Monday, September 26, 2005
The Government Accountability Office has released Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined (GAO-05-690) (9/23/05) (135 pages). Here are the Results in Brief:
Whether gauged in absolute numbers and revenues forgone or in comparison to federal spending or the size of the economy, tax expenditures have represented a substantial commitment of federal support over the past three decades. Between 1974 and 2004, tax expenditures doubled in number from 67 to 146, and while some were repealed or allowed to expire, considerably more were added to Treasury’s list. Based on our analysis of Treasury’s estimates, the sum of revenue loss estimates associated with tax expenditures, adjusted for inflation, tripled from approximately $240 billion to nearly $730 billion over the period.5 The 14 largest tax expenditures, headed by the largest single tax expenditure— the income tax exclusion for employer-provided health care—accounted for 75 percent of the aggregate revenue loss in fiscal year 2004. The sum of the revenue loss estimates for tax expenditures that are used by individual taxpayers increased in real terms from approximately $190 billion to nearly $650 billion. Since 1981 when outlay-equivalent estimates were first available, the sum of the outlay-equivalent estimates for tax expenditures has been similar in magnitude to discretionary spending, and this sumexceeded total discretionary spending for most years during the last decade. As a share of the U.S. economy, the sum of tax expenditure outlayequivalent estimates remained relatively stable at about 7.5 percent of GDP since the last major tax reform legislation in 1986. Across budget functions, the size of tax expenditures varied, and for some budget functional areas, such as housing and education, tax expenditures were the same magnitude as, or larger than, federal spending
Although tax expenditures are substantial in size, little progress has been made in the Executive Branch to increase the transparency of and accountability for tax expenditures. The entire set of tools the federal government can use to address national objectives—including discretionary and mandatory spending, tax provisions, and loans and loan guarantees—should be subject to periodic reviews and reexamination to ensure 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. Tax expenditures may not always be efficient, effective, or equitable and, consequently, information on these attributes can help policymakers make more informed decisions as they adapt current policies in light of our fiscal challenges and other overarching trends. In addition, some tax expenditures, at least as currently designed, may serve to exacerbate other key private sector and public policy challenges, such as controlling health care costs. Although data and methodological challenges may impede studies of some tax expenditures, periodic reviews of tax expenditures could help establish whether these programs are relevant to today’s needs; if so, how well tax expenditures have worked to achieve their objectives; and whether the benefits from particular tax expenditures are greater than their costs. Over the past decade, however, the Executive Branch has made little progress in integrating tax expenditures into the budget presentation, in developing a structure for evaluating the performance of tax expenditures, or in incorporating tax expenditures under review processes that apply to spending programs, as we recommended in 1994. Also, more recently, OMB has not used its PART process to systematically review tax expenditures and promote joint and integrated reviews of tax and spending programs sharing common, crosscutting goals. One of the key impediments to moving forward in evaluating tax expenditures’ performance is the continuing lack of clarity about the roles of OMB, Treasury, IRS, and departments or agencies with outlay program responsibilities.
We are recommending that the Director of OMB, in consultation with the Secretary of the Treasury, take several steps to ensure greater transparency of and accountability for tax expenditures by reporting better information on tax expenditures’ performance and more fully incorporating tax expenditures into federal performance management and budget review processes.
In providing comments on a draft of this report, OMB's Associate Director for Economic Policy disagreed with our recommendations, raised concerns about our use of tax expenditure estimates developed by Treasury and reported in the annual federal budget, and implied that increasing the attention paid to tax expenditures due to the severity of the nation’s longterm fiscal imbalance would lead to tax increases. Pursuant to the Congressional Budget Act of 1974, the term tax expenditure, as our draft stated, has been used in the federal budget for three decades, and the tax expenditure concept—while not precisely defined—is a valid representation of one tool that the federal government uses to allocate resources. In addition, OMB's implication that focusing more attention on tax expenditures would automatically lead to increased taxes is unfounded. Our report states that the revenues forgone through tax expenditures reduce revenues available to fund other federal activities or they require higher tax rates to obtain a given amount of revenue. Thus, if the evaluations of tax expenditures we call for lead to reducing or eliminating some tax expenditures, the net change after rate adjustments could, depending on overall congressional priorities and preferences, result in tax reductions for many taxpayers. Furthermore, although specific tax expenditures, such as the earned income tax credit (EITC) and Liberty Zone tax benefits, have received varying degrees of scrutiny, efforts to date have not provided the Congress and others with an integrated perspective on the extent to which programs and tools—including tax expenditures— contribute to national goals and position the government to successfully meet 21st century demands. The lack of a requirement to disclose tax expenditures in agencies’ annual performance and accountability reports may result in important performance and cost related data not being fully considered with other federal resources allocated to achieve similar objectives. Although challenges must be overcome to provide systematic reviews of tax expenditures, these challenges cannot be addressed absent effective leadership within the Executive Branch. For these reasons, we believe our recommendations, if fully implemented, will ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward greater scrutiny of tax expenditures.