Executive budget formulation. Evaluation. Federal Budget Processes Include Fewer Budgetary Controls, Fewer Reviews, and Less Information for Tax Expenditures Than Other Types of Spending

		OMB and Agencies Conduct Fewer Reviews and Provide Less Information on Tax Expenditures Than Other Spending in Formulating the President’s Budget

While tax expenditures are included in the development of the President’s  Budget, they are subject to fewer reviews, and less information is  required to be provided on them. Instead, tax  expenditure revenue loss estimates are presented separately from other  types of spending in the budget’s Analytical Perspectives. We have  reported in the past that this presentation makes their relative  contributions toward achieving national priorities less visible than  spending programs. Similar to Mandatory Spending, the Congressional Budget Process Does Not Require Annual Reapproval or Review of Non-expiring Tax Expenditures

As part of the congressional budget process, tax expenditures are treated  similarly to mandatory spending in that expiring tax expenditures being  considered for extension and new proposals are subject to standard  congressional controls for new legislation; but existing, non-expiring tax  expenditures are not subject to annual congressional budget processes. OMB and Agencies Have Made Limited Progress Identifying Tax Expenditures’ Contributions to Agency Goals

OMB Circular No. We  found that 7 of the 24 CFO Act agencies identified tax expenditures as  contributors to their missions (two instances) or to specific goals (five  instances). The tax expenditures these seven agencies identified  accounted for 11 of the 169 tax expenditures included in the President’s  Budget for Fiscal Year 2017, representing an estimated $31.9 billion of  $1.23 trillion in forgone revenues for fiscal year 2015. A Lack of Clarity about Agencies’ Roles Leads to Inaction in Identifying Tax Expenditures That Contribute to Agency Goals

As we have previously reported, one key impediment to including tax  expenditures in agency performance reviews is the continuing lack of  clarity about the roles of different federal agencies in conducting reviews  of tax expenditures. A-11  guidance noted that OMB would work with Treasury and agencies to  identify where tax expenditures align with their goals, and that this  information was to be published on Performance.gov and included in  relevant agency plans, beginning in February 2014. Options to Further Incorporate Tax Expenditures into Federal Budgeting Processes Have Various Potential Benefits and Challenges

Further incorporating tax expenditures into federal budgeting processes  could help achieve various broad benefits, based on our assessment of  the roundtable discussion we held with budget and tax experts and on our  prior work (see figure 7). While these options offer a range of potential benefits, there are  challenges and tradeoffs for policymakers to consider in whether or how  to implement any policy to further incorporate tax expenditures into  federal budgeting processes. Policymakers could require that all, or some subset of, tax expenditures  expire after a finite period. This option could  result in greater oversight of tax expenditures, as policymakers would be  required to explicitly decide whether or not to extend more or all tax  expenditures. We have previously reported that frequent  changes in the tax code, such as from extended or expired tax  provisions, can create uncertainty and contribute to compliance  burden by making tax planning more difficult. Conclusions

In recent years, revenue losses from tax expenditures have reached  levels similar to discretionary spending; approximately $1.23 trillion in  revenue was forgone for fiscal year 2015. Without additional  OMB and Treasury assistance, agencies may continue to have difficulty  identifying whether or which tax expenditures are relevant to their goals,  and may be limited in their understanding of how the range of federal  investments and policy tools contribute to agency goals. Recommendation for Executive Action

To help ensure that the contributions of tax expenditures toward the  achievement of agency goals are identified and measured, the Director of  OMB, in collaboration with the Secretary of the Treasury, should work  with agencies to identify which tax expenditures contribute to their agency  goals, as appropriate—that is, they should identify which specific tax  expenditures contribute to specific strategic objectives and agency priority  goals.
Why GAO Did This Study

Tax expenditures—special credits, deductions, and other tax provisions that reduce taxpayers’ tax liabilities—represent a substantial federal commitment. If Treasury’s estimates are summed, an estimated $1.23 trillion in federal revenue was forgone from the 169 tax expenditures reported for fiscal year 2015, an amount comparable to discretionary spending. Tax expenditures are often aimed at policy goals similar to those of federal spending programs.
GAO was asked to identify the extent to which tax expenditures are incorporated into federal budget processes. This report (1) compares the treatment of tax expenditures and other spending in federal budgeting processes; (2) evaluates the extent to which OMB and agencies have identified tax expenditures’ contributions to agency goals; and (3) examines options to further incorporate tax expenditures in federal budgeting processes. To address these objectives, GAO reviewed agency budget documents, OMB guidance, prior GAO reports, and performance plans and reports available as of January 2016 for all 24 CFO Act agencies. GAO also held a roundtable discussion with budget and tax experts to examine options for further incorporating tax expenditures into budgeting processes.

What GAO Found

Federal budget formulation processes include fewer controls and reviews, and provide less information on tax expenditures—which represented an estimated $1.23 trillion in forgone revenues in fiscal year 2015—than for discretionary or mandatory spending. For example, in the President’s budget, tax expenditure revenue loss estimates are presented separately from related spending, making their relative contributions toward national priorities less visible than spending programs. Likewise, only proposed tax expenditures or those that expire are subject to review within congressional budget processes, similar to mandatory spending. Existing, non-expiring tax expenditures are not subject to such review.
The Office and Management and Budget (OMB) and agencies have made limited progress identifying tax expenditures’ contribution to agency goals. As of January 2016, 7 of the 24 Chief Financial Officer (CFO) Act agencies identified tax expenditures as contributors to their agency goals—as directed in OMB guidance—or agency missions. The tax expenditures they identified accounted for only 11 of the 169 tax expenditures included in the President’s Budget for Fiscal Year 2017, representing an estimated $31.9 billion of $1.23 trillion in forgone revenues for fiscal year 2015. Based on interviews with agencies and reviewing past GAO work, GAO found that a lack of clarity about agencies’ roles leads to inaction in identifying tax expenditures that contribute to agency goals. To address this, OMB guidance previously stated that it would work with the Department of the Treasury (Treasury) and other agencies to identify where tax expenditures align with agency goals. OMB removed that language in June 2015, citing capacity constraints. Without additional OMB and Treasury assistance, agencies may continue to have difficulty identifying whether, or which of, the remaining 158 tax expenditures—representing $1.20 trillion in forgone revenues—contribute to their goals.
Based on an assessment of budget and tax experts’ input and prior GAO work, GAO found that options to further incorporate tax expenditures into budgeting processes could help achieve various benefits; but policymakers would need to consider challenges and tradeoffs in deciding whether or how to implement them. For example, one option is to require that all, or some subset of, tax expenditures expire after a finite period. This option could result in greater oversight, requiring policymakers to explicitly decide whether to extend more or all tax expenditures. However, this option could lead to frequent changes in the tax code, such as from extended or expired tax expenditures, which can create uncertainty and make tax planning more difficult, as GAO has reported previously.

What GAO Recommends

GAO recommends that OMB, in collaboration with Treasury, work with agencies to identify which tax expenditures contribute to agency goals. OMB generally agreed with GAO’s recommendation.