Tax Entitlements

Spending on the revenue side

The nation’s long-term fiscal imbalance provides an . . . impetus for reexamining all major spending and tax provisions. This includes tax incentives and subsidies intended to promote various social and economic objectives.—Government Accountability Office, 2005

Tax entitlements are reductions in tax liabilities that result from

  • excluding or exempting items from gross income (“tax exclusions”),
  • deducting items from either gross income or adjusted gross income (“tax deductions”),
  • granting preferential tax rates for certain items of income (“tax preferences”),
  • applying credits to directly reduce taxes owed (“tax credits”), or
  • deferring tax liability on certain types of income (“tax deferrals”).

In the context of budgeting, these are more commonly referred to as “tax expenditures” because the government foregoes revenues it would have otherwise collected.1 (Colloquially, they are often referred to as “tax preferences” and “tax breaks”—or as “tax loopholes” by those who disagree with particular provisions.)

In effect, tax expenditures are “spending on the revenue side” of the budget because policymakers have written into the Tax Code provisions that reduce Federal taxes in order to achieve specific policy outcomes such as encouraging home ownership, financing postsecondary education, assisting a particular industry, or stimulating research and development.

Tax expenditures may also be viewed as the revenue equivalent of spending entitlements. For example, just as Americans 65 and older are legally entitled to Medicare hospital insurance benefits (on the spending side of the Federal Budget), employees who receive health insurance from their employers are entitled to exclude the employer-paid premiums from their gross income. In both examples, eligible individuals are legally entitled to specific benefits—one on the spending side of the Budget, the other on the revenue (tax) side.

Annual tax expenditures are growing both in number and in dollar amount. From 1974 to 2004, the number of tax expenditures reported by the Treasury Department more than doubled, from 67 to 146;2 some were repealed during that time, but many more were added. As reflected in figure 5.1, the aggregate dollar amount of tax expenditures is approaching a trillion dollars per year—nearly as much as total discretionary spending.

As with spending programs, one cannot generalize about tax expenditures. Tax expenditures are as varied in purpose and operation as programs on the spending side of the budget. Nevertheless, because of the enormous aggregate impact of tax expenditures on Federal revenues, it is important to understand their global impact on the Federal Budget and U.S. economy.

The GAO recently conducted a comprehensive review of tax expenditures and recommended that the “Office of Management and Budget (OMB), consulting with the U.S. Department of the Treasury, take several steps to ensure greater transparency of and accountability for tax expenditures by reporting better information on tax expenditure performance and more fully incorporating tax expenditures into federal performance management and budget review processes.”

This is sound advice for two reasons: (1) oversight of Federal programs can only be fully effective if policymakers examine spending programs and related tax expenditures, and (2) the unsustainable explosion of Federal debt projected as far as the eye can see requires that policymakers carefully and regularly review the efficacy of all Federal tax expenditures. Unfortunately, OMB rejected the GAO recommendations and has thus far not applied either the GPRA or PART performance review processes to the nearly $1 trillion of annual tax expenditures.

This article was adapted from the book: America's Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year, by Charles S. Konigsberg, Editor, The Concord Coalition's Washington Budget Report.