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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
  • Some Background
  • Tax Expenditures
  • What are the largest 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 tax 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?
        • How did the TCJA affect the federal budget outlook?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
      • 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?
        • How might the Tax Cuts and Jobs Act affect economic output?
      • Economic Stimulus
        • What is the role of monetary policy in business cycles?
        • 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?
      • 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?
        • How might the taxation of capital gains be improved?
        • What is carried interest, and should it be taxed as capital gain?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
      • 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?
        • What 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 is the Cadillac tax?
        • 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?
      • 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?
        • How should wealth be taxed?
        • 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?
      • Taxes, Energy, and the Environment
        • 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 it 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 a 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 has been the state and local experience with retail sales taxes?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on 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 be taxed under a VAT?
        • What would the 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 a 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: Update for 2015
      • Return-Free Tax Filing
        • What is it return-free tax filing and how would it work?
        • What are the benefits of return-free tax filing?
        • What are the drawbacks of return-free tax filing?
        • How would the tax system need to change with return-free tax filing?
        • Who would qualify for return-free tax filing?
        • Would return-free tax filing raise taxes?
        • What was the experience in California with return-free tax filing?
        • What other countries use return-free tax 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?
    • Glossary
      • Glossary
        • Glossary

What are the largest tax expenditures?

Tax Expenditures

<4/5>
Individual Taxes
Q.

What are the largest tax expenditures?

A.

Tax expenditures make up a substantial part of the federal budget. Some of them are larger than the entire budgets of the programs or departments that spend money for the same or related purposes. For example, the value of the tax breaks for homeownership, although reduced by the latest tax bill, still exceeds total spending by the US Department of Housing and Urban Development.

Table 1 ranks the top 13 US tax expenditures, based on the 2018 estimates by the Joint Committee on Taxation (JCT). The Office of Management and Budget also publishes lists of tax expenditures based on estimates by the US Department of the Treasury, but the 2018 estimates were prepared before passage of The Tax Cuts and Jobs Act (TCJA) late in 2017.

The largest tax expenditure (an estimated $172.8 billion in fiscal year 2019) is the exclusion of employers’ contributions for employees’ medical insurance premiums and medical care. Under this provision of the tax code, contributions are excluded from an employee’s gross income, while an employer may deduct the cost as a business expense.

The next-largest tax expenditure on the JCT list is the preferential rate structure for capital gains and dividends ($127.0 billion in 2019), which are taxed at rates ranging from 0 to 20 percent, as compared with individual income tax rates that range from 10 to 37 percent. Capital gains also benefit from the step up in basis at death ($34.0 billion in 2019), which permanently exempts all unrealized capital gains accrued during an individual’s lifetime on assets that are passed on at death.

The third-largest tax expenditure is the credit for children and other dependents ($121.7 billion in 2019, up from $54.1 billion in 2017). TCJA doubled the child credit to $2,000 per qualifying child, increased the maximum refundable credit amount to $1,400, raised the income at which the credit begins to phase out to $400,000 for joint returns ($200,000 for single), and introduced a new $500 credit for nonchild dependents. At the same time, TCJA eliminated personal exemptions for taxpayers and dependents. JCT and Treasury, perhaps inconsistently, did not count the dependent exemption as a tax expenditure, so the tax expenditure budget accounts imply a greater increase in child benefits from the switchover than taxpayers realized on net.

The fourth- and fifth-largest tax expenditures are the benefits for tax-qualified retirement saving accounts. The tax on contributions, as well as the income earned within the accounts, is deferred until withdrawal begins at retirement. At that point, in addition to the benefits of the deferral, many taxpayers are in a lower bracket. Alternatively, some Roth retirement saving gets no deferral of tax on deposit, but complete exemption from tax of all investment returns on the saving. The revenue losses from retirement saving accounts in 2019, measured on a cash flow basis, are estimated to total $121.5 billion for employer-sponsored “defined-contribution” plans such 401(k) plans and $90.7 billion for traditional defined-benefit plans. There are additional losses from deductible individual retirement accounts ($17.7 billion), back-loaded (Roth) accounts ($7.7 billion), and plans for the self-employed ($14.7 billion).

