Tax expenditures (such as special tax credits) substantially reduce federal revenue but can help achieve social and economic goals. However, it is not always clear how successful tax expenditures are in achieving their intended policy goals.
Tax expenditures are provisions of the tax code that can reduce how much a taxpayer owes and therefore federal revenue. Examples include special tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates. Tax expenditures have the same net effect on the federal budget as spending programs.
Tax Expenditures Are Comparable in Size to Federal Discretionary Spending
Note: Summing tax expenditure estimates provides a sense of size but does not take into account possible interactions among individual tax expenditures or outlay effects from refundable credits. Total change in tax revenues from repealing tax expenditures could differ from the sum of the estimates.
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.
Paying attention to tax expenditures is an important step to addressing the nation’s fiscal health, and they should be part of broader tax reform discussions. However, tax expenditures are not regularly reviewed and their outcomes are not measured as closely as other government spending. Periodic reviews and evaluations could help determine how successful tax expenditures are at achieving their intended goals, and how their benefits and costs compare to other programs with similar goals.
Some ways to improve scrutiny of tax expenditures include:
- The Office of Management and Budget (OMB) and the Treasury could develop a framework for evaluating tax expenditure performance
- OMB, in consultation with Treasury, could work with agencies to identify which tax expenditures contribute to agency goals