Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined
GAO-05-690
Published: Sep 23, 2005. Publicly Released: Sep 23, 2005.
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Highlights
Numerous federal programs, policies, and activities are supported through the tax code. As described in statute, tax expenditures are reductions in tax liabilities that result from preferential provisions, such as tax exclusions, credits, and deductions. They result in revenue forgone. This report, done under the Comptroller General's authority, is part of an effort to assist Congress in reexamining and transforming the government to meet the many challenges and opportunities that we face in the 21st century. This report describes (1) how tax expenditures have changed over the past three decades in number, size, and in comparison to federal revenue, spending, and the economy, and (2) the amount of progress made since our 1994 recommendations to improve scrutiny of tax expenditures.
Whether gauged in numbers, revenues forgone, or compared to federal spending or the size of the economy, tax expenditures have represented a substantial federal commitment over the past three decades. Since 1974, the number of tax expenditures more than doubled and the sum of tax expenditure revenue loss estimates tripled in real terms to nearly $730 billion in 2004. The 14 largest tax expenditures, headed by the individual income tax exclusion for employer-provided health care, accounted for 75 percent of the aggregate revenue loss in fiscal year 2004. On an outlay-equivalent basis, the sum of tax expenditure estimates exceeded discretionary spending for most years in the last decade. For some budget functions, the sum of tax expenditure estimates was of the same magnitude as or larger than federal spending. As a share of the economy, the sum of tax expenditure outlay-equivalent estimates has been about 7.5 percent of gross domestic product since the last major tax reform legislation in 1986. All federal spending and tax policy tools, including tax expenditures, should be reexamined to ensure that they are achieving their intended purposes and designed in the most efficient and effective manner. The nation's current and projected fiscal imbalance serves to reinforce the importance of engaging in such a review and reassessment. Although data and methodological challenges exist, periodic reviews of tax expenditures could establish whether they are relevant to today's needs; if so, how well they have worked to achieve their objectives; and whether the benefits from specific tax expenditures are greater than their costs. Over the past decade, however, the Executive Branch made little progress in integrating tax expenditures into the budget presentation, in developing a structure for evaluating tax expenditure outcomes or in incorporating them under review processes that apply to spending programs, as we recommended in 1994. More recently, the Administration has not used its Program Assessment Rating Tool process to systematically review tax expenditures or promote joint reviews of tax and spending programs sharing common goals.
For more information, contact James McTigue at (202) 512-7968 or mctiguej@gao.gov .
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Office of Management and Budget | To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of the Office of Management and Budget (OMB), in consultation with the Secretary of the Treasury, should resume presenting tax expenditures in the budget together with related outlay programs to show a truer picture of the federal support within a mission area. |
As of March 2024, OMB does not plan to implement this recommendation. OMB did not present tax expenditures in the fiscal year 2025 budget with the related outlay programs, as GAO recommended in September 2005. OMB did not agree that GAO's recommendation was necessary and stated that presenting information on tax expenditures together with related outlay programs was not useful for budgeting, and that such a presentation is not part of the congressional budget process. However, the Congressional Budget Act of 1974 requires a list of tax expenditures, including special tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates (2 U.S.C. Sec. 602(e)(1), 622(3)). Whereas OMB favors reporting tax expenditures separately from the rest of the budget, GAO has reported that an integrated presentation is also useful to show the relative magnitude of tax expenditures compared to spending and credit programs across mission areas. OMB previously presented tax expenditure sums alongside outlays and credit activity for each budget function in the federal budget from fiscal year 1998 through fiscal year 2002. Tax expenditures resulted in an estimated $1.54 trillion in forgone revenue in fiscal year 2023 (the last revised estimates available) and have been roughly equivalent to federal discretionary spending levels in recent years. Until tax expenditures are integrated in the President's budget, the budget will not provide a comprehensive picture for policymakers or the public to compare all of the policy tools used within a mission area.
|
| Department of the Treasury | To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of OMB, in consultation with the Secretary of the Treasury, should develop clear and consistent guidance to Executive Branch agencies on how to incorporate tax expenditures in strategic plans, annual performance plans, and performance and accountability reports, to provide a broader perspective and more cohesive picture of the federal government's goals and strategies to address issues that cut across Executive Branch agencies. |
In October 2005, the Department of the Treasury responded that this recommendation did not relate to Treasury. OMB Circular A-11 (last update August 2013) specifies that Treasury Office of Tax Analysis has lead responsibility for tax policy and analysis of tax expenditures and that agencies are to work with this Treasury Office, to develop data and methods to evaluate the effects of tax expenditures that affect (or are directed at the same goals as)agency spending programs. The GPRA Modernization Act of 2010 (GPRAMA) establishes a new framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. GPRAMA requires OMB, in coordination with agencies, to identify tax expenditures among programs and activities that contribute to federal government-wide goals and to assess their contributions. In August 2012, OMB updated Circular A-11 with information on implementing GPRAMA in agency performance planning and reporting. The 2012 guidance instructed agencies to identify tax expenditures that contribute to agency priority goals, which represent a small subset of agencies' goals overall. However, in April 2013, GAO's review of the agency priority goals found that only one agency, for one of its priority goals, identified two relevant tax expenditures - the only agency priority goal out of all 102 to have tax expenditures identified as external contributors. In July 2013, OMB updated Circular A-11 and directed agencies to identify tax expenditures that contribute to each of their strategic objectives. In the guidance, OMB stated that it plans to work with the Department of the Treasury and agencies to facilitate alignment of tax expenditure information with agency priority goals and strategic objectives. This guidance, if properly implemented, should position OMB, Treasury, and the agencies to more broadly identify how tax expenditures contribute to each agency's overall performance.
