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Tax Expenditures: What is the tax expenditure budget?

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The tax expenditure budget comprises the estimated revenue losses attributable to various exclusions, exemptions, deductions, nonrefundable credits, deferrals, and preferential rates in the tax code. These provisions reduce the income tax liabilities of individuals or businesses that undertake certain types of activities. For instance, people who donate to charities often deduct their donations on their tax returns and thus reduce their income tax. The tax expenditure budget estimates the aggregate cost of this and other provisions. The Congressional Budget Act of 1974 requires that the budget include estimates for tax expenditures, but only for those provisions that affect the federal income taxes of individuals and corporations. The government could, but does not, formulate tax expenditure budgets for Social Security and other taxes.

  • Both the Office of Tax Analysis in the Treasury Department and the congressional Joint Committee on Taxation (JCT) estimate tax expenditures; the items that each includes and the estimated values are generally similar but do not always match. The Office of Management and Budget (OMB) publishes the Treasury’s estimates in its Analytical Perspectives volume that accompanies each year’s publication of the Budget of the U.S. Government. Each year JCT issues estimates covering the current and four subsequent fiscal years.
  • OMB’s tax expenditure budget for fiscal 2008 totaled $878 billion, but the estimates for individual provisions are not strictly additive. Various provisions interact in ways that can make their combined tax expenditure differ from the sum of their individual revenue costs.
  • Tax expenditures operate essentially like direct expenditures, even though they appear as tax breaks. They benefit hundreds of different types of activities and individuals and currently account for one-fourth to one-third of all benefits and subsidies granted to the public.
  • Like mandatory programs (or entitlements) on the spending side of the budget, most tax expenditures do not go through a direct appropriations process each year. They continue and often expand with no congressional vote; for example, the value of charitable deductions rises with an expanding economy.
 
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