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Tax Expenditures: Spending through the Tax Code

Posted on December 10, 2014
As we near the end of the year, you may be trying to make charitable donations so you can take a tax deduction. The charitable donation deduction is one of many special tax provisions that can reduce the amount of taxes a person or company must pay. These provisions are called “tax expenditures” because they amount to government spending through the tax code. We have examined tax expenditures very closely to determine whether policymakers and the public know how effective tax expenditures are in achieving their intended goals. Spending to Achieve Policy Goals Altogether, the federal government forgoes more than $1 trillion each year in income tax revenue due to tax expenditures. You may be familiar with some of the more common tax expenditures, such as the mortgage interest deduction for homeowners or the exclusion that allows employees to avoid paying taxes on the value of employer-paid health insurance policies. Just like spending programs, tax expenditures are aimed at particular policy goals, such as helping pay for college, constructing low-income rental housing, and encouraging energy-efficient home improvements. The video below describes an example of a tax expenditure that encourages energy-efficient home improvements: https://www.youtube.com/watch?feature=player_embedded&v=ZwAn2swtXOk Less Scrutiny of Tax Expenditure Performance Policymakers and the public don’t always know whether they are getting their money’s worth from the more than $1 trillion spent on tax expenditures. Tax expenditure performance is often less visible than that of spending programs, which are part of the annual budget process and subject to more systematic reviews. With less scrutiny, it may be more difficult to determine if tax expenditures are the most efficient way to accomplish a policy goal, or whether they are duplicating other federal programs. To help, we issued a guide on how to assess tax expenditures. The infographic below shows the 5 main questions for assessing a tax expenditure’s effectiveness.

How to Evaluate Tax Expenditures

GAO-13-167SP_Tax_expenditures

(Excerpted from GAO-13-167SP)

To learn more about our work on tax expenditures—including links to recent reports—you can visit our Key Issue page.
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