|
| Department of the Treasury | To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of the Office of Management and Budget (OMB), in consultation with the Secretary of the Treasury, should resume presenting tax expenditures in the budget together with related outlay programs to show a truer picture of the federal support within a mission area. |
In October 2005, the Department of the Treasury responded that this recommendation did not relate to Treasury. In June 2010, Treasury reiterated that OMB controls budget presentation. In the President's Fiscal Year 2015 Budget, tax expenditures were separately reported rather than integrated alongside related spending.
|
| Office of Management and Budget | To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of OMB, in consultation with the Secretary of the Treasury, should require that tax expenditures be included in the PART process and any future such budget and performance review processes so that tax expenditures are considered along with related outlay programs in determining the adequacy of federal efforts to achieve national objectives. |
OMB made some progress in including tax expenditures along with related outlay programs in the executive branch's budget and performance review processes, as GAO recommended in September 2005. However, as of March 2024, OMB had not developed a systematic approach for conducting such reviews. The GPRA Modernization Act of 2010 (GPRAMA) requires OMB and the agencies to identify the relevant tax expenditures that contribute to each crosscutting priority goal (31 U.S.C. Sec. 1115(a)(2)). Beginning with its August 2012 update to Circular No. A-11 with guidance for implementing GPRAMA and continuing in subsequent annual updates, OMB has directed agencies to identify tax expenditures that contribute to each of their agency priority goals. Beginning with the July 2013 update, OMB expanded its guidance to include identifying these contributions to agency strategic objectives. In both July 2013 and July 2014 OMB guidance, OMB stated that it planned to work with the Department of the Treasury and agencies to facilitate alignment of tax expenditure information with agency priority goals and strategic objectives. However, in its June 2015 update of this guidance, OMB removed the language about working with Treasury and agencies to align tax expenditures with agency goals. OMB's August 2023 guidance still directs agencies to identify tax expenditures that contribute to their agency priority goals and strategic objectives. Coordinated reviews of tax expenditures with related federal spending programs that are consistent with GPRAMA requirements could help policymakers reduce overlap and inconsistencies, and direct scarce resources to the most effective or least costly methods of delivering federal support. Ensuring the inclusion of tax expenditures in the GPRAMA crosscutting goals along with other related programs would be an important step toward providing policymakers with the breadth of information needed to understand the full federal effort to accomplish national objectives.
|
| Department of the Treasury |
Priority Rec.
To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of OMB, in consultation with the Secretary of the Treasury, should develop and implement a framework for conducting performance reviews of tax expenditures. In developing the framework, the Director should (1) determine which agencies will have leadership responsibilities to review tax expenditures, how reviews will be coordinated among agencies with related responsibilities, and how to address the lack of credible performance information on tax expenditures; (2) set a schedule for conducting tax expenditure evaluations; (3) re-establish appropriate methods to test the overall evaluation framework and make improvements as experience is gained; and (4) to identify any additional resources that may be needed for tax expenditure reviews. |
Treasury did not submit comments on this report and deferred to OMB. OMB agreed that this recommendation had promise and also said that tax expenditure evaluations were the responsibility of Treasury, which had access to the necessary data. As of March 2024, the Director of OMB had not taken action to develop a framework for reviewing tax expenditure performance, as GAO recommended in June 1994 and again in September 2005. Since their initial efforts in 1997 and 1999 to outline a framework for evaluating tax expenditures and preliminary performance measures, OMB and the Department of the Treasury have ceased to make progress and retreated from setting a schedule for evaluating tax expenditures. The President's fiscal year 2012 budget stated that developing an evaluation framework is a significant challenge due to limited data availability and analytical constraints of isolating the effect of any single program. The administration planned to focus on addressing some of these challenges so it could work toward crosscutting analyses that examine tax expenditures alongside related spending programs. However, OMB and Treasury had not reported on progress on this recommendation since the President's fiscal year 2012 budget. As of March 2024, OMB said it does not plan to address this recommendation. Assessing the performance of tax expenditures is critically important given that many tax expenditures that function as entitlement programs do not compete openly in the annual budget process. Although revenue losses from tax expenditures exceed $1 trillion each year, many tax expenditures are not subject to congressional reauthorization, and therefore Congress does not have the opportunity to regularly review their effectiveness. Periodic reviews could help identify redundancies in related tax and spending programs and could help determine how well specific tax expenditures work to achieve their goals, as well as how their benefits and costs compare to those of programs with similar goals.
