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The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Some Background

  • Briefing Book
  • Tax Expenditures
  • How did the TCJA affect tax expenditures?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

How did the TCJA affect tax expenditures?

Tax Expenditures

<5/5
Individual Taxes
Q.

How did the TCJA affect tax expenditures?

A.

The TCJA reduced some tax expenditure provisions, eliminated others, and introduced and expanded still others. In addition to these direct changes in tax expenditure provisions, an increase in the standard deduction and lower individual and corporate tax rates reduced the number of taxpayers using tax expenditure provisions and the value of the tax benefits they receive.

While the Tax Cuts and Jobs Act (TCJA) reduced overall federal receipts by about $1.5 trillion over 10 years, it did modestly reduce the net revenue cost of tax expenditures. Comparing the first post-TCJA Joint Committee on Taxation (JCT) tax expenditure estimates to its last pre-TCJA estimates, the sum of the revenue losses for all tax expenditures for fiscal years 2018–20 (the years for which both JCT studies provide estimates) declined from $5.0 trillion to $4.5 trillion. (The total revenue losses from tax expenditures do not exactly equal the sum of losses from each provision because of interactions among the provisions, but studies by the Urban-Brookings Tax Policy Center have shown that the simple sum of revenue losses from separate provisions is a reasonably good approximation of the revenue loss of tax expenditures including these interactions.)

The TCJA eliminated and reduced some tax expenditures while introducing some new ones and increasing some existing ones. In addition, interactions between tax expenditures and changes in the law affected the number of taxpayers who benefit from tax expenditure provisions and the value of benefits they receive. The most important of these indirect effects comes from lower individual and corporate income tax rates, which reduce the value of many tax expenditures, and the increase in the standard deduction which reduces tax benefits from itemized deductions.

The tax expenditures that the TCJA reduced the most in fiscal years 2018–20 were the deduction of nonbusiness state and local income and property taxes, replacement of deferral by a reduced tax rate on the active income of controlled foreign corporations, deductions for mortgage interest on owner-occupied residences, subsidies for insurance purchased through health benefit exchanges, expensing of business depreciable property for small businesses under section 179, and the deduction for income attributable to domestic production activities (table 1).

The existing tax expenditures that the TCJA increased the most were the credit for children and other dependents and depreciation of equipment in excess of the alternative depreciation system. The largest new tax expenditure enacted in the TCJA was a 20 percent deduction for qualified business income (table 1).

 

Direct changes in tax expenditures

Most of the tax expenditures that the TCJA eliminated were small. The principal exception was the deduction attributable to domestic production activities ($58 billion in 2018–20), which was 9 percent of taxable business income. (For large corporations, the deduction was equivalent to a cut in the tax rate on profits from domestic production from 35 to 31.9 percent.) With the lower corporate tax rate from the TCJA, Congress believed this deduction was no longer needed to reduce the tax burden on domestic manufacturing.

The TCJA raised much more revenue from reducing several large tax expenditures instead of eliminating them. It reduced the value of the nonbusiness state and local income, sales, and property tax deductions in fiscal years 2018–20 to less than one-quarter its former cost. This resulted from a combination of changes: a $10,000 cap on the amount of taxes taxpayers could claim as a deduction; an increase in the standard deduction and reductions in other itemized deductions, which reduced the number of taxpayers claiming the deduction; and modestly lower individual income tax rates, which reduced the tax saving for taxpayers who claim it.

International provisions in the TCJA also reduced tax expenditures. The replacement of deferral of the profits of controlled foreign corporations until repatriation with a reduced tax rate on intangible profits accrued in low-tax countries reduced estimated tax expenditures in 2018–20 by $147 billion. JCT previously scored deferral as costing $365 billion over the three-year period, while the estimated revenue loss from the reduced tax rate on accrued profits (10.5 percent instead of 21 percent) was $218 billion. More than 100 percent of the reduction is this tax expenditures was, however, attributable to reduction in the corporate rate from 35 to 21 percent instead of the reform of international provisions.

The largest expansions were for the child credit and depreciation of equipment by businesses. The child tax credit was doubled from $1,000 to $2,000 per child. TCJA introduced a new $500 credit for dependents and other children receiving the regular child tax credit, it increased the income levels at which the credit phases out, and it increased the amount of the credit that could be refunded. These changes raised the estimated 2018–20 revenue loss from the child credit by $187 billion.

