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Trends in Tax Expenditures, 1985-2016

Allison Rogers , Eric Toder

Published: September 16, 2011
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Abstract

The landmark Tax Reform Act of 1986 greatly changed the cost of tax expenditures. The revenue lost to tax expenditures declined sharply after enactment of the 1986 Act, falling from nearly 9 percent of total GDP in fiscal year 1985 to 6 percent in 1988. Since then, tax expenditures have gradually increased as a share of GDP but have remained below the 1985 level. Furthermore, the composition of tax expenditures has changed significantly.

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The landmark Tax Reform Act of 1986 greatly changed the cost of tax expenditures. The revenue lost to tax expenditures declined sharply after enactment of the 1986 Act, falling from nearly 9 percent of total GDP in fiscal year 1985 to 6 percent in 1988. Since then, tax expenditures have gradually increased as a share of GDP but have remained below the 1985 level. Furthermore, the composition of tax expenditures has changed significantly.

Methodology


We use as our data source the annual list of tax expenditures compiled by the Office of Tax Analysis of the U.S. Department of the Treasury and reported annually in the Budget of the United States Government.1 We omitted 1986 and 1987, which were years of transition between the pre- and post-tax reform systems, but include all other years from 1985 through 2016. Each budget estimates tax expenditures for the projected five-year budget period and the two previous years. For example, the 2012 budget reports tax expenditures for fiscal years 2010 through 2016. In all cases, we used the latest estimate for a given fiscal year. Thus, the 1988 estimates come from the fiscal budget, the 1989 estimates from the fiscal year 1991 budget, and the 2010-2016 estimates from the fiscal year 2012 budget.

To produce a more consistent time series, we adjusted some Treasury estimates to correct for anomalies and inconsistencies. Treasury included particular tax expenditure items in the budgets in some years but not in others, even though the provisions remained in effect in both sets of years. Other provisions were estimated using changing methodologies or were based on data that have been updated irregularly. Still other cases had sharp drops or spikes in estimates that could not be explained by changes in the tax law, timing effects, or economic events.

End of excerpt. The entire report with graphs and footnotes is available in PDF format. View corresponding data in Excel.