The voices of Tax Policy Center's researchers and staff
Would you be surprised to learn that in addition to the $1.3 trillion the federal government will spend on Medicare, Medicaid , and related health programs this fiscal year, it also will spend another $381 billion on health care through special provisions in the tax code?
The federal tax code is rife with special exclusions, deductions, credits, and other provisions that benefit certain activities or groups of people. They are called tax expenditures because many serve the same function as direct spending but are delivered through the tax system. In the aggregate, they will amount to over $1.4 trillion in fiscal year 2020. States have their own tax expenditures, including many they adopt through conformity with federal income tax law.
To help you learn more about tax expenditures, the Tax Policy Center has released a new feature page. This online resource includes animated videos explaining the basic concept of tax expenditures and links to background briefs, blogs, and reports that go into more detail.
Tax expenditures typically are overlooked in discussions about how to limit the size of government because they are administered through the tax code. Though recorded in the budget as revenue reductions (thereby making government appear smaller), tax expenditures often have the same effects on income distribution and the allocation of resources as equivalent spending programs. The most illuminating measure of government size would treat many of these preferences as spending rather than revenue reductions.
Government uses tax expenditures to provide a substantial share of its assistance to many activities. They include promoting health insurance coverage; home ownership; general support for states, localities, and private charitable organizations; use of renewable energy; research and innovation; higher education; retirement savings; and support for low-income working families and families with children.
However, many tax expenditures could be more cost-effective if they were modified or redesigned. Some subsidies and supports might be more effectively administered as direct spending programs instead of as special tax provisions. Some tax expenditures provide unwarranted benefits to selected industries and individuals without promoting any clear public policy objective and should be scrapped or redesigned. The revenue saved by making these changes could lower taxes, reduce the budget deficit, or help meet important societal needs.
Tax expenditures infrequently get the attention they deserve. To learn more about them, take a look at TPC’s new feature page.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.