Most discussions about addressing the country’s budget deficit essentially leave out a $1.1 trillion slice of the federal government.
That’s the size of the federal government’s “tax expenditures” in fiscal year 2009, based on calculations in a new Citizens for Tax Justice report this week. That’s larger than the “discretionary” federal budget that gets so much attention each year. Tax expenditures are the breaks and credits individuals and businesses get courtesy of Uncle Sam, usually to encourage or reward certain types of behavior or to provide extra income to the poor. They are as common and uncontroversial as the home mortgage deduction or as obscure (and targeted to narrow interests) as a special write-off for “motorsports entertainment complexes.”
You can’t have a rational discussion of the federal deficit without taking a hard look at these tax expenditures. Unfortunately, broaching this subject evokes memories of near-disasters as politicians come too close to some political third rails, as President Obama did last year when the administration floated the idea of limiting charitable deductions for high-income people to help pay for health-care reform.
It doesn’t have to. While many tax expenditure provisions benefit individuals and are connected to broadly shared goals and an identifiable social benefit, the federal government surrenders billions of dollars annually on tax breaks wrangled by corporate lobbyists or on tax benefits that mainly benefit the wealthy.
The Citizens for Tax Justice report breaks out tax expenditures by category, and reveals that tax expenditures related to businesses and investment (totaling about $200 billion a year) are the second largest category, after health ($265 billion). The total tax expenditures in housing ($153 billion) far exceeds direct spending on housing programs ($51 billion).
From the standpoint of the federal budget, and often arguably even from a policy perspective, there is no difference between a dollar spent to subsidize a particular activity and a tax dollar foregone to support that same activity. But, as the CTJ report states:
… the only real difference is that a subsidy provided through the tax code seems to receive a great deal less attention (in terms of its cost and in terms of who benefits) than one provided through direct expenditures.
Members of Congress often focus on discretionary expenditures, not because they make up most government spending but because they are politically easier to limit. In fact, the figures in this report show that discretionary expenditures are less significant than tax expenditures in many spending categories. The other problem with fixating on discretionary expenditures is the fact that most of them are for defense — and yet calls for capping discretionary expenditures are always limited to “non-defense” spending.
CTJ has long been among the organizations calling for a “performance review” of all tax expenditures. A November 2009 report listed several justifications for such a review, including these two:
Tax expenditures, whether measured as a share of GDP or as a share of income taxes, have crept up to levels not seen since just before the Tax Reform Act of 1986, which drastically reduced tax expenditures. If history can provide any clues for the future, the number and size of the “holes” poked in the tax base may finally be approaching the level required to inspire a closer look at tax base broadening, and tax expenditure review.
… The dire budgetary outlook facing the federal government will require a search for new revenue sources, both in order to reduce the budget deficit, and to “pay for” new spending priorities without increasing the deficit. Since a tax expenditure review system can help to identify ineffective tax breaks that should be eliminated, such a system should become increasingly well-received in this budgetary environment.
Sima J. Gandhi, an economic policy analyst at the Center for American Progress, also wrote that now is the time for a critical and thorough assessment of tax expenditures.
Some of these subsidies make sense. Others warrant a closer look. Funding for those that don’t work should be rightly eliminated. And funding for those that do make sense should continue.
Though tax expenditures are a form of government spending, they feel like tax cuts because they are implemented through the tax code. This makes them politically popular; politicians find it easier to pass government spending programs when they can sell them as tax cuts.
What’s more is that Congress fails to regularly review these tax expenditures, and the government’s budgeting process largely ignores tax expenditure spending. This lack of scrutiny, combined with their popular veneer, makes them a privileged form of government spending that once put in place are hard to dislodge.
Last week Citizens Against Government Waste released the 2010 edition of its highly publicized “Pig Book,” which highlights what the organization believes is questionable government spending. The organization’s website, however, does not show that the organization has ever done an equally comprehensive look at how the government “spends” its ability to bestow favored tax status on individuals and businesses. That’s typical of the one-sided look at the deficit problem that is perpetuated by conservatives and by much of the media. Instead of looking for what can taken away from the elderly and low-income people, any group discussing fiscal responsibility would have to also look at how we can identify and eliminate tax breaks that keep us from reducing the deficit and investing in our future.