How Tax Breaks Boost the Deficit

Policy Memo
Monday, March 27, 2017

The Congressional Budget Office (CBO) has released an overview of certain tax breaks -- known as “tax expenditures” -- that can provide elected officials and the public with helpful information as President Trump and many lawmakers shift their focus to revamping the tax code.

“Tax expenditures, projected to total more than $1.5 trillion in 2017, cause (federal) revenues to be lower than they would be otherwise and, like spending programs, contribute to the deficit,” the CBO said in a recent blog post.

The Concord Coalition has long urged elected officials to reduce or eliminate many tax expenditures to help reduce the deficit while making the tax code simpler and more growth-oriented. Tax expenditures, however, receive far less public attention and congressional scrutiny than direct government spending.

“Current tax law includes an array of exclusions, deductions, preferential rates, and credits that reduce revenues for any given level of tax rates in the individual, payroll, and corporate income tax systems,” says the blog post by CBO analyst Joshua Shakin. “Some of these provisions are called tax expenditures because, like many government spending programs, they provide financial assistance for particular activities or to certain entities or groups of people.”

The CBO notes that tax expenditures are more similar to “mandatory” spending programs like Social Security and Medicare than they are to spending that Congress appropriates on an annual basis. As with mandatory spending programs, CBO says, “any person or entity that meets the legal requirements can receive the benefits” from these provisions in the tax code.

Some of the largest tax expenditures this year involve workers’ health benefits from their employers, pension funds, dividends and capital gains, and state and local taxes. Also of great interest to many taxpayers are the deductions for home mortgage interest and charitable contributions.

In 2013, the budget office estimated that “more than half of the combined benefits of 10 major tax expenditures would accrue to households” in the highest fifth of the population.

Based on estimates by the Joint Tax Committee in Congress, CBO expects tax expenditures to equal more than 8 percent of GDP this year, which is equal to nearly half of all federal revenues for the year.

While tax expenditures are generally seen by their advocates as advancing societal goals, CBO points out that these provisions in the tax code can also have “a broad range of effects that do not always further societal goals.” For example, they may lead to “an inefficient allocation of economic resources” by encouraging greater consumption of certain goods and services.

Because such tax expenditures can reduce some tax bills so significantly, elected officials may not find revamping the tax code to be as quick and easy as some have suggested.

The last major revamping of the tax code took place in the Reagan administration, when many tax breaks were eliminated. Over the past three decades, however, Congress put more and more new tax expenditures in place.

In recent years, some lawmakers in both parties have expressed an interest in once again weeding out the tax code. There is potential for bipartisan cooperation, which would increase the chances of meaningful reform.

The Concord Coalition believes that such an effort could play a significant role in lowering future deficits, making the tax code more efficient and putting the federal budget on a more sustainable track.