The sixth-largest tax expenditure, the earned income credit ($72.6 billion in 2019), mainly benefits low-income families with children. The credit increases with family size and is phased out as income rises above a threshold amount. Most of the credit’s budgetary cost comes from the portion that exceeds income tax liability and is therefore counted as outlays, rather than as a tax expenditure, in the Office of Management and Budget estimates.

In general, tax expenditures for individuals are larger than tax expenditures for businesses. Only two business tax expenditures made it into the list of the top 13: the reduced tax rate on active income of controlled foreign corporations ($68.0 billion in 2019) and accelerated depreciation of equipment in excess of the alternative depreciation system ($63.0 billion in 2019).

The seventh largest, the reduced tax rate on foreign income, replaces pre-TCJA rules that allowed companies to defer tax on most income accrued within controlled foreign corporations. The eighth largest, the tax subsidy for investment in equipment, was increased by a TCJA provision that allows firms to deduct purchases of qualifying equipment immediately (bonus depreciation) through 2022. Beginning in 2023, however, bonus depreciation is scheduled to phase out at a rate of 20 percent per year, reaching zero in 2027.

The ninth-largest tax expenditure is the subsidy for health insurance purchased through health benefit exchanges under the Affordable Care Act ($51.3 billion). A TCJA provision reduces this subsidy by eliminating a penalty tax on individuals who lack insurance coverage, effectively reducing the number of people who purchase subsidized insurance coverage. The JCT projects that the cost of the tax subsidy will decline to $44.3 billion by 2021.

The tenth-largest subsidy is the 20 percent deduction for qualified business income ($50.2 billion in 2019). This deduction, made newly available by the TCJA for tax years beginning in 2018, is available to individuals with income from self-employment and ownership of shares in pass-through businesses (partnerships and subchapter S corporations) but is partially limited for high-income individuals according to complex criteria based on the types of activities from which they earn income, the wages they pay to their employees, and the amount of capital they own.

The eleventh-largest tax expenditure is the exclusion of untaxed Social Security and railroad benefits ($37.0 billion). These benefits are partially or fully excluded from adjusted gross income for taxpayers whose incomes fall below threshold amounts.

The twelfth-largest tax expenditure is the exclusion of the first $250,000 of gains ($500,000 for joint filers) on sales of a principal residence ($36.3 billion). Homeowners also benefit from the home mortgage interest deduction ($33.9 billion in 2019). TCJA substantially reduced the benefit of the mortgage interest deduction by raising the standard deduction and setting a $10,000 limit on state and local income and property tax deductions, so that many fewer taxpayers claim the remaining itemized deductions and many of those who do claim them receive much smaller benefits than before.

The thirteenth-largest tax expenditure is the exclusion of benefits under cafeteria plans ($35.0 billion in 2019). These are plans in which employers allow employees to set aside funds to purchase certain goods and services from pretax dollars. The biggest uses of cafeteria plans are for out-of-pocket health expenses (including the employee share of health insurance premiums) and dependent care expenses.

Two itemized deductions from earlier years have dropped off the top 10 list. The cost of the deduction of state and local income, sales, and property taxes will decline from $100.9 billion in 2017 to only $21.2 billion in 2019 because of the increase in the standard deduction and because the tax deduction is now limited to no more than $10,000 per tax return.

The cost of the charitable deduction will also decline, but the charitable deduction, although substantially reduced after TCJA, would have just made the top 13 list if JCT considered it a single tax expenditure item. Instead, JCT reports separate estimates for the charitable deduction for education ($7.3 billion), the charitable deduction for health ($3.3 billion), and the charitable deduction except for education and health (31.3 billion).

Data Sources

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, Daniel Berger, and Yifan Powers. 2016. “Distributional Effects of Individual Income Tax Expenditures: An Update.” Washington, DC: Urban-Brookings Tax Policy Center.

US Department of the Treasury. 2017.

US Senate Budget Committee. 2008. Tax Expenditures: Compendium of Background Material on Individual Provisions. Washington, DC: US Government Printing Office.

Individual Taxes
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