Special tax breaks, known as tax expenditures, are generally enacted with goals unrelated to ensuring that the tax system collects revenue efficiently and fairly. Instead, these programs are designed to encourage particular activities or reward specific groups of taxpayers. Because they lack tax policy justification, tax expenditures are often described as spending programs “hidden” within the tax code.
Tax expenditures are exceedingly popular among lawmakers, but not for reasons of good policy. Rather, political attitudes and loose procedural rules are responsible for the excitement surrounding these provisions. This undeserved popularity can and should be reined in, at least in part, by implementing a tax expenditure performance review system. Such a system would impartially judge whether these provisions are fulfilling their stated objectives.
The tax expenditure review concept has a lengthy history at the federal level, although progress toward its implementation has slowed in recent years. Despite recent delays, several factors suggest that implementation is now more important and more attainable than at any time in recent memory.
This report discusses the merits and history of federal tax expenditure performance review, outlines reasons to be optimistic that such a system can be implemented soon, examines statelevel efforts on this issue, and draws attention to several key questions that must be answered in designing a review system.