	Introduction

Spending programs and tax expenditures are the two primary ways that the federal government provides benefits to the public. Though each type of intervention increases net budget deficits, differences in the budget process, saliency, and targeting of each may have ramifications for usage across different types of services. This report briefly describes spending programs and tax expenditures, observes a few ways that they differ, and discusses how those distinctions may inform the relative use of each type of intervention across the government portfolio. Description

		Spending

Federal expenditures (or spending) are transfers from the federal government to individuals, firms, or institutions that do not draw directly from individual or corporate tax liability. Federal spending programs fall into three broad categories: (1) discretionary spending, (2) mandatory spending, and (3) net interest payments. The Congressional Budget Office (CBO) estimates that federal spending will total $3.897 trillion in FY2016, or 21.1% of annual gross domestic product (GDP). Tax Expenditures

Tax expenditures are revenue losses attributable to federal tax provisions. There are three main types of tax expenditures: (1) exclusions, exemptions, and deductions from gross personal or corporate income; (2) preferential tax rates for certain programs; and (3) refundable and nonrefundable tax credits. The Joint Committee on Taxation (JCT) estimates the revenue losses attributable to certain programs. Tax expenditures were projected to increase net deficits in FY2016 by $1.521 trillion, or 8.2% of GDP. These factors may have implications for the relative usage of spending programs and tax expenditures in meeting certain policy objectives. Budget Outcomes

Holding other activities constant, increases in resources devoted to spending programs and tax expenditures lead to increases in net budget deficits—spending programs through increases in federal outlays, and tax expenditures through reductions in federal receipts. Mandatory spending programs are legislated outside of the appropriations process. The ease and ability to complete this process may differ across spending and tax expenditure programs. The mechanisms for targeting and enforcement implemented by spending programs are dependent on context. Tax Expenditures

The adoption of tax expenditure programs may be restricted by the use of income tax returns to allocate benefits. Usage by Budget Function

The following tables identify the largest spending and tax expenditure programs in eight categories of federal activity: (1) defense and international affairs; (2) general science, space and technology, natural resources and the environment, and agriculture; (3) commerce and housing, community and regional development, and transportation; (4) education, training, employment, and social services; (5) health, including Medicare; (6) income security; (7) Social Security and veterans' benefits; and (8) administration of justice and general governance.
Spending programs and tax expenditures are the two primary ways that the federal government provides benefits to the public. Though each type of intervention represents a transfer from the government to individuals and firms, differences in the budget process, saliency, and targeting may have ramifications for usage across different types of services. This report briefly describes spending programs and tax expenditures, observes a few ways that they differ, and discusses how those distinctions may inform the relative use of each policy across the government portfolio.
Federal expenditures (spending) are transfers from the federal government to individuals, firms, or institutions that do not draw directly from individual or corporate tax liability. Federal spending programs fall into three broad categories: (1) discretionary spending, (2) mandatory spending, and (3) net interest payments. The Congressional Budget Office (CBO) estimates that federal resources devoted to spending programs will total $3.897 trillion in FY2016, or 21.1% of annual gross domestic product (GDP).
Tax expenditures are revenue losses attributable to federal tax provisions. There are three main types of tax expenditures: (1) exclusions, exemptions, and deductions from gross personal or corporate income; (2) preferential tax rates for certain programs; and (3) refundable and nonrefundable tax credits. The Joint Committee on Taxation (JCT) estimates the revenue losses attributable to certain programs. As of December 2015, projected revenue losses due to tax expenditures in FY2016 summed to $1.521 trillion, or 8.2% of GDP.
Holding other activities constant, an increase in spending programs or tax expenditures will increase net budget deficits. However, differences in the characteristics and composition of spending and tax expenditures may have implications for the way each is used across major sectors of the federal budget. Federal spending programs may be better able to target groups that are unlikely to file federal tax returns, like low-income and elderly households. Tax expenditures may be more likely than spending programs to utilize targeting and enforcement services already undertaken by the federal government.
Other differences important to federal usage occur within certain types of federal spending and tax expenditures. Discretionary spending and, in some cases, expiring tax expenditures typically involve more frequent legislative action than mandatory spending and permanent tax expenditure programs. Discretionary spending programs also provide increased budget certainty to Congress through the use of budget authority, while mandatory spending and tax expenditure resources depend on the participation and benefit choices of program recipients.
This report identifies the largest spending and tax expenditures across eight major categories of federal activity: (1) defense and international affairs; (2) general science, space and technology, natural resources and the environment, and agriculture; (3) commerce and housing, community and regional development, and transportation; (4) education, training, employment, and social services; (5) health, including Medicare; (6) income security; (7) Social Security and veterans' benefits; and (8) administration of justice and general governance.