|
| Office of Management and Budget | To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of OMB, in consultation with the Secretary of the Treasury, should develop clear and consistent guidance to Executive Branch agencies on how to incorporate tax expenditures in strategic plans, annual performance plans, and performance and accountability reports, to provide a broader perspective and more cohesive picture of the federal government's goals and strategies to address issues that cut across Executive Branch agencies. |
OMB has taken action to address how agencies should incorporate tax expenditures in strategic plans and annual performance plans and reports, as GAO recommended in September 2005. The GPRA Modernization Act of 2010 (GPRAMA) established a framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. GPRAMA requires OMB, in coordination with agencies, to identify tax expenditures among programs and activities that contribute to federal government-wide goals and to assess their contributions. In August 2012, OMB updated Circular A-11 with information on implementing GPRAMA in agency performance planning and reporting. The 2012 guidance instructed agencies to identify tax expenditures that contribute to agency priority goals, which represent a small subset of agencies' goals overall. However, in April 2013, GAO's review of the agency priority goals found that only one agency, for one of its priority goals, identified two relevant tax expenditures, the only agency priority goal out of all 102 to have tax expenditures identified as external contributors. In July 2013, OMB updated Circular A-11 and directed agencies to identify tax expenditures that contribute to each of their strategic objectives. In the guidance, OMB stated that it plans to work with the Department of the Treasury and agencies to facilitate alignment of tax expenditure information with agency priority goals and strategic objectives. This guidance, if properly implemented, should position OMB and the agencies to more broadly identify how tax expenditures contribute to each agency's overall performance.
|
| Office of Management and Budget |
Priority Rec.
To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of OMB, in consultation with the Secretary of the Treasury, should develop and implement a framework for conducting performance reviews of tax expenditures. In developing the framework, the Director should (1) determine which agencies will have leadership responsibilities to review tax expenditures, how reviews will be coordinated among agencies with related responsibilities, and how to address the lack of credible performance information on tax expenditures; (2) set a schedule for conducting tax expenditure evaluations; (3) re-establish appropriate methods to test the overall evaluation framework and make improvements as experience is gained; and (4) to identify any additional resources that may be needed for tax expenditure reviews. |
As of March 2024, the Director of OMB had not taken action to develop a framework for reviewing tax expenditure performance, as GAO recommended in June 1994 and again in September 2005. Since their initial efforts in 1997 and 1999 to outline a framework for evaluating tax expenditures and preliminary performance measures, OMB and the Department of the Treasury have ceased to make progress and retreated from setting a schedule for evaluating tax expenditures. The President's fiscal year 2012 budget stated that developing an evaluation framework is a significant challenge due to limited data availability and analytical constraints of isolating the effect of any single program. The administration planned to focus on addressing some of these challenges so it could work toward crosscutting analyses that examine tax expenditures alongside related spending programs. However, OMB and Treasury had not reported on progress on this recommendation since the President's fiscal year 2012 budget. As of March 2024, OMB said it does not plan to address this recommendation. Assessing the performance of tax expenditures is critically important given that many tax expenditures that function as entitlement programs do not compete openly in the annual budget process. Although revenue losses from tax expenditures exceed $1 trillion each year, many tax expenditures are not subject to congressional reauthorization, and therefore Congress does not have the opportunity to regularly review their effectiveness. Periodic reviews could help identify redundancies in related tax and spending programs and could help determine how well specific tax expenditures work to achieve their goals, as well as how their benefits and costs compare to those of programs with similar goals.
|
| Department of the Treasury | To ensure that policymakers and the public have the necessary information to make informed decisions and to improve the progress toward exercising greater scrutiny of tax expenditures, the Director of OMB, in consultation with the Secretary of the Treasury, should require that tax expenditures be included in the PART process and any future such budget and performance review processes so that tax expenditures are considered along with related outlay programs in determining the adequacy of federal efforts to achieve national objectives. |
In October 2005, the Department of the Treasury responded that this recommendation did not relate to Treasury. OMB made some progress in including tax expenditures along with related outlay programs in the executive branch's budget and performance review processes, as GAO recommended in September 2005. However, as of March 2024, OMB had not developed a systematic approach for conducting such reviews. The GPRA Modernization Act of 2010 (GPRAMA) requires OMB and the agencies to identify the relevant tax expenditures that contribute to each crosscutting priority goal (31 U.S.C. Sec. 1115(a)(2)). Beginning with its August 2012 update to Circular No. A-11 with guidance for implementing GPRAMA and continuing in subsequent annual updates, OMB has directed agencies to identify tax expenditures that contribute to each of their agency priority goals. Beginning with the July 2013 update, OMB expanded its guidance to include identifying these contributions to agency strategic objectives. In both July 2013 and July 2014 OMB guidance, OMB stated that it planned to work with the Department of the Treasury and agencies to facilitate alignment of tax expenditure information with agency priority goals and strategic objectives. However, in its June 2015 update of this guidance, OMB removed the language about working with Treasury and agencies to align tax expenditures with agency goals. OMB's August 2023 guidance still directs agencies to identify tax expenditures that contribute to their agency priority goals and strategic objectives.
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AccountabilityComparative analysisLossesPerformance appraisalProductivity in governmentTax administrationTax expendituresTransparencyTaxpayersRevenue loss