Probably the best current description and quantification of “tax expenditures” comes from the U.S. Congress Joint Committee on Taxation. A February 28, 2011 report from the Joint Committee on Taxation entitled “Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates”, provides a description and quantification of the tax expenditures that are contained in the Internal Revenue Code (IRC). Tax expenditures in the IRC are defined as:
Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability. Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.
Special income tax provisions are referred to as tax expenditures because they may be considered to be analogous to direct outlay programs, and the two can be considered as alternative means of accomplishing similar budget policy objectives. Tax expenditures are similar to those direct spending programs that are available as entitlements to those who meet the statutory criteria established for the programs.”
Tax expenditures have increased substantially in the last two and a half decades. The Joint Committee on Taxation report explains:
The Tax Reform Act of 1986 “represents one of the most comprehensive revisions of the Federal income tax system since its inception.” Among other considerations, Congress was concerned that erosion of the tax base required tax rates to be higher than otherwise would be necessary. With the elimination of various tax expenditures and other preferences and the enactment of other base-broadening provisions, the Act sharply reduced individual income tax rates. The Act retained some of the tax expenditures most widely utilized by individuals and business incentives believed to be beneficial to the economy.”
Interestingly, when the 1986 tax simplification occurred, the U.S. had a political alignment that was strangely opposite from, and yet identical to, what now exists. In 1986, Ronald Reagan (a Republican) was in the White House. The Senate was controlled by the Republicans, and the House was controlled by Democrats. Despite the political split, the two political parties were able to accomplish compromise that now is viewed (at least by Congress) as impossible.
The Joint Committee’s Report provides a nine-page list that identifies, in much summarized form, the post-1986 legislation that created new tax expenditures. Their list provides an average of more than one piece per year of legislation containing new tax expenditures, with the rate of such legislation increasing notably in later years.
This article summarizes the largest tax expenditures that exist currently, and provides additional details. Importantly, the exclusions, deductions, credits, and special rules that make up the current tax expenditures amount to over $1 trillion per year, nearly matching the total amount of annual revenue that is generated from the income tax itself.