	Factors to Consider When Evaluating Expiring Tax Provisions

Factors commonly used to evaluate tax policy in general can be applied  to decisions of whether and how to extend expiring tax provisions,  including tax expenditure provisions. The factors, listed in table 1 and  discussed below, may also be relevant to evaluating other policy tools,  such as spending programs or regulations. Tax expenditures may, in effect, be viewed as  spending programs channeled through the tax system. Revenues foregone through tax expenditures either reduce funding  available for other federal activities or require higher tax rates to raise a  given amount of revenue. Like decisions about spending, deciding  whether to extend an expiring tax expenditure involves considering  whether the benefit of the intended outcome is worth the effect on other  programs or tax rates. Simplicity, transparency, and administrability. Relationship to Other Policy Tools. Tax expenditures are one policy  tool out of several—including spending, grants, loans and loan  guarantees, and regulations—that policymakers can use to achieve public  goals. How a tax expenditure is designed can affect its revenue effects and  how it relates to the criteria for a good tax system. can help in evaluating tax  If not well designed or effectively implemented, tax expenditures can  contribute to mission fragmentation and program overlap, thus  creating the potential for duplication with other policy tools. Measurement Challenges. Unavailable or insufficient data can hinder  policymakers’ ability to consider how the factors described above relate to  particular tax expenditures. A key challenge is that data necessary to  assess how and by whom a tax expenditure is used generally are not  collected on tax returns unless IRS needs the information to ensure tax  compliance or is legislatively mandated to collect or report the  information. We and the Office of Management and Budget  (OMB) have noted that the desired outcomes of a tax expenditure or  other policy tool are often the combination of effects of the program and  external factors. Illustrating These Factors Using Examples from GAO’s Past Work

Our prior reports on tax expenditures illustrate how these factors can be  used to help evaluate whether and how to extend expiring tax provisions. Our past work related to domestic  ethanol production highlights the importance of considering how tax  expenditures relate to other policy tools. Congress allowed the credit to expire at the end of  2011. Our past work on higher-education tax expenditures  illustrates how tax expenditures that are not transparent (i.e., cannot be  easily understood by taxpayers) can result in taxpayers making decisions  that do not maximize their tax benefits. In  2005, we reported that little is known about the effectiveness of  education-related federal grants, loans, and tax expenditures in promoting  student outcomes including college attendance, students’ choice among  colleges, and the likelihood that students will continue their education. We  also found that research gaps may be due, in part, to data and  methodological challenges—such as difficulty isolating the behavioral  effects of the tax expenditure under study from other changes—that have  proven difficult to overcome. We found  that the research tax credit, as currently designed, distributes incentives  unevenly across taxpayers and provides many recipients with windfall  benefits, earned for research that they would have done anyway. Our work on the nonbusiness  energy property credit highlights the importance of considering revenue  foregone and the criteria for good tax policy when determining whether  and how to extend specific tax provisions. JCT estimates the budgetary effect of the President’s proposal extending  and modifying this provision through December 31, 2013, would be about  $2.4 billion in fiscal years 2012-2022.
Why GAO Did This Study

GAO was asked to discuss the extension of tax provisions, sometimes called tax extenders, that either expired in 2011 or are scheduled to expire at the end of 2012. For a prior hearing of this subcommittee, the Joint Committee on Taxation (JCT) prepared a document detailing 64 expiring tax provisions. Most of these provisions are tax expendituresreductions in a federal taxpayers tax liability that result from special credits, deductions, exemptions and exclusions from taxation, deferral of tax liability, and preferential tax rates. Tax expenditures are often aimed at policy goals similar to those of spending programs, such as encouraging economic development in disadvantaged areas and stimulating research and development. Because revenue is foregone, these provisions may, in effect, be viewed as spending programs channeled through the tax system. For those provisions the President proposed extending through 2013, JCT estimated the budgetary effect would be at least $40 billion in foregone revenue over its 10-year budget window.
This testimony outlines factors useful for considering trade-offs when deciding whether and how to extend provisions and illustrates their application to some of the expiring provisions. GAOs testimony is based on previous work on tax reform and tax expenditures.

What GAO Found

Factors commonly used to evaluate tax policy, as well as other policy tools such as spending programs or regulations, can be applied to decisions about whether and how to extend expiring tax expenditures, as discussed below.
Revenue Effects . Revenues foregone through tax expenditures either reduce resources available to fund other federal activities or require higher tax rates to raise a given amount of revenue. Like decisions about spending, deciding whether to extend an expiring tax expenditure involves considering whether the benefit of the intended outcome is worth the effect on other programs or tax rates. The nations long-term fiscal challenge makes it all the more important to ensure tax expenditures are efficient and relevant.
Criteria for Good Tax Policy . Three long-standing criteria typically used to evaluate tax policyequity; economic efficiency; and a combination of simplicity, transparency, and administrabilitycan be applied to the expiring tax expenditures. Because the criteria may sometimes conflict with one another, there are usually trade-offs to consider when evaluating particular tax expenditures.
Relationship to Other Policy Tools . Tax expenditures represent just one policy tool of severalincluding spending, grants, loans, and regulationsthat policymakers can use to achieve policy goals. If not well designed, tax expenditures can create the potential for duplication with other policy tools.
Measurement Challenges . Unavailable or insufficient data can hinder policymakers ability to consider how the factors described above relate to particular tax expenditures. A key challenge is that data necessary to assess how a tax expenditure is used and by whom generally are not collected on tax returns unless the Internal Revenue Service needs the information to ensure tax compliance or is legislatively mandated to collect or report the information.
GAOs prior reports on tax expenditures illustrate how these factors can be used to evaluate whether and how to extend expiring tax provisions. For example, GAO found that the research tax credit, as currently designed, provides many recipients with windfall benefits earned for spending they would have done anyway. A report on domestic ethanol productionin which GAO suggested modifying or phasing out a tax credit that was duplicative of the renewable-fuel standardhighlights the importance of considering how tax expenditures relate to other policy tools. GAOs work on higher-education tax expenditures illustrates how tax expenditures that are not transparent (i.e., cannot be easily understood by taxpayers) can result in taxpayers making decisions that do not maximize their tax benefits. This work also concluded that little is known about the effectiveness of education-related federal grants, loans, and tax expenditures in promoting certain student outcomes, such as college attendance. Research gaps may be due, in part, to data and methodological challengessuch as difficulty isolating the behavioral effects of the tax expenditure under study from other changesthat have proven difficult to overcome.

What GAO Recommends

GAO has made many recommendations in its previous reports on tax expenditures that reflect the factors described in this testimony. Some have been acted on, while others have not.