A new report from Citizens for Tax Justice explains why it’s time for the federal government to finally follow through on its long-unfulfilled promise to evaluate the usefulness of special tax breaks.
Does the research and experimentation tax credit, for example, actually encourage research? Or does it simply enrich high-tech firms? Does the mortgage interest deduction increase homeownership, or does it only reward people who would have purchased homes anyway? Shockingly, these types of fundamental policy questions have not been addressed in any type of systematic and transparent fashion by our government.
In total, the federal government spends over $1 trillion each year on programs it administers via the tax code – i.e. “tax expenditures.” To put that in perspective, annual spending on tax expenditures is actually slightly larger than the entire discretionary spending budget (i.e. the portion of federal spending that Congress must approve each year).
The lack of scrutiny directed toward tax expenditures first gained attention in the late 1960’s when an official listing of tax expenditures was finally produced in an effort to highlight these programs’ size and importance. In 1993, Congress indicated a desire to take this concept one step further by suggesting that the performance of tax expenditures be regularly reviewed. Soon after this, the Executive Branch did make some slow progress toward reviewing tax expenditures before effectively abandoning the idea soon after the start of the Bush Administration.
CTJ's new report makes the case for resuming these efforts toward the creation of a tax expenditure review system. Among the reasons for moving forward on this issue now are:
- Tax expenditures, whether measured as a share of GDP or as a share of income taxes, have increased immensely over the past twenty years.
- Restoring fiscal sustainability will be nearly impossible without a closer look at the more than $1 trillion spent annually via the tax code.
- Creating a new “cross-program” performance review framework, of the type advocated by President Obama, will require the review of tax expenditures.
- Tax expenditure review fits perfectly into President Obama’s agenda to improve government transparency.
- A new dataset, described by the OMB as permitting “more extensive, and better, analyses of many tax provisions” will become available in the very near future.
- State efforts on the tax expenditure review front have provided the federal government with some powerful lessons from which to draw in creating a review system.