tax liability that are the result of special exemptions and exclusions from taxation, deductions, credits, deferrals of tax liability, or preferential tax rates. Similar to spending programs, tax expenditures represent a substantial federal commitment to a wide range of mission areas. If the Department of the Treasury (Treasury) estimates are summed, an estimated $1 trillion in revenue was forgone from the 173 tax expenditures reported for fiscal year 2011. Tax expenditures are often aimed at policy goals similar to those of federal spending programs. Existing tax expenditures, for example, are intended to encourage economic development in disadvantaged areas, finance postsecondary education, and stimulate research and development. For some tax expenditures, forgone revenue can be of the same magnitude or larger than related federal spending for some mission areas. The revenue the federal government forgoes from a tax expenditure reduces revenue available to fund other federal activities, requires higher tax rates to raise any given amount of revenue, increases the budget deficit, or reduces any budget surplus.

Given the interest in tax expenditures' effectiveness, Congress asked GAO to develop a framework that could be used to evaluate their performance. In response, this guide describes criteria for assessing tax expenditures and develops questions Congress can ask about a tax expenditure's performance.

For information, contact James R. White at (202) 512-9110 or

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Evaluation criteriaLiability (legal)LossesPerformance measuresTax creditTax expendituresTaxpayersTax deductionsFederal spending