Tax Expenditures Have Represented a Substantial Federal Commitment over Time

Whether gauged in absolute numbers, by revenues forgone, or in  comparison to federal spending or the size of the economy, tax  expenditures have been substantial over the last three decades. As a share of the U.S. economy, the sum of tax expenditure  outlay-equivalent estimates remained relatively stable at about 7.5 percent  of GDP since the last major tax reform legislation. The sum  of the revenue loss estimates declined to approximately $728 billion in  2004. Trends in the sum of tax expenditures are due, at least in part, to legislation  affecting the number or scope of tax expenditures or modifying tax rates or  other basic structural features of the tax code. While Tax Expenditures Have Exceeded Discretionary Spending in Some Years, They Have Remained Relatively Stable as a Share of the U.S. Economy

The sum of tax expenditure outlay-equivalent estimates exceeded the  amount of discretionary spending for most years during the last decade, as  shown in figure 8. The  income tax exclusion for employer-provided health care—the largest single  tax expenditure—accounted for 12 percent of the sum of tax expenditure  outlay-equivalent estimates and represented about 27 percent of total  federal support in the health function, which includes Medicaid. The  entire set of tools the federal government can use to address national  objectives—including discretionary and mandatory spending, tax  provisions, loans and loan guarantees—should be subject to periodic  reviews and reexamination to ensure that they are achieving their intended  purposes and designed in the most efficient and effective manner. The  nation’s current and projected fiscal imbalance provides an additional  impetus for engaging in such a review and reassessment. Periodic reviews of tax  expenditures could help to 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. The Executive Branch Has Made Little Progress Since 1994 to Improve Scrutiny of Tax Expenditures

Although OMB and Treasury in 1994 supported expanding federal reviews  of tax expenditures, the Executive Branch made little progress over the  past decade to integrate tax expenditures in the budget presentation and to  incorporate tax expenditures under review processes that apply to  spending programs, as we recommended in 1994. At the same time, our  current and projected fiscal imbalance serves to reinforce the need for  reassessing all activities. Specifically, this report describes (1) how  tax expenditures have changed over the past three decades in reported  number and aggregate size and in comparison to federal spending, revenue,  and the economy; and (2) the progress that has been made since 1994 in  how the Executive Branch scrutinizes tax expenditures. We also considered activities to include tax expenditures under OMB’s  Program Assessment Rating Tool process. As described in app. 21st Century Challenges: Performance Budgeting Could Help Promote  Necessary Reexamination.
Why GAO Did This Study

Numerous federal programs, policies, and activities are supported through the tax code. As described in statute, tax expenditures are reductions in tax liabilities that result from preferential provisions, such as tax exclusions, credits, and deductions. They result in revenue forgone. This report, done under the Comptroller General's authority, is part of an effort to assist Congress in reexamining and transforming the government to meet the many challenges and opportunities that we face in the 21st century. This report describes (1) how tax expenditures have changed over the past three decades in number, size, and in comparison to federal revenue, spending, and the economy, and (2) the amount of progress made since our 1994 recommendations to improve scrutiny of tax expenditures.

What GAO Found

Whether gauged in numbers, revenues forgone, or compared to federal spending or the size of the economy, tax expenditures have represented a substantial federal commitment over the past three decades. Since 1974, the number of tax expenditures more than doubled and the sum of tax expenditure revenue loss estimates tripled in real terms to nearly $730 billion in 2004. The 14 largest tax expenditures, headed by the individual income tax exclusion for employer-provided health care, accounted for 75 percent of the aggregate revenue loss in fiscal year 2004. On an outlay-equivalent basis, the sum of tax expenditure estimates exceeded discretionary spending for most years in the last decade. For some budget functions, the sum of tax expenditure estimates was of the same magnitude as or larger than federal spending. As a share of the economy, the sum of tax expenditure outlay-equivalent estimates has been about 7.5 percent of gross domestic product since the last major tax reform legislation in 1986. All federal spending and tax policy tools, including tax expenditures, should be reexamined to ensure that 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. Although data and methodological challenges exist, periodic reviews of tax expenditures could establish whether they are relevant to today's needs; if so, how well they have worked to achieve their objectives; and whether the benefits from specific tax expenditures are greater than their costs. Over the past decade, however, the Executive Branch made little progress in integrating tax expenditures into the budget presentation, in developing a structure for evaluating tax expenditure outcomes or in incorporating them under review processes that apply to spending programs, as we recommended in 1994. More recently, the Administration has not used its Program Assessment Rating Tool process to systematically review tax expenditures or promote joint reviews of tax and spending programs sharing common goals.