The largest new tax expenditure, the 20 percent deduction for qualified business income received by owners of pass-through businesses (sole proprietorships, partnerships, limited liability companies, and subchapter S corporations), effectively reduces the top rate on qualified business income from 37 percent to 29.8 percent.

On the business side, the largest change was the enactment of 100 percent bonus depreciation for five years beginning in 2018 (and then phasing out at 20 percent per year beginning in 2023). Bonus depreciation raised the cost of depreciation of equipment in excess of the alternative depreciation system (JCT’s view of depreciation rules under the baseline income tax) by $176 billion between 2018 and 2020.

Indirect effects on the costs of tax expenditures

Lower marginal tax rates reduce the cost of tax expenditures that take the form of exclusions and deductions, because reducing taxable income provides smaller tax benefits at lower rates. TCJA modestly reduced the value of many individual tax expenditures by reducing the individual rate schedule from rates ranging from 10 to 39.6 percent to rates ranging from 10 to 37 percent.

The decline in the top corporate tax rate from 35 to 21 percent was much larger than the cut in the marginal individual rates. Most corporate tax expenditures are small, however, so the corporate rate cut per se did not change their total cost very much. Changes in what were the two of the three largest corporate tax expenditures before the TCJA (depreciation in excess of the alternative depreciation system and the domestic manufacturing deduction) were largely or wholly the result of other changes in the legislation (expensing of investment in equipment, and elimination of the domestic manufacturing deduction), while more than 100 percent of the reduction in tax expenditures for foreign-source income was a result of the lower corporate tax rate.

Other provisions of the legislation also had significant indirect effects on selected tax expenditures. The increase in the standard deduction significantly reduced the value of itemized deductions, which benefit taxpayers only to the extent that their sum exceeds the standard deduction. And the cap on the state and local deduction reduced the value of other itemized deductions, by also reducing the amount by which itemized deductions exceed the standard deduction.

For example, the cost of the mortgage interest deduction declined from $234 billion to $112 billion. Only a small portion of this decline came from the direct provisions affecting mortgage interest—the reduced ceiling on the size of new mortgages eligible for the deduction from $1 million to $750,000 and elimination of the deduction for up to $100,000 of home equity loans. Most of the estimated saving was instead an indirect effect of the increase in the standard deduction, the $10,000 cap on state and local tax deductions, and lower marginal tax rates. The same indirect effects reduced the estimated cost of charitable deductions (other than for education and health) from $142 billion to $110 billion.

Indirect effects also reduced other tax expenditures. The Congressional Budget Office estimated that the elimination of the penalty tax on individuals without health insurance coverage would reduce the take-up rate for health insurance plans under the Affordable Care Act exchanges. The resulting reduction in coverage would then reduce tax subsidies paid out by the exchanges by about $80 billion between 2018 and 2020. On the business side, the estimated tax expenditure for small business expensing under section 179 declined from about $100 billion to about $40 billion between 2018 and 2020, even though the amount of deductions taken was made more generous. The estimated tax expenditure declined because, with bonus depreciation in place, the additional benefit of allowing expensing under section 179 is much less than it would have been without bonus depreciation.

Updated May 2020
Data Sources

Joint Committee on Taxation. 2017. “Estimates of Federal Tax Expenditures for Fiscal Years 2016–2020.” JCX-3-17. Washington, DC: Joint Committee on Taxation.

———. 2018. “Estimates of Federal Tax Expenditures for Fiscal Years 2017–2021.” JCX-34-18. Washington, DC: Joint Committee on Taxation.

Further Reading

Marron, Donald, and Eric Toder. 2013. “Tax Policy and the Size of Government.” Washington, DC: Urban-Brookings Tax Policy Center.

Rogers, Allison, and Eric Toder. 2011. “Trends in Tax Expenditures: 1985–2016.” Washington, DC: Urban-Brookings Tax Policy Center.

Toder, Eric and Daniel Berger. 2019. “Distributional Effects of Individual Income Tax Expenditures After the 2017 Tax Cuts and Jobs Act.” Washington, DC: Urban-Brookings Tax Policy Center.

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